RBI should have 29 different interest rates for 29 different states based on the Taylor’s law
RBI’s interest rate fixing in India is a scattershot approach, which assumes that the country is uniform, which is not the case in reality. A uniform interest rate, therefore, is a wasteful proposition in a country that varies from the prosperity of Punjab to the utter neglect and backwardness of Tripura – both economically and socially. Progressive states like Punjab, Haryana, Gujarat, Maharashtra, Tamil Nadu and Karnataka have high per capita income, low level of hunger, better infrastructure and low poverty rate, thus inspiring confidence in the minds of investors. States like Orissa, Rajasthan, Bihar, et al find it difficult to attract investment. In this light, the current interest rate/lending rate mechanism is out of sync.
Furthermore, economist & Nobel laureate Taylor explained in his widely accepted Taylor’s law that if inflation augments by 1%, the interest rate should rise by a little over 1%. He also remarked that a rise in total output by 1% should correspond with a 0.5% rise in interest rate, and when it falls by 1%, interest rate should be cut by 0.5%. However, RBI’s methods in this direction have confounded everyone. When SDP fell for some states (like in Karnataka, last year’s growth fell to 14.92% from 17.35% the previous year), interest rate has been uniform. Similarly, when the output rose, RBI did not act in accordance with Taylor’s principle.
RBI’s interest rate fixing in India is a scattershot approach, which assumes that the country is uniform, which is not the case in reality. A uniform interest rate, therefore, is a wasteful proposition in a country that varies from the prosperity of Punjab to the utter neglect and backwardness of Tripura – both economically and socially. Progressive states like Punjab, Haryana, Gujarat, Maharashtra, Tamil Nadu and Karnataka have high per capita income, low level of hunger, better infrastructure and low poverty rate, thus inspiring confidence in the minds of investors. States like Orissa, Rajasthan, Bihar, et al find it difficult to attract investment. In this light, the current interest rate/lending rate mechanism is out of sync.
Furthermore, economist & Nobel laureate Taylor explained in his widely accepted Taylor’s law that if inflation augments by 1%, the interest rate should rise by a little over 1%. He also remarked that a rise in total output by 1% should correspond with a 0.5% rise in interest rate, and when it falls by 1%, interest rate should be cut by 0.5%. However, RBI’s methods in this direction have confounded everyone. When SDP fell for some states (like in Karnataka, last year’s growth fell to 14.92% from 17.35% the previous year), interest rate has been uniform. Similarly, when the output rose, RBI did not act in accordance with Taylor’s principle.
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