Uma Shashikant on Mon, Aug 9th, 2010 12:29:16 am
Yes, Venky, you are right. The RBI did not have much of a choice and there is always the "demand-side" impact that creeps in, as RBI have themselves noted in the policy documents. Also, a higher interest rate would deter hoarding elements and perhaps set better inflation expectations.
Ah, how sorely I miss your keen Editor's eye - error it is indeed - rate hike and not rate cut. Thanks, Venky.
Venky on Mon, Aug 2nd, 2010 8:32:34 pm
Interesting perspective. But let me, with your permission, take the argument one step forward...
Even if the RBI is convinced that it's supply-side constraints that are driving inflation, can it afford not to raise interest rates in the short term? Could it not be faulted for inaction, then?
The problem, as I see it, is that it isn't within the RBI's purview to address supply-side constraints. And it has only one policy tool to address inflation - even if it is convinced about the nature of the underlying problem.
Correct me if I'm wrong...
Also, I think there's a minor mistake in the last paragraph: Where you say: "But the net effect of a swift rate cut.."
I think it should read: "But the net effect of a swift rate HIKE..."