The Hindu Business Line : Price rise

The prices of necessities, such as foodgrains and vegetables, are going up. On the other hand, those of DVD players, computers, telephone calls and air travel are falling steeply.

One is reminded of Marie Antoinette's advice to the Parisians to eat cake if they could not afford bread. And the rest is history, as they say.

A spokesman of the Government declared recently that people will not tolerate an inflation rate more than 7 per cent.

Till sometime ago the "acceptable rate of inflation" to the Government — not to the public — was 5 per cent. So the threshold is changed like the Plan targets being revised to fulfil achievements.

What is the relevance of a real rate of interest under such circumstances? With the Savings Bank rate pegged at 3.5 per cent and term deposits not fetching more than 6 per cent the average depositor loses in the purchasing power of both the principal and interest.

The rule of thumb used in calculating the real rate reckons with only interest, not principal. Raising the deposit rate would result in a corresponding increase in cost of credit.

But the authorities are not in its favour in view of the Assembly elections and the large Government borrowing programme yet to be completed.

Prices will continue to rise but consolation may be drawn from the (provisional) decline, albeit in driblets, in the rate of inflation, if it happens.

A. Seshan

e-mail

Letters to the editor and contributions can be sent by e-mail to: bleditor@thehindu.co.in