Does the increasing inflation rate warrant an increase in interest rates, too, to protect real rates of interest?
Theoretically, yes. The problem we are facing now is of stagflation rather than inflation. On the one hand, we are witnessing a glut in production of most producer and consumer goods, and on the other hand, prices are still rising. I attribute the price rise mainly to the fall in the value of the rupee, which has sharply pushed up costs of imports and had a cascading effect on most commodities. Increasing interest rates is, therefore, not the answer. Credit off-take is poor and if the economy has to be kick-started, interest rates ultimately will have to be brought down. Further, government’s control over revenue expenditure needs to be strengthened. The solution, therefore, lies in controlling inflation through better price administration, more efficient public distribution and control of revenue expenditure by government and simultaneously giving industrial production a boost through lower interest rates. • How could RBI achieve the conflicting objectives of reducing cost of capitals
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