Software & Finance - Monthly Magazine Online

Volume 4 - Issue 7

July 2014

Deflation in India?

In Oct 2008 RBI Interest rate was set at 9.0% and the inflation was around 6.0% at the time. To accelerate the growth, RBI slashed the interest rate like anything almost 50% in 6 months time frame. In April 2009, RBI set the interest rate at 4.75%. It triggered the inflation like anything and also created a credit bubble. In 2009-2010, Inflation was its highest level in the last 15 years crossed more than 12.00%. From March 2010, RBI has started really worrying about the inflation rate and started rising the interest rate to tackle the inflation. Currently the interest rate is at 8.50% as of Oct 25, 2011 and inflation came down to 8.00% from double digit.



RBI Interest Rate Change History


Currently interest rate was set at 8.00 % by RBI on Jan 2014. With the recent political change, when the RBI starts increasing the rate further, it will end up in collapsing the home prices.


The other important factor is unemployment problem in India. Currently it is under control but the labor cost in India is sky rocketting and now india is not considered as cheap labor compared to China, Philippines, Indonesia and other south american countries. Now the call centers are getting relocated from India to other countries. This would be a huge problem for India since India is depending foreign countries for growth since it did not do any products, especially software products on its own.


When the unemployment kicks off and RBI increases the interest rate, inflation will get controlled completely. That's the good news, but the bad news it will not only control and it will continue to create deflation because of domino effect. However deflation is good for poor and lower middle class people since they can afford food, transportation and living cost easily.