Rates Unchanged - RBI's Dec'13 Policy Review

Well any central bank has the onus of regulating the money supply in the economy keeping a tab on the inflation. But somehow I fail to understand that, how can one tame inflation by inflation? By increasing rates the household budgets are inflated immediately. How can one tame inflation by just increasing the interest rates?

Simply stated, when RBI decides to increase rates, it tries to restrict the money supply in the economy, by making it more expensive to borrow, and thereby anticipating that the inflation will come down in prospect.

But food inflation does not exist due to excessive money supply. People don’t necessarily take loans to buy food articles, THINK! Food inflation occurs primarily due to non-existent infrastructure in the farm-to-fork logistics chain. Food inflation may also be caused due to illegal hoarding, as was seen recently in the case of onions, or due to unruly weather. The RBI can’t fight food inflation by snowballing rates. It has got only policy rates to play around with, and nothing much as a firearm to control inflation.

The RBI governor has done the right thing by not increasing rates as the inflation can’t be suppressed by increasing the rates alone. On the contrary making the money more expensive hurts the businesses badly and eventually growth gets hampered.

No doubt the common Indian has been weighed down upon under inflation for so many months now. But RBI has limited options to tackle this menace. The real job is of the government to manage supply change logistics better and to avoid these unnecessary inflationary bouts.

The obligation lies with the government alone to bring about reforms/changes in the system and provide its citizens with better infrastructure. The government of India reeling under high fiscal deficit as always tries to push the responsibility on RBI and seems to make RBI a scapegoat for any matters concerning Inflation.

Looking at all this in perspective, I seriously doubt that government is going to do something radical before going into elections, in say six month’s time from now.