After yesterday’s hike the rates have increased to 8%. This move is aimed at maintaining the inflation at it’s current level or in simple words check the increasing cost of living.
The two devils in this game have been named as rise in fuel costs & increase in cost of industrial goods. What does an increased rate of interest means to me- High cost of currency! High cost of currency means- difficult money. Difficult money means, less money for future production, this in turn means – Goods to be sold at higher price. Lets dive a bit deeper (but do understand, I am sharing only what I understand, an open idea forum. That is it. Whole world is feeling the pangs of inflation.)
In this article – I will talk of the second reason- The increased costs of manufactured goods.
How much increasing interest rates does helps? It makes borrowing hard. High interest rates means, if you are not having enough back up, you may not borrow. Or, may be, borrow a little.
What is the actual effect of this increased interest rates to different types of industries?
Large Scale industries- It affects them the least. Their borrowing won’t reduce that much. For one thing their borrowings are large, second most of their transactions are within, inside the banking system. So apart from the high cost of borrowing, it won’t effect them. Second point, when you are dealing with large industries, they can easily get their borrowings refinanced. In short, also the point of attention, when the money never leaves the bank- it remains theirs. Not much risk.
But when it comes to Medium scale industries & small scale industries, their interactions are smaller plus the money withdrawn has a strong chance of leaving the banking system, a huge risk. It goes to common people, it goes to small merchants, who may or may not be using banks. The trouble in releasing the money is high. It makes it very hard to finance the MSIs and SSIs. Difficulty in getting needed finances could force these industries to increase the prices. Infarct, to inflate at their own levels.
As an example-
When LSI asks – it asks for Rs. 100. It may actually be taking loan of Rs. 75. And that money too will remain inside banking system.
But when SSI asks- it asks for Rs. 10. It could very well be taking out complete Rs. 10. And use it all up- out of which nothing may return (except for the interest)
My question is- How do we calculate the advantages of increasing interest rates? Is this factor too kept in mind? Could a special package of lower interest rates to selected SSIs & MSIs help in reducing the cost of manufacturing goods? Could lower interest rates specifically for SSIs help in reducing cost of manufacturing goods. Could that, in turn, help in improving our IIP?
Can it, in turn, help in taming inflation?
PS. – if this article carried any meaning, i would invite you to read the next article which will focus on cost of fuel and a few points to highlight the challenges it carries for us people and a few suggestions. (Interesting?)