Food-inflation, gold,...,...

If inflation and supply side factor are considered it is a structural problem because due to high inflation, especially oil (we can do little about) and food, which are stuffed in government coffers. It is all the indifference of the government which has made prices overshoot the inflation target, and this is about food and food prices... Therefore, if prices are high due to mismanagement of the government and fiscal spending (too much), it is a structural problem. Liquidity I do not think is a problem since inflation is high and prices are a problem, too much money chasing the government food stock…

If banks will buy gold from ordinary citizens it would be inflationary since it will push liquidity into the system. It is like open-market-operations when you buy gold/bonds it means you are increasing money supply and therefore expected inflation and when you sell it, it means you are sucking liquidity out of the system and thereby lower inflation. It is not intelligent to put pressure on already elevated prices...

If everybody will try to sell the same time, prices will start falling… But why anybody would sell gold and not holding it, because prices may still go up? If they are expecting a downturn, sort of crisis, they will buy gold because the first thing that goes down in any crisis is the stock market and since there is an (observed) negative correlation between the gold prices and stock prices it means that if the gold investors are expecting a downward correction in the stock-market or a slowdown in the economy they will invest in gold, a safe-heaven like dollar for investors. And that will keep the gold prices from going down, too much. Investment in gold will increase and will increase our imports. Our demand for gold is largely inelastic. A slowdown will further increase demand for gold and its import further, again, worsening our CAD. If the government wants people to do away with gold and imports it should maintain an environment conducive to investment in the stock market to divert resources from investment in gold…

Devaluation V/s Revaluation...

Article;
Road rocky for INDIA not a repeat of 1997 ASIA-Crisis.

Comment;

There is one more reason for borrowing abroad, low interest rates due to recession and the investment in emerging economies did not crowded out investment in the US. But, now, the scene is different... The money is flowing out of the emerging markets in favor of a strong currency and higher bond yields, inflation indexed bonds, too, because prices are rising slow in the US. Domestic investors (in the US) would turn to an economy like this; they would be reaping higher real returns because inflation is low. The focus of the article was growth and financing, of current account deficit, too. INDIA needs foreign exchange inflows to finance the CAD and to attract them the strategy will be to offer higher returns, both, inform of a strong (domestic) currency and/or higher interest rates this will not only increase foreign exchange inflows and will also help reduce the current account deficit due to a stronger currency, the impact would be double, we would be able to pay for imports and will pay less, too. But things have changed dramatically in the past few days… the rupee has depreciated to 68 because the FM said the rupee is undervalued... There is one more theory that says the rupee is overvalued (the REER-real effective exchange rate). The other says it is undervalued ( Big Mac Index). I do not know why we want to devalue even when there is no problem of unemployment to push exports and prices…

Things have changed, especially on the currency side...

Article;
FIIs pull out Rs 3000 Cr from Indian equities in a week.

Comment;

We repeatedly read that foreign exchange inflows are leaving the Indian shores amid depreciating rupee. Then why not the RBI using its foreign exchange reserves and keeps the Indian rupee strong and attract capital inflows. It will also help mitigate the hedging cost for foreign investors and will attract more capital inflows. A less volatile exchange rate and a strong (expected) one will attract more foreign investment to bridge the CAD. This is one way. Exports are the other, by depreciating currency. The RBI has both the ways which can reduce the pressure on currency and CAD. Both are inflationary, more or less, because they will increase employment and income somewhere, foreign or at home. But since Indian-Economy is close to full-employment it can choose to lower money- supply, inflation and depreciation by choosing higher interest rates which will also attract foreign investment (already suggested by many). A strong currency and higher interest rate will help us overtake the US as an investment destination. Higher interest rates and low inflation are good for savings and investment, income constant. And good for appreciation and strong-currency, too…     

Business-Cycle, INDIA...

Article;
Easier ECB norms are Govt- RBI storing up problems for future by allowing more foreign-debt.

Comment;

Borrowing in own currency reduces the risk of default because we can monetize the debt. Therefore piling debt and that in a different currency are two different things. From the view-point of risk and credibility the latter poses a serious concern in case our exports are not that good because it is the only way we earn foreign exchange and the others are just measures to manage inflows and out flows, not certainly income, interest income apart. CAD due to low capital inflows may be exaggerated due to our interest payment on debt which is a double pressure on our foreign exchange reserves. ECB just to finance CAD will prove to be a bad idea in the medium-term because it increases our liability, sooner or later. We are concerned about fleeing foreign capital but it might be good from the inflation point of view, less investment, less income less demand. I think the economy will first go down before moving forwards in terms of prices. At-least signs are there fleeing foreign capital, depreciating currency, falling stock market, falling gold prices (almost recovered). Even the stock market admitted that valuation were very high, market is expensive. Therefore we are going through a correction after the highs (boom) of 2005-11. We are handling the hangover of elevated prices which are retreating to their original levels. At lower levels prices become sticky. I think INDIA has just completed a cycle. But we have good signs, too, when market goes down it becomes more affordable…

Real Wages/Income...

Article;
Containing financial risks more important than propping growth.

Comment;

Our objective is price stability with full-employment. Because when there is full employment there is no one dependent on the State, means a zero fiscal deficit, which actually will necessitate no further taxes. The economy will be in equilibrium... But the problem is non-accelerating-inflation-rate of unemployment, NAIRU. It is different for different countries. It is calculated by research. But i think in a large country like INDIA it must be around 4-6%. But our current unemployment rate is 3% which is out of our range (4-6%) in which inflation becomes low and stable. It is in a range which has put pressure on prices to go up, an upward bias. Income is rising faster than employment. The market is competing for labor and the RBI has put brakes on the interest rate which has also put brakes on higher wages and income (indirectly). The RBI is trying to avoid a wage-price spiral but in the long-run wages and income will go up in real terms because we are trying to converge our per capita income to the developed countries' figures. Wages and income rise in real terms also when prices fall. As long as the RBI can not tolerate higher wages and income it can concentrate to look at the real side of the issue, lower prices and higher real wages and incomes. But inflation (WPI) is again inching above to hurt real wages/income. I think in the short run the RBI can choose to keep the value of money, and therefore, wages/income intact by choosing higher interest rates (months)...

Pigou-Effect...

This thing what i thought to be only my stand on deflation and falling prices but it turned out to be “Pigou-effect” which students are taught during studies. I have also studied it in my (incomplete) PG but forgot what it says but when i read “real cash balances” it was not difficult to recapture by the meaning…

Any ways, Pigou-Effect is materialized when prices fall (it’s a deflation) to establish or restore full employment. When prices fall the value of the cash balances people are holding increases in value because they, now, can purchase more with the same quantity of money. The “real” value of money increases.

 I added that we should float a lower re-denomination of any currency to increase the space in which prices can fall. And (thought) the US could’ve gained from deflation and falling prices…

Higher Income Against Inflation...

Article;
Rupee battle Y V Reddy and D Subbarao were wrong as they tried to manipulate currency.

Comment;

We must weigh down the gains and losses due to a depreciating currency. There are many positives, too, and the most important are growth and employment creation with in the economy, and, another could be the Indians holding the Dollars. There is a trade-off between the gains and losses from depreciation in the exchange rate. On the gain side we have growth and employment because exports increase, and, on the loss side we have inflation and high interest rates. A high interest rate can encourage, discourage savings. We need to see what is in the best interest of the country... And, in the long–run we bat for higher income, everybody, poor and rich, alike. So from this angle we need to score more for growth and employment means more income (our target) by choosing a higher inflation target and low interest rates in favor of a depreciating currency. And income will rise in real when the rate of inflation is lower than the rate of growth of income. That would mean a rise in “real income”. And, at best we can expect that the rate of growth of wages/income equals the rate of growth of inflation. Inflation erodes the value of income because prices may rise faster than income and could affect the income’s real-value. But unluckily the RBI does not decide the rate of growth of wages/income, directly…