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Of late, the Indian economy has been experiencing turbulence, with the value of the rupee fluctuating rapidly, the rate of inflation burning holes in the pockets of millions, and the current account deficit widening at an alarming rate.
As of August 2013, India’s inflation rate has been recorded at 6.1 percent, an increase over the past few months. In fact, the rate of inflation has varied since the beginning of this year – in January, the rate of inflation was at 6.62 percent; in February, the inflation rate increased to 7.28 percent; in March, people heaved a sigh of relief when the rate of inflation decreased to 5.65 percent; after March, the rate of inflation kept going down to 4.77 percent in April and 4.58 percent in May.
Sadly, these good times didn’t last long and from June 2013, the rate of inflation picked up pace and it escalated to 5.16 percent and 5.79 percent in July.
These fluctuations in the rate of inflation seem uncontrollable and unpredictable, partly because the Indian government and related agencies are taking unexpected and surprise steps.
Recently, India’s new Reserve Bank of India Governor Raghuram Rajan increased the key repo rate by a quarter points in an attempt to fight inflation. Investors were shocked at the governor’s decision because combating inflation with higher interest rates means a greater sacrifice of output.
Now, loans to purchase houses and cars will become costlier in light of this new policy. As soon as the governor made the announcement of an increase in the key repo rate, the Indian rupee went hurtling down and stocks came crashing down. Only time will tell if the governor’s move is beneficial for the Indian economy and the citizens of India.
Former governor of the Reserve Bank of India Duvvuri Subbarao had spent years fighting inflation by raising the benchmark interest rate 13 times between March 2010 and October 2011, but to no avail – the inflation rate in India crossed 10 percent at that time and fluctuated intensely between 8 and 11 percent.
And now, the new governor is set to do the same. Between April and May 2011, India’s inflation touched the lowest, but soon started rising uncontrollably, partly because of higher oil prices and because the depreciating value of the rupee made imported goods more expensive. There is a need for a policy that has been well thought of, instead of surprising investors and the public with policies that are decided on the spur of the moment.
The rate of inflation is intricately linked to the value of the rupee. Last month, the value of the rupee fell drastically against the US dollar and this accelerated the rate of inflation.
In the last few days, the Indian currency appreciated from over 68 rupees to a dollar to slightly above 61 rupees to a dollar. However, the strength of the currency decreased once the Reserve Bank of India announced an increase in the interest rate.
Inflation can be controlled if the value of the rupee is stable. If the rupee keeps fluctuating, it will affect the rate of inflation, and this will in turn change the dynamics of the country’s export and import values.
The country’s economy is fragile at the moment and slight changes or adjustments in interest rates and policies can make a huge difference to the value of the rupee and inflation.
So, until we see a constant appreciation of the Indian currency, we may have to be prepared for sharp fluctuations in the rate of inflation.