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:

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One Response to India hikes interest rates to contain inflation

  1. Here’s where Warren and I always disagree. I say raising interest rates does stop inflation, because higher rates increase demand for money. Further, there is no evidence higher rates slow the economy. In fact, there is some evidence that higher rates actually are stimulative, because they force the government to pay more interest into the economy. (See: Interest rates vs GDP)

    Warren has said, in the past, higher rates increase costs, which exacerbates inflation, reduces the deficit and slows the economy.

    Let’s say I am wrong, and raising interest rates is not the way to fight inflation. Then, what is?


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