It is natural that once inflation is high, it reflects both in gold as well as in interest rates.
Gold is an antidote and works against inflation. People park money in gold as it constantly negates inflation and abnormally increases in value during inflation.
The Interest rates will be hiked to increase deposit growth rate. The emphasis will be on savings. Objective is to take money out of the system and put it in the bank. This reduces availability of money in the system and value for money increases and it drives prices down and consequently inflation will also cool down.
This is economics and it is only one side of the coin. But situations will not be similar to what they describe in the text books.
What we are facing here is a peculiar situation wherein both inflation as well as industrial slow down is present. To counter industrial slow down and create jobs, we need to push production up. So that supplies will increase. More and more supplies bring prices and inflation down. In order to do this, Industry needs cheaper credit. If interest rates are increased, there will be a direct threat to industrial growth. That means lower interest rates.
I am quite surprised when I saw what this great man has done. Generally a priest does that. He simply followed text book and has left everything to act of god to rectify the situation. Most of the banks are reluctant to implement. This transitional failure will surely create confusion and will never achieve the purpose.
RBI governor’s statement on this move
I am eagerly waiting for rains. (Hoping rains will increase food supplies and production and these supplies will bring down prices and inflation)
His statement Earlier on slow down:
2009 is tough and 2010 will be tougher
A policy maker shall make policy decisions keeping prevailing situation and economic conditions in view. A policy maker work starts by assessing situation and not by christening what situation is.
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