Wednesday, September 21, 2011

Inflation - the many sides of it

India has been facing an inflation headache for more than 2 years now. Nothing seems to be able to tame the beast to levels the government would like to. The central bank (RBI) is doing what it can (raise the benchmark interest rates), the government is doing what it can (issue positive statements, push supply side factors to the extent possible etc.), and the people are doing what's the only option for them (bear the brunt!).

I posted an update in social media, and people brought in fantastic angles of the story to the fore. It turned out to be a very lively and intense debate, sure to benefit anyone who reads through the whole thing. Enjoy the heated debate, in all shades! I have not edited the comments.

Sandeep Manudhane: It's quite amazing that the Indian central bank (RBI) is following an inflation-busting strategy using higher interest rates, quite independent of what the government may want. This highlights two things (1) The RBI may be becoming more autonomous and free of Finance Min's control, and (2) It is charting a course different from other nations in the world (ex. Turkey that reduced its interest rates, hoping for higher growth & hence lower prices).

Sunil Talwar: while rbi may b growing its wings, the entire strategy seems to be lopsided. raising interest rates, assuming that people will buy less and save more to reduce pressure on the economy, is not right. in india we need a two pronged strategy to control inflation; ‎1. remove or reduce corruption, by which i mean the black money in circulation. immediate or instant fall out of this action will be so much more money in the system ‎2. reduce interest rates, open doors for more capital to come in not in the service industry as it is coming in today, but more in manufacturing set up, in hard core infrastructure. attract large capital with long gestation periods of pay out or no movement out at all