Illogical expectations bad for the economy

The government and industrialists are very keen for the Reserve Bank to cut interest rate further. Cheaper borrowing costs will encourage new investments which will increase growth and thus create more jobs. But companies will invest more only if there is demand for their products and growth in consumer demand is at its lowest in 10 years. Even so called Fast Moving Consumer Goods, such as toothpaste and detergents, have slowed. Since people do not buy these using bank loans or credit cards it is difficult to understand how a cheaper borrowing cost is going to help. There is anxiety that there is a short window of opportunity for the RBI to reduce rates before food prices start to increase, if the monsoon is poor, and oil prices may rise later in the year as the European economy gathers steam. However, if food and energy costs do rise inflation will rise again and the RBI maybe forced to raise rates. What is the point of lowering rates only to raise them again after a few months? Mystery. The Chief Economic Adviser, Arvind Subramanian also wants a cut in interest rate because inflation is within targets set by the RBI, with retail inflation falling to 4.87% in April, well below the RBI's target of 6% by January, 2016, and wholesale prices falling by -2.65% in the same month. He is worried about interest rate cuts in China which will make its currency weaker against the rupee, making Chinese goods cheaper in dollars. That will affect export of Indian goods and hamper the Prime Minister's efforts to increase manufacturing in India. But a weaker rupee will increase the cost of imports, especially oil, and add to inflation. In setting interest rates the RBI surveys the population to judge the " inflation expectations " of the people. From March 2011 to March 2015 between 60 to 80% of people expected prices to continue to rise by more than 10% in the short term, until the December quarter of last year, when the number fell to 36%. Similarly, 70-80% of people expected long term inflation to rise by over 10% over a similar period but that number has fallen to 39%. There is no mystery in these figures. A lot of decisions are made by people on perceptions, not based on any economic calculations, or on what they are told by relatives and friends. They voted against the ruinous Congress policies of handouts, in parliamentary elections last year, but enthusiastically voted for even more suicidal policies of the Congress agents, the AAP Party, in January this year. Reducing interest rate will cut returns from term deposits paid by banks and if people feel that they are losing more from inflation than they are gaining from financial investments they will resort to buying gold. Gold imports rose by 78% to $3.1 billion in April. Even so gold smuggling increased to Rs 10 billion last year. Since only 10% is caught the total figure could be in excess of Rs 100 billion. Recently a film on constipation has raked in over Rs 1 billion. Is that a hint for the RBI to loosen up?