Fire Fighting with Oil

On 25th October the Reserve Bank has again raised the Repo rates by 25 BP. Thus the Repo Rate Now stands at 8.5%. It is the highest anywhere in the world. The Rupee has reacted sharply to this and there has been an appreciation of Rupee by over 2% in a single day on 28th October 2011.
The reason for this increase and the past increases as well is stated to be that it will contain inflation. I find it illogical. For two reasons:

1. The depreciation of Rupee by 10% in past about a month itself had been inflationary.

2. The increase in repo rate by the Reserve Bank itself is inflationary. The Repo rate is the base lending rate for the Banking Industry. If lending rate goes up, it carries with it the cost of production as it is also an input component for goods produced.

I am no economist but I do not feel it right. It is compounded by the fact that same medicine which has already been administered by the Reserve Bank for many times in the past one year has not produced any result. I wish this persistence may bring some tangible result this time.

© Sandeep Bhalla

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