THE Reserve Bank of India’s continuing – but evidently futile – battle against inflation has started pinching the average middle-class.

A majority of salary earners are caught between a rock and a hard place – while the country’s central bank keeps jacking up interest rates, making borrowings dearer, inflation continues to make life miserable.

Last week saw the RBI raise the repo – the benchmark rate at which it lends money to banks – by 50 basis points to nine per cent, the highest in seven years, and the cash reserve ratio (CRR) by 25 basis points to nine per cent. But a day later, the figures revealed the ineffectiveness of the central bank’s one-point agenda to tackle the price-rise, by raising interest rates: inflation, as measured by the wholesale price index rose to 11.98 per cent – for the week ended July 19 – the highest since the current WPI series was introduced in the mid-1990s.

Just a year ago, inflation was at a moderate 4.65 per cent, and the RBI had set a cap of 5.5 per cent for the current fiscal. Now with inflation soaring to nearly 12 per cent, the RBI appears reconciled to the inevitable.

“Inflation will continue at the current level for the entire second quarter and up to the first part of the third quarter,” says Y.V. Reddy, the governor of the RBI. “From the second half of third quarter (mid-November), it should start moderating and from the fourth quarter we are confident that we should be able to bring it down to seven per cent.”

Indeed, this time around, the RBI chief will have to deliver, as the top bosses of the United Progressive Alliance (UPA) government will be closely monitoring developments on the price front. The government has to call elections by April – May, and it would not tolerate double-digit inflation when it seeks the popular mandate for another term.

For the past six months, the RBI – which is far from being an autonomous central bank – has been making loud noises about the need to curb prices. But all its efforts – by way of jacking up the repo or increasing the CRR – have gone waste.

Since April, the start of the financial year, the RBI has raised the repo (by 125 basis points) and the CRR (150 basis points) three times. But inflation has climbed steeply, despite the RBI’s efforts to tame it.

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THE RBI’s efforts to curb inflation have only succeeded in slowing down the economy, which was witnessing buoyant growth. The constant rate hikes have dampened investor sentiment and slowed down investment inflows.

The Reserve Bank last week was forced to acknowledge that the Indian economy would for the first time in four years slow down to around eight per cent, from the previous nine-plus per cent growth rates. “The economy has underlying conditions to grow at eight per cent,” remarked Reddy. “The current saving and investment ratio would normally assure eight per cent growth. I venture to say eight per cent plus.”

It was only last year that Prime Minister Manmohan Singh and his senior cabinet colleagues were boldly forecasting double-digit growth rates, and there were very few doubting India’s ability to match up China’s frenzied growth.

The government had unveiled plans of attracting investments of up to $500 billion in the infrastructure sector, which would boost GDP growth to 10-plus per cent. However, reckless spending by the UPA government – much of it on pet schemes of the Leftists, who were providing crucial outside support – on populist programmes, and an over-cautious central bank have slowed down the economy.

The spurt in global crude oil prices has also had its impact on the Indian economy. The government, after much dilly-dallying, went in for a modest 10 per cent hike in the price of petrol a couple of months ago. While continuing extending unjustifiable subsidies to consumers of petrol, diesel and liquefied petroleum gas (LPG), the government steadfastly refused to go in for realistic pricing of petroleum products – which would encourage consumers to conserve the natural resource.

But the RBI was directed to unleash its anti-inflationary weapons – mechanically raising interest rates every quarter and hurting home buyers, industries and other borrowers. Tragically for the government and the central bank, this has had virtually no impact on curbing the inflationary trend.

The monsoon is also likely to play spoilsport this year, with several important agricultural states – including Maharashtra, Karnataka and Andhra Pradesh – continuing to suffer from scanty rainfall. Already, Maharashtra is facing a massive power crisis – as against a peak demand of over 15,000 MW, the government-owned utilities are able to generate just a little over 9,000 MW.

The farm sector will continue to grow at an anaemic pace if the rains fail to bring cheer to farmers. This will affect the off-take of consumer goods during the peak season – which begins in October – ultimately hurting economic growth.

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BANKS in India have already started raising their lending rates. Last week, some of the largest public and private banks went in for an upward revision of their lending rates, just a day after the RBI’s unexpectedly sharp hike in the repo rate.

ICICI Bank, the largest private sector bank, and HDFC, the largest housing finance company, jacked up their prime lending rates by 75 basis points. ICICI Bank’s corporate lending rate has shot up to 17.25 per cent and the retail rate to 14.25 per cent. The floating home loan rates of HDFC have gone up to 11.75 per cent.

Leading public sector lender, Punjab National Bank, raised its rate by one per cent. State Bank of India, the country’s largest bank, is also expected to go in for an upward revision in lending rates.

The move has come as a nasty blow for the millions of urban consumers who have taken loans to buy flats in Mumbai, Delhi, Bangalore, Hyderabad and other major cities. Similarly, there are hundreds of thousands of borrowers who have opted for consumer, auto, educational, home improvement and other loans. Combined with the high cost of food, it threatens to upset many a middle-class budget.

The hike in housing finance – home loan rates have jumped by 60 per cent over the past three years – has caused a sharp slowdown in the real estate market in major cities. According to real estate industry sources, demand has fallen by almost 50 per cent in several residential localities of Mumbai and Delhi.

Though prices have still not started falling, they appear to have reached a peak in most cities, especially the metros. What is worrying the industry is that it appears to have coincided with a sharp increase in supplies, which could result in a glut in the market, leading to further fall in prices.

International developers and investors have been pouring billions of dollars into the Indian real estate sector over the past two years. Many of these projects are now nearing completion, and could flood the market with new apartments and office blocks. This could have a devastating impact on the real estate market.

Fortunately, bad loans are still rare in the mortgage business, nor do lenders offer sub-prime mortgages to consumers. Consumer and auto loans do turn sticky, but most lenders claim that bad loans are negligible in the industry. They also do not have to resort to drastic measures like foreclosures, so the impact of a spurt in interest rates is unlikely to be cataclysmic in India.