There are two types of inflation, shall we say, good inflation and bad inflation.
Good inflation is there when prices are going up due to continued increased demand.
Bad inflation is when the stocks are low, and are not being replenished, and the shortage
continues, and what is there is offered at a higher price, like onions in India.
In the 1930s, bad inflation took over the world, especially in Germany, with hyperinflation
and the printing of currency notes of high denominations and the usage of wheelbarrows to
carry the money to buy a loaf of bread. Such too was the situation in Zimbabwe not too long ago,
and there of course they did not even have wheelbarrows to carry the currency around. People
had to be trillionaires to buy a loaf of bread.
That shows an acute reaction to a model of currency issuance and control that leads to such a
grotesque situation. Where people can think and calculate and issue rationally, such a situation
ought not to arise.
In what was British India at that time, again in the 1930s, farmers stopped growing food because
it had to be sold at such high prices that people stopped buying as much as before. Farmers became
poor, unable to pay the rents on their plots or their housing. The zamindars could not collect their
rents, and consequently the whole system fell apart, the whole cycle of consumerism affected.
Such a situation causes bad inflation, where scarcity puts the prices up. Shortages are created,
together with the ills of hoarding, wastage while people go hungry and a disillusionment with production.
What was happening before the crash of 2008 and a hint of the 1930s in happening in India today.
Onions there are more expensive then the ones we buy in England, imported from the same region.
There is something quite wrong with the handling of the situation in India. I firmly believe the loosening of monetary policy and the reduction of the benchmark repo rate would have helped greatly.
That is the opinion of industrialists and that of bankers, but obviously not of the committee that decides such matters in the Reserve Bank of India. Today's hiking of the rate from 7.25 percent to 7.50
seems a step that will not help anybody.
With an increased money supply and lower interest rates, the Western economies have weathered the sceptre of a prolonged recession. By grace of God, with continuing production of crops and means to eat well, all other industries can do well also as consumerism gets a boost, a strengthening Recovery leading hopefully to a growing Prosperity.
Such should too be the case in India. Alas, if only they would listen and have faith. In such a burgeoning economy which has huge potential of further growth, they must have confidence of investment from abroad, even if they reduce the interest rate.
Today's interest rate hike indicates it was not welcomed by the financial markets. Clearly peoples' hopes have been dashed for the meantime. Hopefully, next month the situation may be more favourable.