Business Today

Should the RBI persist with a high interest rate regime to tame inflation?

Most agree that a hard interest rate regime may not yield the desired results for the Reserve Bank of India, or RBI.

     Print Edition: March 20, 2011

Most agree that a hard interest rate regime may not yield the desired results for the Reserve Bank of India, or RBI. The RBI has hiked rates seven times in the past year to check inflation. But the calibrated tightening of rates seems to have had little impact. Perhaps it is not surprising as this time it is supply bottlenecks which are driving prices higher. Contrast this with 2008 when the RBI did the same thing - tightened interest rates to fight inflation. The economy then was overheating and there were visible demand side pressures. The RBI's strategy paid off.

So, will the RBI avoid raising rates further? Unlikely. Expect a fresh round of rate hikes if inflation doesn't cool off. The central bank is hoping to prevent rising food and fuel prices from further spilling over into generalised inflation.

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