Higher Interest Rates Will Choke Economic-Growth...

Article;
Policy makers running out of time options on rupee.

Comment;

Subbarao is right when he says that he does not target any exchange rate but his job is to rein in volatility and inflation. The rupee is already undervalued and its value will slowly converge to its true value, around Rs 75 (an expectation). The rupee is depreciating because the American central bank is planning to withdraw its $85 billion stimulus which has sent yield on American bonds up which has made them more attractive compared to the Indian debt and equity. The Indian government is trying to bring dollar denominated bonds which can help borrowing dollars to finance the CAD which I think is not a bad idea in the short-run but in the long-run we need to increase exports to pay for imports. A low foreign exchange reserve and demand for dollars has also put the Indian rupee under pressure. It is an irony that the central bank has put hold on investment by not reducing interest rates and we want higher foreign investment just to finance the CAD. We do not need to increase interest rates since interest rates in INDIA are already high compared to the US and it will choke the economic growth. And, only economic growth -more production of goods and services- can lower demand for imports. We desperately need to increase production of goods and services to reduce imports and increase exports to pay for imports which is only possible if interest rates come down. But we have paused, as long as, stability in the foreign exchange market is restored…

Growth Over Inflation...

Article;
RBI should hike rates even if it sacrifices economic-growth.

Comment;

RBI has not one but two big reasons to hike interest rates. Number one inflation which is above 9% but we do not consider CPI as an index for inflation. We have accepted WPI as a gauge of inflation, more appropriate for rate cuts. According to CPI both food and fuel inflation are above 10%... Therefore to bring down them near to 5% we need to raise interest rates. The second reason is falling rate of bank deposits. Our deposit rate is lower than our lending growth rate which is the second reason to tighten liquidity. They are discouraged because the interest rate they are getting for their savings is less than rate of inflation. I mean real interest rates (nominal interest rate minus inflation) have become negative. And, a third and well know reason for monetary policy tightening, these days,is our CAD. So far inflation was our biggest concern. Every  time growth picks-up in INDIA inflation reaches 10% and sometimes more than 10, as high as 20%, which points that inflation in INDIA is a structural problem and 10% inflation has become the “new” normal. If we accept CPI inflation as sticky only then we have a reason to soften interest rates or otherwise we have all the reasons to tighten liquidity conditions. But our growth concerns now (i think) have replaced the focus from inflation because everybody is now demanding higher income to cope with the rising prices to compensate for loss in value of purchasing power and savings…

Lower-Redenomination (China)...

Article;
China risks following Japan into economic-coma.

Comment;

Recently I thought that any currency should appreciate in the long run and moreover its domestic value must also increase because marginal utility starts declining after reaching a height therefore prices start falling. So in the long-run we have increasing returns from money supply because prices start falling as every economy falls in deflation after a boom period. And, it makes sense why prices start falling in the long run because demand equals supply and after a point supply exceeds demand and prices start falling. We call it deflation and as an example we have Japan and the US… They are trying to avoid a deflation but it is natural for prices to fall in the log-run, as have been said before, and we can make use of deflation too to increase real wages and income (any type of wealth) by floating a lower denomination of a currency. So far China has used higher denomination means Yuan to Renmibi but now it has to move from Renmibi to Yuan. Money-supply wise more Yuan and less Renmibi in circulation. That would increase real value of the Chinese Currency. It seems logical that the domestic value of a currency should also appreciate in the long-run and not like the way it is executed in the real life. We choose higher redenomination when we should go down, I mean lower denomination. We are progressing therefore value of money must also increase…

Inflation and Depreciation...

Article;
It will be illogical for RBI to cut rates.

Comment;

It is true that the RBI should be more concerned about inflation than the rupee exchange rate. We read that Indian rupee is undervalued and that its right value is Rs 76 per dollar, according to Mac Donald Currency Index. The RBI should be worried about inflation which has sent the real interest rate in negative and people’s savings are losing value because inflation is higher than the interest rate they are getting for their savings, which has reduced the rate of deposits. They are discouraged if they know… Our inflation rate is 9% and if our currency depreciates 10% once a year we should not be surprised. Our inflation rate and our depreciation rate is almost same therefore (i think) we have a correlation, and there should be... I think if the RBI concentrates on inflation it will keep the currency depreciation in check because tighter monetary policy will release less liquidity in the system…

Chinese Economy...

Article;
All the signs coming from the economic data show that China is in big trouble.

Comment;

We know that rising wages will be detrimental for Chinese competitiveness but good for domestic consumption. China has absorbed all the surplus labor and has reached its limits of expansion and can not expand without raising wages. I think China will continue to use depreciation as a tool to retain its competitiveness. There are two things to achieve competitiveness either devaluation or depreciation. The former is materialized when the market cut wages to achieve competitiveness in foreign trade and the latter is done with a view to achieve cheap currency and generate demand. I think we will see the Chinese economy slowly turning to domestic demand after cashing three decades of foreign demand…

US should invest in INDIA and spend at home...

Article;
Subbarao needs a bazooka not a squirt gun.

Comment;
As far as FIIs are concerned they also must be hedging themselves against falling rupee as people hedge them against inflation by investing in gold. The issue with these investments is that the returns are subject to decrease in total value as the time passes because prices may rise faster than income. It is profitable to invest in India where interest rates are higher and spend that money in the US where inflation is low. Interest rates are higher in INDIA compared to the United States. This is also profitable from the point of view of micro saving and investment. US citizens should invest in INDIA. They can earn higher interest rates by living in a low inflation country…

Inflation, domestic and foreign...

Article;
Is the Indian-Economy heading towards stagflation.

Comment;
The key to reduce inflation is to bring food inflation down by implementing food security bill. By bringing inflation down we will have more room for aggressive monetary easing to push for higher growth rate. India is not too much dependent on exports and our problems are mostly domestic (inflation) and international due to fuel of which we could not take advantage of falling prices due to weakening currency. For INDIA the problem remains the same, "inflation" domestic because of food prices and international because of fuel prices. Monetary tightening can help reduce demand and inflation but we are, now, more concerned about bringing growth back because we think we are now stagflating… Unemployment is not a problem in INDIA but low per capita is always a problem. By hiking interest rates the RBI has once again signaled that keeping inflation, domestic and foreign (due to weak currency), low is its top most priority…

INDIA has the potential but inflation needs to come down...

Article;
BofA three positives for Indian markets.

Comment;

India needs two things to grow in the long-run, a good rate of growth of population, a supportive one, and a good stock of food, which INDIA has to push for growth. INDIA has the capacity to withstand any crisis. We have shown our resilience... We are only stuck in inflation, especially supply side, transport and availability of demand, Good & services, which is why prices are high. We need more investment to bring the articles to the market...

Article;

RBI Guv D Subbarao hikes interest rates but not quite. 

Comment;

If Subbarao is concerned about inflation then a rise of 50-100 bps hike in interest rates will only dent inflation by 1 %. Actually the Taylor rule says that if we have to reduce inflation by 1% then the Reserve-Bank has to increase interest rate by more than 1%. But INDIA's woe is imported inflation, especially through oil and transport prices transmission to other prices. I'm not sure how this rate hike will play out to reduce inflation, especially CPI. I hope that 1 % hike in interest rate will reduce inflation by 1% (at best)...

Trade...

Article;
INDIA'S economic reforms not enough -US trade officials.

Comment;

The priority for both the countries in the long run is to increase employment opportunities and a higher per capita income for the growing population and, in short, more tax because of our ever growing demand and magnitude of poverty. No major country is without poverty. Poverty in emerging economies is a major issue and more acute in terms of numbers. Therefore to remove poverty we need more jobs for those do not have a job. Manufacturing may be capital or labor intensive depending on the level of technology but for a labor rich country a labor intensive technology is more appropriate to reduce unemployment. Therefore as far as technology is concerned we need to import more labor intensive technology in manufacturing and they would be cheap compared to capital intensive techniques. But this time when there is a great wage differential between the US and INDIA it is profitable to put manufacturing plants in INDIA and exports less-skilled job to INDIA. Every job created will create more jobs in the partner’s economy. May be in the long run INDIA would be able to export less skilled jobs to the US…

Tie-up rupees with dollars...

Article;
Rupee may fall further as US economy improves

Comment;

Indian currency is depreciating because of out pour of dollars and investment from the economy and, the central bank can not loose monetary policy since it will further depreciate the currency. Our major concern is CAD and imported inflation because of oil which can improve only if, either currency becomes strong, or imports go down. But the Indian currency is depreciating and the RBI can not cut interest rates. We are in a paradox… We can not loose monetary policy and we too can not increase interest rates so that less money supply makes the Indian currency strong because Indian Businesses have already stalled investment due to high interest rates. The prompt reply of a depreciating currency is to increase supply of dollar by the central bank, but, here again; it can not help much since we are already short of dollars. But in this situation if the RBI demands more dollars it will put more pressure on the rupee to depreciate and dollar to appreciate, and, we need to increase the demand for the Indian-rupee so that it can appreciate with the demand and go strong. We need both a strong rupee and a good foreign currency reserve which can be achieved if we increase demand for Indian rupee. Demand for Indian-Rupee will help us improve foreign exchange reserves because people will buy the Indian unit with dollars to buy Indian-exports. India needs to tie-up the demand for Indian-Rupee with the demand for dollars. Let people buy the Indian-Currency with the dollars…

Minimize Unemployment...

Article;
RBI must understand its mandate

Comment;

We need to look at the unemployment rate to decide the course of growth. Somewhere it (the unemployment rate) is 2.2 and at other 3.8. Some expect it to be around 22% which can not be accepted as wrong since an economy has many types of unemployment, frictional unemployment, seasonal employment, disguised unemployment, etc. etc.. which can be added to arrive at the above figure. In the US the total employment figure is around 65-70% even after the recession. Economics aim at minimizing unemployment...

Early to taper QE...

Article;
US Federal Reserve and China churn already choppy global economy

Comment;

It is too early to withdraw the stimulus because we need to achieve full-employment and according to Keynes it is established with 5% frictional unemployment. The actual target for unemployment is 5% and not 6.5% as the FED says. We need unemployment at 5% to restore full-employment. I think it is still too early to taper QE...

We Need A Strong Rupee For The Reserve Currency Status...

Article;
Investor Sentiment Will Turn In Favour Of Rupee -Chidambaram

Comment;

The government and the RBI should aim at increasing demand for Indian-Rupee in the international market which has long-term implications. A stronger rupee will attract more capital inflows. It is an irony that we need to collect US$ for CAD but the long-run foreign investment depend on a strong rupee. We need more dollars which means the demand for dollar already exists therefore it is a strong currency but we need to create demand for Indian Rupee so that we are also in the race of acquiring the status of a reserve-currency. We are the third largest country after US and China in term of GDP but we have no ambitions like that… There should be a balance between the demand for dollars and demand for Indian-Rupee to keep their values/exchange rate right. We see that investors find refuge in a strong economy and currency like the US when the economy recovers. It is a strong economy that has maintained its investment status even after the banking crisis. I think in the long run we are competing with the US…

Food Security Bill Over FDI in Multi-Brand Retail...

Article;
Chidambaram advocates FDI in multi-brand retail

But it is more important to bring Food Security bill than to attract FDI in multi brand retail. Both are aimed at controlling inflation by removing supply side bottlenecks for food. The demerit of FDI in multi brand retail is that it makes us dependent on foreign capital inflows. I agree that FDI's are long-term investments but food-security is in our own hands and we are delaying its transmission to higher growth rate because high food prices are stopping us in from lowering interest rates…