ponderings & pennings

In one of my recent evaluation discussions I was asked about my views on interest rates to which I replied that they should be increased. The person raised his brows and re-confirmed “raised”.

I do believe that there is no need for India to tread the path of US as at this time the economies of the two countries are performing very differently. Thanks to the conservative RBI, the sub-prime crisis is not having any direct affect on Indian financial sector and the liquidity is not a concern except the regular quarterly hiccups. But looking at the gradually inching up inflation data (latest being 4.35 from 4.07 and this 4.35 does not include the latest hike in fuel prices) it bodes concern about the economic growth given the haunting oil price rise and also the not so far monsoon vagaries in our country. Thus I believe that to handle this it would be prudent for us to take a firm stand and not follow US and reduce our rates. The recent reduction in PLR by SBI twice within a fortnight could be nothing but appeasement of FM who prepares himself for the last budget of his government’s current term. Politics has always played games with economics and will always continue to do so.

Anyway coming back to tinkering with the rates, there is a catch 22 for us. If we increase the rates, we end up increasing the differential between US and our rates and that will lead to more inflow of funds and appreciate INR. If we reduce the rates the fear of inflation assumes proportions that make the economic growth forecasts pale away. One of my friends has a sort of solution – appreciate the currency. That could be done but then it will involve even more active role for the central bank so as to manage the surge in liquidity and will find itself back at fighting inflationary tendencies. But that in one way can help the next government by allowing it to have more funds to launch social expenditures.

Here is another of my favs: