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Saturday, October 06, 2012

The RBI GOVERNOR and the INFLATION: Is 6-7% inflation (WPI) normal in India?
The RBI talks of NOT cutting the interest rates if the inflation does not come down.....Good point!! But can inflation really be made low with only monetary means when the supply side steps undertaken by the UPA, are being blocked by opposition?
Why is the inflation so low in the US? It is primarily because of addressing infrastructure concerns and importing items from China through mammoth retail chains like Wal-Mart. Ironically  a section of Indian Polity sees it as an invasion of India's sovereignty.....!! It seems these politicians of the political parties want to have cake and eat it too--a pure vote game politics, which is dogging Indians since the last few decades...!!
Moreover, the real question is: can India with a mixed economy model that comprises both capitalism and socialism, still  have the Wholesale Price Index to measure it instead of  more advanced, Consumer Price Index, which the developed countries generally use?
Till now RBI (in any government in power) has tried to obfuscate this issue, very cleverly by saying that the Consumer Price Index is not  particularly suitable for India because there is too much of a lag in reporting the Consumer Price Index numbers.......Huh!!
Also, India falls under the category of emerging economy (or developing country), where the inflation is bound to be a little high. So, when the Reserve Bank of India's governor, Dr.Duvvuri Subbarao says, that the comfort zone is around 5%, then may I ask him on what basis he says so? I feel 6-7% inflation (WPI) is normal in India and therefore there is an immediate need for a repo/reverse repo cut by the RBI.
Dr.Duvvuri Subbarao, in a recent RBI bulletin has said, "If we take a long sweep
of history, there is no doubt that innovation has contributed to enhancing the quantum, quality and reach of financial intermediation. In recent years though, financial innovation has become a contentious issue. Unbridled financial innovation and the failure of regulators to check that are also being cited as among the culprits for the global financial crisis. Quite understandably, the crisis has triggered a number of questions about financial innovation. Is all financial innovation for the good? Are there good and bad innovations? What determines if an innovation is
good or bad – the innovation itself or the way it is used? Who is to determine if an innovation is good or bad? Do regulators have the wisdom and competence to
regulate without stifling value adding innovation? These questions are subject matter of a vigorous debate among financial markets and financial sector regulators. Even as this is largely work in progress, the objective of all this effort is clear – to make both innovators and regulators more responsible".
So, the question is: is it a responsible job to make the EMIs too costly, so that common people find difficulty in buying real estate in major cities, as they become large pocket speculators' paradise?
Is it proper to bleed the India Inc, with such high interest rates, when they cannot go for capex, leading to shortage of products---giving rise to demand pull?
So, can prolonged high interest rate cure an ailing economy, which is already being hit by demand pull. If the companies cannot go for expansion and there are problems in importing products, due to vote bank politics, how can inflation be calmed down?

RBI Bulletin source: www.rbi.org.in.