The RBI and the government have chosen to control rising prices even if it means lower growth. Thursday’s rate hikes will make capital dearer. Growth requires cheap loans for industry and individuals. But high prices hurt the poor the most. Prices have risen due to high demand, insufficient production and easy money supply. In rescuing industry from recession the government gave a large financial bailout. Then came Central and state pay hikes. The job guarantee scheme and Bharat Nirmaan have lifted rural incomes. The result is a massive demand for food and consumer goods.
Since supplies cannot be increased in a short time due to industrial and agricultural production constraints, the RBI is trying to suppress demand by withdrawing excess money from the system. It is driving banks to raise interest rates. This affects industry as well as individuals taking loans to buy houses, cars etc. However, those with money in banks stand to gain. The RBI has raised the key rates ten times since March 2010 but with mixed results. Demand has slowed and hurt the realty and auto sectors. Car and home sales have plummeted. And this raises the spectre of loan defaults. In some sectors, however, there has been no impact and demand is so robust that loan disbursement is high, corporate results are encouraging and wholesale inflation is at an uncomfortable level. This keeps 8 per cent growth hopes alive. India grows as urban Indians spend and consume a lot.
Also driving up prices is oil. The government’s rising oil bill and higher cost of servicing loans will take away money needed for education, health, infrastructure and welfare. Worse, industrial slowdown means lower tax revenue. Stock prices are declining as foreign money moves out to safer destinations. Experts expect two more rate hikes of the same size. High commodity prices are hurting almost all countries and central banks all over do what the RBI is doing to fight inflation: raising interest rates.
Since supplies cannot be increased in a short time due to industrial and agricultural production constraints, the RBI is trying to suppress demand by withdrawing excess money from the system. It is driving banks to raise interest rates. This affects industry as well as individuals taking loans to buy houses, cars etc. However, those with money in banks stand to gain. The RBI has raised the key rates ten times since March 2010 but with mixed results. Demand has slowed and hurt the realty and auto sectors. Car and home sales have plummeted. And this raises the spectre of loan defaults. In some sectors, however, there has been no impact and demand is so robust that loan disbursement is high, corporate results are encouraging and wholesale inflation is at an uncomfortable level. This keeps 8 per cent growth hopes alive. India grows as urban Indians spend and consume a lot.
Also driving up prices is oil. The government’s rising oil bill and higher cost of servicing loans will take away money needed for education, health, infrastructure and welfare. Worse, industrial slowdown means lower tax revenue. Stock prices are declining as foreign money moves out to safer destinations. Experts expect two more rate hikes of the same size. High commodity prices are hurting almost all countries and central banks all over do what the RBI is doing to fight inflation: raising interest rates.
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