Is the time right for RBI to raise interest rates and the government to roll back its stimulus measures?

Exports are doing badly. Cost of Indian production is not competitive globally other than ITES, due to high cost of funds. To get into global competition funds to our industry has to be at international rates. The artificial doctoring of dollar rates and interest rates will only harm this country in the long run.

Lately the debate of what RBI's goal is - whether it is growth or stability of prices - has caught attention of the financial market. Growth is the strategic long term goal of every economy, but stability of prices is thought to be primary responsibility of central bank. Theoritically speaking, assuming that such aggresive inflation figures can be tamed by monetary actions is very MONETARIST and may not completely hold good in today's dynamic and global economies.

Supply side is being completely ignored in most of such discussions. Increasing imports of food materials can be a temporary solution but it is more pertinent for the government to support the local industries and agriculture. Primary factors leading to short supply can be - poor monsoon (which will show its effect this year); slowdown in domestic industries leading to reduced investments and expansions; persisting poor infra facilities for storage and distribution of agriculture production. A new factor responsible for inreased prices can be entry of large players in retail. One can find exponential difference in prices of these stores vis-a-vis the local vegetable market.

Liquidity is increasing everyday with more investments by foreign companies and domestic financial institutions. But utilisation of this money is what seems to be lacking. More of such monies are being investment in financial products than projects. This can be due to still-cautious investors which find it impossible to trust execution capabilities of entrepreneurs.

It is in my opinion important for RBI to maintain the current level of interest rates and in fact increase direct support to loca industries. Patience on our level is also required as it takes time for results to become apparent.

I think inflation has picked up slightly from what I hear from there and now. Interest rate hike is a question that need be answered in sequester of RBI governors. If their data points to higher inflationary proposition they might. Then the markets which are moving back to life might get hit in which case companies will find it difficult to raise cheap credit too, Raising rates can also work against the stimulants like stimulants producing the revnue growth and higher rates making it difficult to raise production to meet the rising demand which case raising rates may not grip.

The GOI should concentrate on checking the increasing prices of essential commodities.  Withdrawal of stimulusat this time is not advisable as it may affect the prices adversely. 

Definitely price trends look worrisome. But I do fell the government should be curbing liquidity in a phased manner and due care should be take to minimize its effect on recovery. Also currently, much bad news from the Gulf, and any wrong decision can prove disastrous. Take measures to control inflation, but be careful about the recovery.    

If you feel inflation is the reason for the rates to be increased... then i feel the rates should'nt be changed. As the current high inflation is due to supply factor and not due to high liquidity in the hands of the people. And i feel interest rate hike can not do much in this situation. And another reason being, we are not in a position to see the hike immediately as still the overall affect of the stimulus package is not been seen. And this may other way affect our economy and hence, share markets. Therefore, i feel in the end of first quater or begining of the second of 2010, the RBI would think of increasing the interest rates when i am very sure the conditions would be favourable. .... Thank you, Manish N... Comments are appreciated!!.

Cheers!!

I don't agree to these RBI and Government measures because already many banks already hold SLR securities in excess of the stipulated norm, and the exact impact on liquidity is a little difficult to gauge. A tight money policy is not conducive for growth, and the RBI seemed to be sending signals that interest rates would be hiked in the next few months. Thus we can see a further inflation.