Does Increasing Interest Rates Curb The Present Inflation

Some people might be feeling that, recently I have posted too much of Technical Analysis. But Candle Stick analysis is like that can’t stop in between.

Now coming to today's topic, "Does Increasing Interest Rates Curb The Inflation Rate", there will be many questions on headline of the topic itself! Like…

1. Is there inflation in India?
2. If NO, why retail prices(Sugar, Grains & Cereals) are so high?
3. If YES, then why WPI is not showing it? And what RBI & as well as Government are doing about it?
4. Does RBI is in position to increase the Interest rates in present condition of recession? & etc...

If you go by WPI headline inflation numbers India is in Deflation! Since June 2009 WPI numbers are in negative, due to reasons like "BASE EFFECT". But does really prices of various commodities like food grains, manufacturing items or for that matter oil are low or in other words is there any contraction in demand? Neither is true in India's case! Yes Food grains like cereals price doubled within this negative range of WPI, i.e. 2-3 months. And oil prices are also almost same whereas International Oil Price crashed from $147 to sub $70 levels. And manufacturing sector products are picking up their respective prices example recently Steel Companies increased their prices. So where is the Deflation? Only in numbers! As I wrote many times BASE EFFECT is causing this mismatch & that is expected to fade away from coming months October & November. But is this BASE EFFECT does not cause any more problems in future? No, it will come into picture in next year when WPI compares with this negative range. So obviously it will be very high & that too it will be accompanied with the recovery in the economy with elastic in demand. So is there any solution for this problem, yes there is. First they need to change components & their respective weightages in WPI series & it should be changing every now then depending upon change in economy, per capita income & etc. Second they need to adjust the Inflation numbers seasonally on which much work is going on in NIPEP & DEA. And I think there should be some coordination while comparing to previous years' numbers so that some type of comparative analysis is done by taking previous month as well as previous year.

So does RBI increase the interest rates to control the Inflation or Interest Rate policies are growth oriented? Because many sectors like Textile & other export oriented industries are badly hit due to this recession. Many experts believe that interest rates have hit the bottom. That means no more easy money? According RBI deputy governor Interest rates will be same till March 2010. And there are various school of thoughts are going on whether the recovery will be V shaped or W shaped or U shaped?

And even if RBI increases the interest rates also does it control the prices? I dont think so, because I believe this increase in price is due to mismatch in Demand-Supply & not because excessive money chasing few goods. In addition to that this year drought is spoiling game much more. And rest of the commodities depend upon the international price movements like oil, sugar & etc. So what is the solution for this situation? I think there is no shortcut in this matter. There should overall revolution in PDS [Public Distribution System] using some new technology like UID, should increase the efficiency of the agricultural productions, less dependency on rainwater & etc.