With the war of words raged by S.Swamy against RBI Governer R Rajan, I
thought it will be interesting to see if R.Rajan has really done
anything wrong. Below are two graphs - first representing the WPI Index
and Inflation while second showing the Repo Rate.
As
and when there has been increase in the the inflation there has been a
equal/relative increase in the repo rate to curb the inflation. During
2008/2009 there was sharp reduction of interest rates because inflation
was low and industry was in dire need of rate cuts.
Now
though the inflation is within the comfortable limits but it has
started to pick up (Jan'16-Mar'16) and it does help to cut rates too
quickly to increase it later when situation is not as demanding as it
was in 2008.
Brazil Case
- In Brazil the economy is already undergoing recession but Central
bank has decided to keep the interest rates high to curb inflation which
is reducing the buying power of households. As it reads, inflation is
near 10.5% while interest rates are kept at 14.25%.
Real Interest Rate
Real Interest Rate = Repo Rate - Inflation Rate
More
is the difference between the Repo Rate, the more attractive deposits
become and attracts more money to banks and further reducing liquidity
in the market which can help to reduce inflation.
In
case of Brazil it is close to 4% while in our case it is almost 1.5%
which outlines how far our governor has gone to reduce the rates and
help businesses which as per S.Swamy, has been ruined by him.
Has
he(R.Rajan) gone too far since inflation already showing its heads up
and rates could be increased soon to be back on track which will further
make S.Sway unhappy?? only time will tell.
