Dr. Sanjiv Agarwal

The government of the day seems to be on the back foot as it has failed check inflation on a continuous basis, fuel prices have risen beyond imagination in past two years and it is not able to concentrate on reforms, given the political developments and host of corruption scandals which have weakened its functioning and decision making.

Oil companies (through government’s consent) increased the fuel (petrol) price by Rs. 3.32 per liter from 16th September, second highest in recent past (a hike of Rs 5 per liter on 15th may). This time not because of global crude price but to pass on the impact of depreciating rupee resulting in higher import cost. Petrol prices have gone up by whopping 39 percent since June 2010 and there have been nine times price hikes since then. However, diesel prices have gone up by just 8.37 percent since June 2010. Dispute this hike, oil companies may further hike the prices in future.

The increase in petrol price will only add to the already high inflation of close to 10 percent, highest since last 13 months (9.78 percent to be precise). The hike in petrol prices will only fuel the inflation rate. Reserve Bank of India once again raised the interest rates, this time being 12th in a row in last 18 months even as economy slows down in order to continue with its anti inflationary stance. RBI, however fails to realize that this is just not working since last one and a half years and it needs to change the prescription. The policy lending rate called repo rate went up by 25 basis points to 8.25 percent which may prove to be a futile exercise once again.

Short term measures like improving the supply side of goods and commodities causing inflation are required alongwith long term measures which may be technological advancement to improve production and productivity, proper implementation of governmental spending, infrastructure development and other measures leading to cost cutting as supply side of goods and services. Both, increase in interest rate and petrol prices will act as a catalyst to rising inflation. It is but natural that businessmen will pass on the costs to the consumer.

With interest rates going up again, increase in mortgage loan rates is sure to follow. The damage from higher interest rates could be mitigated by reducing the tenure of loan which is possible either by partial pre-payment or enhancement of EMI. This applies to all housing, durable, consumer and personal loans.

Inflation and interest is going to hit the forthcoming festive demand also. This time, even discounts and freebies may not help boost the demand as inflation and rising interest rate would spoil the game and adversely affect the sales in coming navratra – diwali season. According to a recent survey by Nomura, consumer sentiment is already turning negative, as seen in the decline in growth rate of consumer durables loans deployed by banks. The reason behind this decline is seen to be inflation and growing interest rates and this downturn is likely to continue until inflation is brought down.

While sales in some sectors may go up but it would be a challenging task – be it electronic goods, other home appliances or even jewellery. Real estate is really going to have tough times.

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