Interest Rate Hikes Might Kill Sentiments

Dec 21, 2022

Inflation means that money is losing its value or its purchasing power. So, another approach to counter inflation can be to ensure that there is even more money in people’s hands. Am I over-simplifying things or does the idea make any sense?

I vaguely remember our experience as an economy in 2013 with a high inflation rate, an increase in interest rates and a consequent impact on the rate of growth. With compare and contrast, what can be the best way to deal with such high inflation scenario?

I consider that the situation in India is much better than the rest of the world, However, the worldwide high inflation at this time is totally understandable- a medium-term imbalance that will correct itself as soon as the demand and supply balance is approached. So, should we really worry about inflation too much? This is because expecting the perfect equilibrium of supply and demand is like wishing for “utopia”? But the hard reality is that in today’s times ‘chaos’ is the new normal.

Can we readjust the target inflation rate considering the ‘realities’ of the world at that time? I sincerely believe that there can be no ‘one rule’ fit for all ‘situations’. Can we rather target 10% inflation as the new normal instead of 4% for the next 2-3 years but target a growth rate of 15% instead of 7%? We may need to think dynamic instead of static.

Why should we really focus on “growth”? Because you should always focus on your biggest opportunities, not your biggest problems.

Growth is all about sentiments. Right now, the sentiments are positive. Everyone believes that the next 2 decades are of India. Let’s not dampen the sentiments anyhow.

More money in the hands of people results in enhancing positive “sentiments”. Then policy visibility and consistency result in increased consumption. Long-term confidence makes you take bold investment decisions. This side of the economic cycle is called the “growth” phase.

A businessman will be discouraged to take a long-term capital investment decision if the cost of funds is volatile. It might also impact the viability of the certain projects. We should encourage long-term investments by businesses and enhanced lending by financial institutions.

Reference link: