Reserve bank of India's decision of not curbing down interest rates has attracted criticism from government. Let us remind our-self that it was the liberalization process of 1991 which took away control of RBI from government Today when inflation rate has came down pressure is building on RBI to reduce it's interest rate. This is because when RBI will reduce interest rates investor will no longer put money in banks as they will not get good return. They will bring this money in market and will invest in projects. This process will boost growth. However, economics says that whenever there will be supply of money in market keeping other things constant the value of money will decrease. This means that if all the people will have money then one will have to purchase a thing at higher price. The thing which was getting at one rupee now one will have to spend two rupee for that. Thus value of money will decrease, on the other hand inflation will rise as things will be charged at higher value.
Now we have to look at other factors which concerns RBI. Actually it's only wholesale price inflation which has came down. Wholesale price index is calculated by weighting a average of indices covering 676 commodities, which are primarily traded in the sector of manufacturing power and fuel. However, food prices remained high for eg. protein based ingredients wheat, and rise went up in double digits. It's not a concern for now, this is because it will help farmers to get more price for commodities and will generate money for monsoon sowing. The concern would be retail price index which is also high. So supplying more money in market by reducing rates is not going to totally help. As far as the fall of rupee is concern we have to see that current account deficit CAD is widening day bye day. CAD is difference between money which government earn by export and money which government pay for imports. Certainly we are earning less and paying more which will force government to generate more money. More money simply equals inflation.
The gold import for the month of may raised by 89% to 8.4 billion dollar which has pressurized trade deficit to increase by 20.1 billion dollar for the month of may. So the trade deficit in addition with CAD and also increased food and retail inflation seems to derail our economic growth. So the question arises what we need to do when rupee has fallen by nearly 7 to 8 % in few months and by 20 % since 2011.
First, RBI needs to definitely ease interest rate by some 25 basis point to gain the confidence of investor. 100 basis points equals one percent. With monsoon on the full swing and breaking records the mood of country will certainly go towards more work and more production mania. At the same time we need to come out of corruption scandals and need to reduce red tapism and clear existing projects as fast as possible. Telecom ministry has given a sign of 100% FDI in telecom sector which we need to implement at great speed. We need to concentrate on raw materials which would be imported. At the same time we need to look at new products and market which would be exportable. For that we will need a definite strategy and alertness and future vision as which sectors will develop in near future. Off course banning gold imports only would not be a solution.
Now a days 'Hawala' market is largely responsible for record gold import. So banning gold for some time and then few months later reducing import excise duty and taxes on gold would be beneficial This would reduce gold import by Hawala, as more people will be opting for legal way and control over gold can be established. There is a slight harm in gold import but if we can give it back to world in attractive form like ornaments then it will create fortune for India At the same time we need to start dealing in rupee on any and every possible format. For eg. next year there would be IPL auction so lets start building a habit of giving money to foreign players in the form of rupee instead of dollar. Dollar selling for some time would also be a good solution. There was talk of creating special currency by BRICS nations, if it will happen then dependence over dollar will certainly going to reduce. The most important of all, we need to create positive environment which will help our economy to come back on track and achieve new heights.
