Inflation....Continued

     The present crisis of inflation is not due to the lack supply, the food grain production in India has reached a record 241 Million Tones compared to 218 MT in 09-10. 

In fact, the fuel price hike has contributed to food price hike to reasonable extent.

Inflation affects the purchasing power of people adversely. Especially food price inflation affects the poor and the low income groups harder than the higher income groups.

To control the rising food price, Our Central bank (RBI) is trying to control money supply in the economy by raising repo rates, at which it lends to other banks, and reverse repo rates, at which it borrows from other banks.

This has increased the interest rate in commercial banks. High bank rate discourages investment and encourages savings, thereby reducing aggregate demand.

However, the increase in the interest rate has not done much to control food price. On the contrary, costlier loan has hampered the growth rates of GDP and industrial output in the current fiscal’s first and Second quarter. According to the RBI, while industrial growth rate decelerated, agricultural growth rate accelerated in this period.

Yet the food price index soared upward.

The increasing interest rates will reduce demand only in the housing and car markets. 

This will make home/car buyers to simply postpone their buying decision, and hence the GDP will be impacted… not on the soaring food prices?