The Dilemma of Interest Rates

Prices are rising and the word inflation is on everybody’s lips. Pressure is on the central banker of the country to take action. Invariably the burden of controlling inflation falls on the monetary policy. Many governments decide that it is time to follow a Tight Money Policy. Interest rates are raised and it becomes harder to secure credit. But the government also has to balance it with helping industry.

In countries like India the growth rate is slowing down. There is a necessity to stimulate the economy. Industrialists would like to secure easy credit so that they can develop their business. They put pressure on the government not to increase interest rates. This is where the government faces the challenge of doing a fine balancing act. They need to raise the interest rates, but at the same time not raise it so high that it hurts the economy adversely.

The responsibility of handling interest rates is with the Federal Reserve in the United States and with the RBI in India. The overall goal of the interest rate regime is to lower unemployment, stabilize prices and boost the economy. But they also have to control excessive growth lest it lead to hyperinflation.