Indian Central bank giving lip service to Inflation control?

The Govt has already given up on combating inflation, when one of the FM secretary s’ directly put the onus of inflation control on the RBIs doorstep. And some foreign agencies expect the inflation to reach 15% by the yr end.

The RBI has done more lip service to inflation than combat it and it shows. If u want to know how the rupee has depreciated in real terms, which means increase in currency and inflation, don’t see the Rupee Dollar chart, see the Yahoo Rupee Euro chart.

And the chart clearly shows that from Aug 2007 levels the Euro has appreciated 15% against the dollar. But the Euro has appreciated 21% against the Rupee , a whole 7% more than it has appreciated against the dollar, which means for purchasing 1 Euro one has to spend Rs67 + bank charges, up from Rs 56 /57 some time back, which only shows that the Rbis Monetary policy is failing and instead of curtailing inflation it is importing inflation, thanks to all the Dollar purchases during the last year in the name of stabilizing the Rupee, and keeping it artificially low to protect the Exporters leading to a 5% rupee depreciation in a year. Worse we have massive reserves in dollars now Up from $200 Billion in Apr 07 or as per the site it stood at 1,96,632 to $300 Billion 302,744 on Jun 20 08 Up a whopping $100 Billion, and this reserve is large and loosing value by the day as dollar is a falling against most other currency s and Gold. I need not remind u that the Iraq war was also fought for the dollar hegemony, and even Iran wants to be paid in Euros for its Oil. See falling Dollar rising OIL.

China with its totalitarian regime and its surplus can afford playing the game, heck! it is even threatening to use its forex reserve as an economic weapon against the US, but can India with its Fiscal Deficit and mismanagement afford it ? and remember after all those massive subsidies some of which go for unwanted purposes, the poorest of the aam admi still pays bribes. No wonder babus want to join Politics.

Inflation in India is managed , so are the interest rates. Worse Taxation, controls and the misrule has meant a not so vibrant debt market and poor BCD (Bond-Currency-Derivatives) nexus making the monetary policy less effective. People holding a whole host of investments from the bank S/B ac to the Fixed deposits to the postal deposit are facing Horribly Negative Returns.

Remember Vietnam printed too many dongs leading to a gold based economy and loss of interest in the national currency. The problem was also exacerbated by its massive negative return of 11% on capital wherein the Inflation rate was 25% while its interest rate on june 11 was 14% . Read this post and this one . Here is a post on negative real rates world over.

Thankfully we are a very long way from Mugabe’s Zimbabwe where the rate of 165,000 percent inflation is so high that the govt is finding it difficult to get paper to print more notes.

Ila writes in her post Central bank misrules

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The first and most obvious question to ask in this story is about RBI’s focus on inflation: Why does RBI not learn from history? Why does RBI obsess with currency pegging, even though it has led to such costly distortions of monetary policy? Why is subsidising exporters more important than delivering low and stable inflation? Why does RBI have a greater loyalty to exporters than it has to the local economy? Or, it it that since the RBI is not an independent central bank, was the ‘prevent appreciation, risk inflation’ loose monetary policy the policy choice of the government? Would RBI have focussed on inflation if it was an independent central bank?

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And she is not alone even Ajay Shah, senior fellow at the NIPFP agrees (Video), as he talks about the rot in the system.

Therefore, i think its high time the RBI stops taking cues from Ben Bernanke and Starts taking cues from Jean-Claude Trichet and focuses upon inflation control and that is easier said than done.

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5 thoughts on “Indian Central bank giving lip service to Inflation control?

  1. Yes it is , not too great a problem , but not trivial either. And an overall fisc deficit of 10% is worrying especially for a developing country starved of capital, because more money is spent on debt servicing and useless subsidies instead of important things like infrastructure, education and health care. Indian govt is the largest debtor plus the bond markets are underdeveloped, and everything is govt controlled (atleast there are attempts) What is most worrying is interference and govt cheating oil psu shareholders, and investors in general with diktats to control prices, souring investor sentiment.

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