Contractionary Monetary Policy with Increasing Interest Rate : Needs to Pause to Observe its Repercussions

Contractionary Monetary Policy with Increasing Interest Rate : Needs to Pause to Observe its Repercussions

It is being observed that in India, RBI has been resorting to Contractionary Monetary Policy almost for last 6-months to chase Inflation.

Contractionary Monetary Policy in simple terms, is reducing money supply in an Economy by increasing Interest Rate.

When Interest is increased, it is expected that more deposits would come to Banks, Credit would be dearer resulting in reduced consumer spending, that can go against the inflation.

Since May 2022, the Reserve Bank of India (RBI) has already done 3-Times hike in Interest Rate, its Repo-Rate was increased from 4% to 4.4% in May'2022, then to 4.9% in June' 2022 and again to 5.4% in August' 2022.

As RBI increases its Repo Interest Rate ( it is the Lending Rate of RBI to Banks ), the Commercial Banks also keep increasing their lending rate, a safe margin of 3-5 %  easily, is the corollary for Retail Borrowing and further higher for Corporate/Industrial/Institutional Borrowings.

To chase Inflation by Contractionary Monetary Policy always is not the best option because, the most notorious effect of Contractionary Monetary Policy is -Unemployment.

Federal Reserve adopts Contractionary Monetary Policy often and at repeated intervals because they in USA are on a different footing, and are tapping the Global Markets to their advantage. Recently Federal Reserve has done tightening of its interest rate by adopting Contractionary Monetary Policy that has made USD to appreciate and causing also havoc to other currencies including Indian Rupee.

The Gauge of Inflation always starts with Food Inflation, it is more so in India. The Food Inflation in India is also not solely due to Extra-Supply of money in the economy, we have various other factors like Seasonal Natural Calamities like Floods, Harvesting Season and  Lean Season, as we have mediocre supply chain infrastructure and storage conditions, that brings in Food Inflation Seasonally.

RBI has called for its Monetary Policy Meeting on 03-November-2022, however, further tightening of Interest Rate having done 3-times in last 6-months, should not be the temptation to chase inflation only.

We have a huge population to feed and Unemployment as the consequence of Contractionary Monetary Policy may have more detrimental effect for India as well.

We are not obliged to follow the Foot Steps of Federal Reserve for that matter, while their Economy and Indian Economy operate on different footings, strengths and weaknesses, Increasing Interest Rates in Indian context has to be exercised with lot of caution as Unemployment would be the biggest pit fall out of it for India.


About the Author : Dr. Nimain Charan Biswal is a B.Sc.(Agri. Science and Technology), M.B.A. and Ph.D.(Management Area ) by qualifications; and he has 36+ years of work experience in both industrial and development sectors in diversified fields of social importance. He has been educated at Orissa University of Agriculture and Technology (OUAT)-Bhubaneswar, Institute of Rural Management Anand (IRMA) and Gujarat University (with Resource Support of IIM-Ahmedabad). He is further educated at IIM-Calcutta, XLRI-Jamshedpur, Apple Computer Industries and Spar Inc., USA. He has worked for reputed National and International Organizations in Senior/Top Management Capacities at Board level as well as Managing Director and CEO. He is a management expert covering extensive areas from management in industrial sectors, management in agriculture and dairy, development management to management of public systems. He is a prominent professional of India and known Internationally as well. He lives at Mumbai in India.


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