Wednesday’s newspaper headlines, highlighting the Reserve Bank of India’s (RBI’s) new muscular approach to squashing inflation, would have made for depressing reading to the aam aadmi. Now, it’s not just my vegetables and milk that are getting costlier, but also my home loan installments and car loans. What have I done to deserve this? Well, there’s no point getting pissed with RBI Governor Duvvuri Subbarao. He is the bad cop who had to step in to fix things when the good cop (the government) is busy living beyond his means. The fundamental problem is this: this government is living beyond its means – spending Rs 12,57,729 crore when it earns Rs 7,89.892 crore, according to the last budget. It has to bridge this gap by borrowing from you. This is one reason why interest rates have to go up. When government borrows too much, it pushes you out of the picture. But like an alcoholic who has had far too much to drink and is still looking for one last swig before dropping into the next gutter, the government wants to spend even more. It wants to give subsidised food to 75 percent of the population in the garb of a Food Security Bill, and higher wages to the rural poor through the National Rural Employment Guarantee Act. This benefits the rural aam aadmi and aurat, but everybody pays the price in the form of higher inflation. Because when the government does not have money, it prints fresh notes to pay its bills. When too much money chases the same amount of food and cereal, you have inflation. The only way to feed the poor is to grow more food, but this can’t happen when you don’t improve agricultural productivity through better irrigation, seeds, fertiliser, and farming techniques. The villain of the piece is thus the government, which is trying to overspend without earning enough. It is eating the seedcorn instead of sowing more to reap a better harvest. And its sins have come back to bite us all in the form of double-digit inflation. The RBI thus has to do the dirty work and cover up for the government’s failures. But even this does not make it a villain. The RBI is actually a do-gooder in villain’s garb. Dear aam aurat, here’s what you gain from Subbarao’s bad cop role. First, raising interest rates is not about hitting you with higher-cost home loans. It also means raising deposit rates. Ask aam dadaji. His bank fixed deposits will earn him more. He should be grinning from ear to ear. Just imagine: currently you get 9.25 percent as the top rate from the State Bank of India when inflation is at 9.44 percent and rising. In essence, you are gifting the money free to the bank, which in turn is gifting it free to the government. By raising interest rates, the RBI is trying to give you a better deal after adjusting for inflation. Subbarao is also trying to hit the government on the head to prevent it from overborrowing on the cheap. When government overborrows, the cost of your money goes up. Second, if high interest rates bring down inflation, you have a double gain. You earn higher rates, and inflation corrodes less of its real value. Third, aam uncle-ji, don’t fret about housing loans. If loan rates are not raised, the realtors will fleece you even more. You benefit when house prices fall, and house prices can fall if loans are NOT cheap. When you are forced to think twice about going to HDFC for that home loan, the realtor knows he has to entice you with something else – maybe a price reduction or some freebies. Your bargaining power improves when interest rates rise. Fourth, don’t forget, builders also have to borrow money. When rates rise, they are pushed harder to sell their stocks of flats in order to reduce their costly borrowings. This again is good for you, if it happens. It may not happen because the builders often run a cartel, and prices are rigged upwards. But you should at least get some psychological pleasure out of knowing that builders are also getting coshed by the RBI’s tough money policy. A corollary: one reason why your dal-roti and veggies cost more is because your middleman trader is hoarding more of it, just like your builder is. By making credit costlier to him, the RBI is trying to nudge him to dehoard and destock. If that does happen, prices can ease a bit. You gain on the swings what you lose on the interest rate roundabout. Fifth, aam bhaiyon aur beheno, let’s understand what rising interest rates are trying to signal to all of us. Higher rates shift money from the pockets of borrowers to savers. Subbarao is thus trying to say, please save more and spend less. Higher rates shift money power from the young (who are usually borrowers) to the old (who are usually savers). But saving more and spending less is not bad advice whether you are young or old. Maybe you should be saving more to borrow less on your next car. Are we saying there is no downside to higher interest rates? Of course, there is. The stock markets will fall. The companies we work for will find demand slowing and profits tapering off. Our salary increments will come under pressure, if business falls. But just as we have to fast for a while when we have had too much to eat the other day at aam aunty’s brother’s wedding, we have to tighten our belts now to make up from all the partying we did from 2003-2010. So hold that virtual rotten tomato you were planning to fling at Subbarao. He is more sinned against than sinning.
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