India hikes interest rates to contain inflation

The higher rates won’t cure their inflation problem, and instead fuel nominal growth and add to the problem.

What does generally happen, however, is inflation helps the automatic fiscal stabilizers work to bring down the govt deficit, which is hailed as a good thing, as it unknowingly undermines aggregate demand and causes a slowdown.

India hikes interest rates to contain inflation

January 25 (AP) — India’s central bank raised key interest rates Tuesday for the seventh time in little over a year as it attempts to contain inflation. “Inflation is clearly the dominant concern,” the Reserve Bank of India said in its latest review of monetary policy. India’s inflation rate jumped to 8.4 percent in December as prices climbed for fruit, vegetables, manufactured goods and fuel. The Reserve Bank of India hiked the repo rate to 6.50 percent from 6.25 percent. It raised the reverse repo rate to 5.50 percent. It kept the cash reserve ratio at 6 percent. The Indian economy reverted to its pre-crisis trajectory, with growth in the first half of the fiscal year ending March 2011 estimated at 8.9 percent, it said.

Debt as a percentage of GDP ratio:

State of the Union

Some of the risks listed at year end seem to be coming on line, including slower growth out of China, euro austerity keeping a lid on demand in the euro zone, and US fiscal balance too tight for anything more than very modest top line growth, given current credit conditions and the negative income effects of near 0 interest rate policy and QE.

With crude oil continuing to soften, and Brent looking to close the gap with WTI by falling more than WTI, the dollar continues to gain fundamental support as it becomes ‘harder to get’ overseas.

And falling gold and silver prices, along with most other commodities, are showing a world that is sensitive to those indicators that QE2 doesn’t look to have been at all inflationary, leaving many people with positions they otherwise would not have taken (long gold, silver, commodity currencies, and other implied ‘short dollar’ positions).

The risk here is that the dollar gets very strong, and commodities very weak, which can lead to a US equity correction as well as a strong bond rally, all contributing to a deflationary malaise, as the theme remains:

Because we believe we can be the next Greece, we continue to work to turn ourselves into the next Japan

Which includes a misguided national effort to export our way to prosperity, which is likely to be featured by the President tonight.