Can you bluff the economy?

Last week the Reserve Bank cut interest rate by 25 basis points to 7.75% and the Cash Reserve Ratio, which banks have to hold to guard against bad loans, also by 25 basis points to great rejoicing by politicians and business fellows. " It is a positive step which will infuse liquidity and help in catalysing growth," said Industry Minister, Anand Sharma. TOI, 30 January. " A weak consumption and investment demand has been derailing the growth momentum of the economy and today's announcement would help improve consumption and investor sentiments," said CII director, Chandrajit Bannerjee. Will it? The State Bank has reduced its base lending rate by only 5 basis points. Since January 2012 the RBI has reduced interest rates by 75 basis points while CRR has been reduced by 200 basis points releasing a whopping Rs 1.4 trillion to banks for lending. Last week's 25 points reduction released Rs 180 billion to banks. The Statutory Liquidity Ratio, the amount banks are required to invest in government bonds, has also been reduced to 23%. All this to increase liquidity into the system, bring down lending costs and make it easy for banks to lend for business or personal loans. But banks have chosen to keep their money in government bonds so the SLR has stayed at 30%, a full 7% more than required, because there is no demand for loans, keeping money as cash earns nothing while investing it in government bonds earns interest and they are safe. " Now we can earn 8-8.5% by simply parking it as SLR which would not have been possible if CRR was not cut," said a bank chief. TOI, 1 February. With Consumer Price Index at over 10% people are seeing their buying power being eroded and are reluctant to take loans for large purchases. With diesel prices being raised every month, electricity bills becoming exorbitant and food prices rising daily the biggest enemy to the economy is inflation. To control inflation interest rate should be raised to 12%. This will encourage savings as people will take advantage of real returns on their money. The attraction for gold will decrease saving huge amounts of foreign exchange and improving the Current Account Deficit and property prices will fall to realistic levels. In 1994-95 interest rate was 10%, 1995-96 it was 12% and from 1998-99 it was 10.5%. Growth rate was 5.5% from 1996-2000 which is the same as now. Why was the economy growing despite such high rates? Because with low inflation people were not worried about spending and industry could expand knowing that demand was strong. Narasimha Rao was the Prime Minister from 1991-1996. He had the courage to do what is good for the country. That is why he is hated by the Congress which exists only to worship The Family. You can bluff the people but can you bluff the economy?