Inflation Rate and Failed RBI Strategies


The monetary authorities including the US Federal Reserve the Euro Central Bank and the Reserve Bank of India are in a quandary. They are confused because their monetary policies are not producing the desired results. For example, take the case of India. The monetary policies adapted by the RBI did not bring down the inflation rate nor did it help the Indian economy which grew less than 5 percent. Should you blame the concerned authorities? Is it the policy fallacy? The answer is an emphatically no.

The basic question is whether the RBI really have the tools to control the inflation rate. Pushing up interest rates by adjusting repo rate for example should normally have an impact on the excess demand push inflation by curbing it. This is not happening and in fact with every interest rate increase the inflation rate has moved up even higher. This may be because the future demand was pushed forward as buyers thought that further interest rate hikes are in the pipeline. India has a very huge unorganized sector with no bank support and an incredible amount of black money which don’t show up in the money supply. The data on M3 for example is grossly inaccurate. The black money created through illegal means run into trillions and are being continuously used to prop up the property and the commodity markets. How can RBI deal with the black money? Practically nothing while interest rate hikes hit industries which are highly competitive and whose net margin is relatively smaller. Unorganized sector interest rates on the other hand is very high and can vary anywhere between 27 to 72 percent per annum.

I made an effort recently to understand the behavior of inflation. To understand this, I went to a neighboring village and (Madurantakam 82 kilometres from Chennai) spoke to a farmer whose crops included both brinjal and lady finger. The current procurement price that he received is anywhere between 10 and 12 Rs a kilo. In the city supermarket, these vegetables are selling for 60 Rs a kilo. If for example, a producer price index is constructed based on the initial traders procurement price and simultaneously construct a consumer price index based on the price a consumer pays in the retail outlet, we will clearly understand as to where the inflation is coming from. The ministers who talk about controlling the inflation are themselves the main architects for pushing the retail prices higher.

The new government if it really cares can initiate steps by proper procurement policies and right kind of financing at the production point with the objective to control inflation. All traders hate the multi product departmental stores because the latter will by pass them and directly procure from the farmer and deny them the exorbitant trading agencies profits. It is the multi intermediary retail traders who are causing havoc to pricing. Currently in India the three most processing issues are the inflation rate, budget deficit and merchandise trade deficit. It is the nature of money to go where it can get the best return. A trader for example borrows money from the commercial bank uses it to finance the supply chain trade and reaps a rich harvest of returns.

An average Indian citizen is helpless not knowing what to do. He is not able to adjust his consumption in the short run. He even paid 100 Rs a kilo to onion recently. Government which turns a blind eye to the common man’s suffering is myopic and non-compassionate. Is there someone higher up in the food ministry to head to this call to keep a check on prices? Inflation is like cancer. Unless you stand up to it, it will destroy you. So Mr. Prime Minister please help to control inflation while you take care of pricing mechanism such as the minimum support price for essentials, we will control from the demand side.

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