The Hindu Business Line : Interest rates and inflation

This has a reference to your editorial “The right monetary signals” (Business Line, April 4, 2008) which advocates the need for decreasing the interest rates as interest cost also plays a role in the pricing of products.

The inflation rate of 6.68 per cent is not new to India. But what makes the difference is the sudden increase in the rate from 4+ per cent to 6.68 per cent within a month and the rise in the cost of food articles which has a direct impact on the common man who has to spend 45-55 per cent of his earnings on food.

No doubt, efforts have been made to reduce the Customs and excise duty to bring down the cost of the articles. But the response does not take into account the fact that ever since we moved over to market-related economics, the availability of articles has not been a constraint and that the prices indeed became cheaper in the past due to import of articles by utilising the lower prices that prevailed abroad.

The recent price rice is due to the release of pent up prices of petro products and increase in prices abroad, leading to a chain reaction. The responses should also include facilitating factors to induce more production in the domestic sector for which reduction of interest rates is a major decision. Besides, if the interest rates are reduced, the flow of foreign currency inflows on account of price differential may also come down.

P. E. Muthu Mumbai

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