The Hindu Business Line : Shock treatment

As rightly stated in the editorial “Villain still at large” (Business Line, July 30), the RBI’s repeated encounters with inflation remind us that the antidote lies in fiscal and economic policies that can bring about a situation of higher supplies. We must create a situation where supplies of all goods and commodities are plentiful.

Abundance is the only answer to the problem of galloping inflation and not Dr Reddy’s effort of creating further shortages by curtailing expansion of capacities and keeping production constant regardless of increase in demand.

Repo rate that was 7.5 per cent on January 31, 2007 has now gone up to 9 per cent and CRR, which was 6 per cent on February 13, 2007 has now risen 9 per cent.

The RBI’s action will further reduce business confidence and create shortages of manufactured goods, thereby acting as a spur for inflation too, unless prices of crude oil and that of other imported commodities decline.

Monetary tightening, that too repeatedly, has lost its effectiveness.

As the RBI has no control over mounting oil prices, money supply curbs and rate hikes will only help reduce capacity expansion in various sectors, particularly in the manufacturing sector, and will not have any significant impact on moderating inflation.

K. K. Ammannaya Udupi

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