Toxic growth.

In its latest meeting the Reserve Bank of India kept the short term borrowing rate steady at 8.5% while reducing the Cash Reserve Ratio by 0.5%, from 6 to 5.5%. This means banks have to keep less money in reserve to guard against bad loans and will free up more money for lending, leading to a softening of interest rates. Hopefully this will encourage more investment leading to job creation and boost growth of the economy. The Bank was careful not to lower interest rates as inflation is still at 7.5%, down from 10% but still above the Bank's comfort zone. The Bank sees inflation coming down to 7% and growth at 7% this financial year ending March 31. The Bank is to be commended for holding its nerve and keeping interest rates steady when politicians, business barons and their puppet press are baying for a cut in rates. The RBI was cowardly when inflation was rising, delaying action so long that 13 rises of rates did not have any effect till now when seasonal factors have brought down food prices. We hope that the RBI will not lower interest rates until inflation is down to 2% and lower it slowly to keep tight control on inflation. It is the duty of economists and journalists to say what the RBI is unable to do and that is that growth at 8% with inflation at 10% is actually a fall of -2%. Trying to ensure liquidity is like trying to fill a glass which has a big hole in its bottom. In this case it is government borrowing. Instead of controlling useless expenditure and fiscal deficit the government is to borrow Rs 400 billion from the market. This takes money out of banks so the RBI buys back government bonds to refinance banks. Endless Quantitative Easing with printed money will only lower the rupee and lead to more inflation. Instead of controlling its expenditure the government has resorted to increasing black money and hot money. Individual foreign investors are now allowed to invest in Indian stocks which, it is hoped, will bring a flood of hot money and support the rupee. Trouble is, this money can flow out as quickly as it flows in. The second is for every politician to keep the pressure on the RBI to reduce interest rates. This will stimulate the property sector increasing black money and spending resulting in increased growth. The remedy is to reduce government expenditure, keep a tight control on inflation and reduce taxes which will allow people to spend. But then how will criminal politicians and thieving civil servants find money to attend mouth watering junkets like the World Economic Forum at Davos?