The Reserve Bank of India has resorted to monetary measures to control rising inflation. As a first step, it hiked the interest rate (repo rate) by 40 basis points and raised the cash reserve ratio (CRR) by half a percentage point. Increasing the CRR by half a percent reduced the monetary availability of Rs 87 thousand crore to the market. However, the question is whether these measures can control the current inflation? Clearly, the Reserve Bank acted in line with the monetary policy adopted in the US. But now questions are being raised about the possibility of controlling inflation by this way in America itself. Not only many serious economists but also market experts have pointed out that such monetary measures are effective when the economy is suffering from overheating. That is, when the animal spirit of investing by taking loans is getting uncontrollable.
When this happens, more jobs are created, more money goes into the pockets of the people, which increases their consumption capacity, and due to this, more demand is created in the market than supply. Whereas now – especially in India – the situation is reverse. Here the main problem of the economy is the disappearance of demand due to reduced consumption capacity. In such a situation, the reason for inflation is the increase in the cost of production and the producers transfer all the cost to the consumers. In such a situation, increasing the interest rate or reducing the amount of rupees available for loan will hardly be of any benefit. Rather, the opposite effect will be that the burden of people and companies who have taken loans will increase, which will further empty the pockets of consumers. As a result, consumption capacity will fall, further compounding the problem of missing out on demand. From this point of view, what is being said seems logical. So it would be better for policy makers to look into this. Or they should take the country into confidence about what is the logic behind their thinking of controlling inflation by monetary tightening.
