Not By Interest Rates

Not By Interest Rates ON the face of it, the Reserve Bank of India's mid-season measures of further reducing the lending and deposit rates of banks is to be welcomed, though not for the reason the monetary authorities have sought to advance, namely, a marked decline in the inflation rate over the past several months. Nor is there much merit in the view sought to be purveyed by t he RBI that broader macro-economic goals can be achieved by developing interest rates as a flexible instrument of monetary policy to be used in response to changes in the overall economic situation. By its very nature, in the Indian situation with vast market imperfections, the interest rate is a relatively blunt instrument. It is likely to be effective, if at all, only at the extremes. In that sense the interest rate policies pursued by the RBI, particularly in the period since September 1990, have created major distortions in the economy. First, a meaningful classification based on functional categories and sectors was dispensed with and a process of eliminating cross-subsidisation