Inflation at 7.61% its ramifications on Indian Economy - Markets!

The provisional data released on 09.05.2008 that inflation expectations are at 7.61% highest in the past 42 months, has sent jitters among equity markets and fears of actual inflation being more than 8.3% as the recent revision of earlier figures are corrected by 110 basis points by the government. What will be the effect of this 8% inflation on Indian economy, you get lots of stuff from various sources. The real issue is inflation is a silent killer of all economic growth(development) and hurts the unorganised sector of working class, the common man more than anyone. Let me analyse the negative returns a safe investment like bank deposit generates:

Any bank offering say 9% interest on long term deposit, deducts the income tax on interest paid at source(TDS); thus, puts less than the assured interest in the hands of an investor. Now adjust the inflation of 8% to the net interest received will result in negative returns to the investor keeping money in a bank deposit. Banks need to raise the deposit rates to attract deposits, which adds to their cost of funds, when passed on to the users of funds from banks(Borrowers) will have to pass on to the consumers once again as their cost of production increases. The increase in prices of goods and services thus, will add to raise in inflation. This is a vicious circle, that is the reason why all governments, regulators are much concerned about raising inflation.

One interesting issue, growth of economy or expansion of economy will tend to raise inflation, thus, for the fear of facing higher inflation growth cannot be sacrified. Recently, our Finance Minister was referring to one observation: in 1990s our country had 8% inflation and 4% growth, where in the last 4 years we achieved 8% growth with 4% inflation. This is really comendable performance. Now the year 2008 is seeing 8% inflation and 8% growth(?) is the big challenge government and regualators are facing. What exactly is contributing to this raise in inflation to over 8% levels, and how much more it can go up? what are the remedies available for controlling it to tolerable levels of 5.5% as being targetted by RBI, shall be discussed in great detail from now on!