Why not let rates adjust automatically every month?

A retired civil servant, Alok Sheel, revisits the old argument about low interest rates. He calls it financial repression. Retirement must be very liberating for civil servants. "Financial repression is a term used to describe a policy environment where central banks and governments deliberately keep interest rates below the rate of inflation," he writes. In which case we Indians are a very repressed people because our politicians, the Congress and now the BJP, fervently believe that low interest rate is the only solution to India's poverty and all its ills. The previous Governor of the Reserve Bank, Raghuram Rajan believed that interest rate should be 150-200 basis points above the rate of inflation. This is known as the real interest rate. Previously inflation was calculated on wholesale prices but Rajan based his monetary policy on the Consumer Price Index, which is usually much higher. Earlier this year the WPI was actually negative, mainly because of lower commodity prices, while retail prices were high at near 6%. Food and fuel have much greater weight on retail prices and these cannot be controlled by raising interest rate. Food prices are dependent on supplies, which are dependent on the vagaries of the monsoon, while fuel depends on international prices, which can vary because of war in the middle east or a severe winter in Europe. Prices change fast but monetary policy has a lag period before it works. Core inflation measures retail inflation minus food and fuel, but those two affect the poor the most. Some kind of inflation targeting is practiced in almost all economies in the world, the only difference being what goods and services go into the price basket. "In market economies with a developed financial system, where alternative avenues of investment are available, financial repression discourages financial savings. It pushes savings into risky assets and unproductive sectors such as gold, speculative real estate and moneylending," writes Sheel. From 2000 to 2007 when India ran positive real interest rates our domestic savings rose from 23.8% to 36.8% of GDP. Current Account Deficit, or CAD, was less than 1% and growth was nearly ind double digits. From 2008 to 2013 real interest rates were negative so savings fell to 33% of GDP and growth rate fell to below 5% while the CAD rose to 4.5%. Negative real interest rates from 1987 to 2000, known as the Greenspan Put, resulted in the sub-prime crisis that nearly brought down the global economy. Sheel reckons that this pressure to lower interest rates is taking away any autonomy that the Reserve Bank is supposed to have. To us it seems simple. Let parliament decide the level of the real interest rate and the interest rate will adjust automatically to the inflation rate published by the Central Statistical Office. But then the politicians will only have themselves to blame.