KILLING GROWTH IN THE NAME OF TAMING INFLATION: RBIS MONETARY POLICY Most of us dont pay much attention to the monetary policy statement announced by RBI once in 2 months without knowing the fact that How important role it plays in our day to day life.... It is the monetary policy of RBI which determines the lending Rate of Commercial Bank which in turn controls the Aggregate Demand of the economy. EXCERPTS OF RBIS MONETARY POLICY ANNOUNCED TODAY: 1. Repo rate ( rate at which RBI lends to the commercial banks against security or in short term ): unchanged at 8 %, 2. Reverse Repo rate ( Rate paid by RBI to commercial banks for parking money with it ): Unchanged at 7 % 3.CRR ( Cash Reserve ratio: % of deposit money bank should compulsorily park with RBI with out intrest): unchanged at 4 % 4. SLR / Stock liquidity ratio ( percentage of Net Demand Time liability of banks which compulsorily to be invested in government Bond / indirect lending to the Government to help them indulging in unproductive expenditure like subsidies and NREGA) : Cut by 0.5 % to 22 % Let see how changing the % of Repo rate, SLR, Reverse Repo rate and CRR will affect day to day life of common man. We all know that current banking system is called as Fractional Reserve Banking System ( Link is given below) in which central banks control the monetary supply( Link is given below) in an economy through changing the percentage of Reserve Requirement. So question is what is the relation ship between monetary supply and GDP, inflation & Employment Generation.How RBI can manipulate the monetary supply to achieve the desired result ( Lower inflation & Higher Growth ). Inflation is nothing but mismatch between supply and demand..so when demand surpasses the supply it will result in inflation.....To kill inflation, solution is to kill demand ( short term solution) or to increase the supply( long term solution)....So increasing the Repo, SLR & CRR will reduce the M3 money supply ( Link is given below) in an economy by increasing the cost of the fund like Housing Loan, Car Loan, Personal Loan which will force the borrowers to postpone their consumption ( Demand). But this reduction in demand will force the suppliers ( Auto Mobiles / Real Estates etc.) to cut down their cost by laying of employees / freezing the new recruitment or postponing the new investment resulting in lower GDP and Higher unemployment. This is vicious cycle.. RBI raises reserve ratios to kill demand...reduction in demand will kill employment... RBIS HAWKISH POLICY SO FAR KILLED INDIAN GDP GROWTH FROM 8 % ( 2011 - 12) to current 4.5 % ( FY 2013 - 2014 CHALLENGES FACED BY INDIAN ECONOMY: It is estimated that India should grow at least at the rate of 8 - 9 % per annum to to accommodate the 12 million job seekers entering into the market every year or in other words to keep unemployment rate at the same level..... so % of Growth less than 8 % will increase the unemployment and will result in social unrest. HOW DIFFERENT IS INDIAS ECONOMY PROBLEM WITH OTHER WESTERN WORLD: Maturity of an economy is being determined by per capita income ( GDP / population). Indias per capita income is around $1500 where as per capita income of Western countires are well above $30000 which means India is still developing economy and has lot of potential. Problem with western economy is that it is matured and stagnated. Further growth in that economy where Per capita income is more than $30000 is difficult . But, green shot is that lower inflation enjoyed by them ( 1.5 % in USA, 0.5 % in Europe and around 1 % in japan). We all know that our currency is fiat currency (not backed up by gold) and any sovereign government can print as much as currency they want as long as their printing machine is in good condition... Only problem with currency printing is that potential of Hyper Inflation.... As suggested by famous British economist John maynard Kenesisan ( we now call Kenesian Economics) after studying the 1930 Great depression, easy way to come out of financial crisis is to increase the government spending ( increasing the money supply in economy resulting higher demand which will result in Higher Growth and employment) by printing money........US Federal bank & European Central Bank is currently following this principle only ( money printing) which infact worked very well in USA. USA has almost comback from 2008 financial crisis. Their last quarter GDP growth is 4 %. But problem with Kenesys economics is that it wont work for india since Indias inflation rate is almost nearer to double digit. moneycontrol/news/cnbc-tv18-comments/why-rajan-deserves-aaa-fornon-event-policy_1146935.html
Posted on: Tue, 05 Aug 2014 18:13:04 +0000
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