Wednesday, October 26, 2011

Interest rate hikes and Inflation

The recent interest rate hikes by RBI as a way to fight inflation has the following flaws:
1) Larger corporates will borrow from abroad directly or even a rights/market approach to raise funds instead of borrowing from the Indian banks.
2) Higher interest rates or higher taxes have NEVER discouraged an entrepreneur. E.g., California and Australia.
3) Higher interest rates affect fixed income group a lot. This includes salaried people who are paid a fixed amount. Since interest rates hikes are passed onto the customers, it is the salaried people who bear the brunt of the cost.
4) Since costs increase while salaries remain the same, the salaried sector starts to shift to both lesser savings and more borrowing just to meet existing demands.
5) This results in more indebtedness of the salaried class and hence more dependent on banks and credit creation.

No comments: