From the recent review, actions and projections of RBI, I am really baffled on What RBI is trying to do? and raised the question that whether RBI had Gone Mad? I may not be an expert on these lines, but, being an economics student one can at least feel the pulse to certain extent.
In an weekend newspaper M.D.Nalapat had written an article titled "The RBI had Gone Mad". In this article, the writer says that "India Inc has been crippled by the duo's policy of relentless rate hikes, ostensibly to "rein in inflation". Neither Reddy nor Subbarao had IQ needed to understand that Inflation in India is caused by factors other than the Interest Rate is a Tragedy for the Country".
He further stated that "Inflation since the UPA took office in 2004 has been largely caused by uncontrolled Government spending, mostly on programmes that are designed to increase the tally of the congress for the next elections. Thus, instead of public works programme that would expand rural infrastructure, what has been implemented is a dole that does nothing to ensure that permanent employment opportunities form as a result of the huge Financial Outlays of the Sonia Gandhi-approved schemes"
Of course, this post is not about the writer's political view or his general view. But the above mentioned article have few valid points, which we need to note, that Inflation in India is not only because of the money supply but it is due to various factors. (Austrian economist may argue differently - but, we are not here for any debate). This article further strengthen my queries and doubts on RBI, here are the 2 major points from this article which supports my query on credibility of RBI
1. The article says that Inflation in India is not due to the prevailing interest rates but it is due increase in uncontrolled Government spending. (RBI failed to feel the pulse?)
2. The Interest rate in India is much higher compared to any developed nation(not even UK and Europe) and China is the only country which comes closer to our interest rate.
This article is not the only reason which made me to raise question on RBI's credibility. There are more valid reasons, they are as follows:
Few days before (i.e. on 16 September, 2011) RBI had announced its quarterly review with an hike of 25 basis points (as expected). They came with the usual reply that this move is to control prevailing inflation. Despite the fact (I hope they know) that raise in interest rate alone cannot contain the present inflation rate.
For the past few years, predictions and revisions of the Central Bank (RBI) have gone hand in hand. In recent past, whenever RBI makes prediction it hardly takes a month or so that it revises its own estimates. After 3 times revision, RBI had predicted the Inflation level of 8% for the year 2010-11, whereas, the actual Wholesale Price Index (WPI) by March 2011 ended at 9.68 %. In the latest review it predicts that inflation will be 7% by the year-end (i.e. March, 2012). (Note: The current (August) WPI stood at 9.78% (Provisional) as compared to 8.87% corresponding month of last year (2010))
Being the Central Bank of country, if RBI fails to feel the pulse of the economy, then it will be a great difficulty for the nation to achieve its macroeconomic objectives. Already people have started losing their confidence on RBI. RBI's credibility and laud which it had received from across the globe are now at stake. In simple, RBI's Goodwill is at stake.
1. The article says that Inflation in India is not due to the prevailing interest rates but it is due increase in uncontrolled Government spending. (RBI failed to feel the pulse?)
2. The Interest rate in India is much higher compared to any developed nation(not even UK and Europe) and China is the only country which comes closer to our interest rate.
This article is not the only reason which made me to raise question on RBI's credibility. There are more valid reasons, they are as follows:
Few days before (i.e. on 16 September, 2011) RBI had announced its quarterly review with an hike of 25 basis points (as expected). They came with the usual reply that this move is to control prevailing inflation. Despite the fact (I hope they know) that raise in interest rate alone cannot contain the present inflation rate.
For the past few years, predictions and revisions of the Central Bank (RBI) have gone hand in hand. In recent past, whenever RBI makes prediction it hardly takes a month or so that it revises its own estimates. After 3 times revision, RBI had predicted the Inflation level of 8% for the year 2010-11, whereas, the actual Wholesale Price Index (WPI) by March 2011 ended at 9.68 %. In the latest review it predicts that inflation will be 7% by the year-end (i.e. March, 2012). (Note: The current (August) WPI stood at 9.78% (Provisional) as compared to 8.87% corresponding month of last year (2010))
Being the Central Bank of country, if RBI fails to feel the pulse of the economy, then it will be a great difficulty for the nation to achieve its macroeconomic objectives. Already people have started losing their confidence on RBI. RBI's credibility and laud which it had received from across the globe are now at stake. In simple, RBI's Goodwill is at stake.
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