There is a national debate going on over the rising Interest rates and the rate hikes by the RBI. Should growth be sacrificed at the altar of curbing inflation. It is a interesting debate and merits a deeper look into it.
The RBI has deviated from the global central banks by raising Interest rates and we now have the Repo rate at 8.25 %. This is the rate at which the RBI lends to the banks. A higher Repo Rate means Interest Rates rise and it becomes difficult for businesses to borrow money and invest in expanding their businesses.
Global, the interest rates are pegged near zero the US Fed and the European central Bank.
What are the advantages of low interest rates?
This means businesses can borrow cheaply, spend on expansion, use that money to buy commodities, speculation, pump up the markets and in general have a good time.
Now if it was so good to have low Interest Rates then why is the RBI increasing rates and spoiling the party?
Unfortunately growth always comes at a price. When we have money chasing too few things and money is available freely, the resources become more expensive.
Inflation drives up the prices and if the wages do not keep pace the life of common man becomes difficult.
Cheaper money also means the value of money goes down. 100 rupees could buy many more things in the 1990s. It could buy 5 litres of petrol, now only about 1.5 litres of petrol for the same price.
Inflation happens because of 2 things. Inflation is a by product of supply demand. Whenever there is a mis-match that when demand exceeds supply, then prices go up.If demand is more, it can be reduced by raising the cost of money. If there are supply side constraints, then production has to be increased.
Unfortunately, the RBI can only look at demand management.India's economy is growing at 7.7 pc which is much more than the world economy growth rate of 3.1 pc and developed economies growing at almost 1-2 pc. The RBI can afford to raise Interest Rates by sacrificing some more growth.
The life of the common man is made tough by inflation. This leads to labor unrest and in general strife. The price of many of the daily essentials going out of reach of the common man
The RBI is criticized by the financial commentators because they have a vested interest in having low interest rates. They can sell more things, can speculate more.
In 2008, Governor Reddy was criticized for raising rates too early but in hindsight, India suffered only a slowdown not a recession. Many did not even feel we were in a slowdown as the job cuts were relatively less.
We are on the cusp or rather already in part 2 of the recession. The next 1 year is going to be bad very bad. Its time to preserve capital and build for a better future in the growth that follows.
Governor Subbarao for all the criticism he is facing now may well turn out to be a visionary. His steps over the last few months have been bold and much needed.
The Recession never ended. It was only a pause due to artificial pumping up of the economy in the US. The second part is still pending and almost here. Last time it was Financial Institutions going down, this time it will the sovereign defaults.
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Editor's Note: Aarti's comments say everything.Thanks Aarti.
Questions to be asked are::::
1. Is liqidity in system drained out to such extent thta banks not able to fulfill needs of corporate credit? Answer is No.
2. Is money growth in system curtailed? Answer is No.
3. Are govrnment 364 day T Bill yields crossing even 8.5% even when repo rate is raised to 8.25%? Answer is No. This is more than enough indiccator of abundance of liqidity in system.
4. What is interest cost of corpratesout of their EBIDTA revenue & how much thta is incrementally increasing with each 1% rise in repo rate? A few basis point if not more. Plz dunt tell coporates are so poor not able to absorb those few basis point rise in costs. That too atfer they are increasing product price beyond 9% YoY (this is nothing but WPI growth aka inflation).
5. What is that social commitment coporates are showing to give back to poor, reducing their product prices voluntarily or to improve literacy levels or to improve civic amenities? Absolute nothing.
Coporate world is running after free money & speculate & mindlessly expand & live beyond it means & show excess in balance sheet as their hard earned profit.
That runaway balance sheet growth on free money is being dubbed as GROWTH on retail investors. Retail investors are being taken for granted, they are getting commanded by industry shenanigans to believe all cock-bull stories only because big shots are telling it on TV.
This is getting as hilarious as it can get. All of us can get it using a bit of some brain, not by singing a chorus for white collar thieves' song.
This nonsense of crying over 0.25% intrest rate increase hurting growth must be stopped.