RBI's Interests...

Article;
BofA-ML sees RBI shoring up forex cover with Re at 62 levels.

Comment;

 It is in the interest of the RBI to keep the rupee value strong because then it will have to pay less every dollar, for imports too, and build a strong balance sheet by accumulating more dollars... If the RBI sells dollars and make the exchange rate more affordable it can buy more dollars per rupee. And, by doing so it can keep the demand and supply of US $ and the Indian-Rupee match each other. Now that we have accepted that, again, the Indian rupee is overvalued (at Rs 62.5) and we need (together with the RBI) to bring it closer to its real value or inflation adjusted value near to Rs 58-60 according to the REER index., We advise the RBI to recoup dollars when the dollar is high. I do not know why the RBI did not do the same when the rupee was trading 45. The answer probably lies in the fact that the RBI (may be) was busy in accumulating gold. The RBI too with the investors accumulated a lot of gold last year... which is not a bad investment… gold and dollars are substitutes to each other… both enjoy the status of safe-heaven…  Therefore we should see gold as a part of foreign currency reserves and should not press the panic button, and, wait for the right time when it is down and does not increase demand and price of dollar or if it is brought down by supplying more dollars. The question is how much the rupee has a value in the RBI’s mind because it has the autonomy to print currency…

RBIs OMOs...

Article;
RBI will take action including OMOs to ensure liquidity.

Comment;

OMO is expected to reduce interest rates on govt. bonds… But why the RBI wants to lower yields on the govt. bonds when fiscal deficit is already high. Buying govt. bonds will, no doubt, increase liquidity to the system but that will also increase inflation and inflationary expectations because govt. will borrow more and will spend more... Therefore, this is inflationary not only due to monetary policy but also due to fiscal policy… The purpose of the OMOs is to reduce yields on govt. bonds so that the govt. can borrow more, but, high fiscal deficit have been a major a concern since the govt. expenditure has been high due to the stimulus provided following the Great-Recession. Even our FM admits that many of the stimuli provided during the recession have not been rolled back which has not only weakened the revenue scene but has also built demand pressure resulting in high inflation. OMOs will definitely release liquidity in the system but that will also push-up already elevated demand and prices…

Exchange-Rate (INDIA)...

Article;
Rupee seen moving towards 66-67 over the next 3-5 weeks.

Comment;

We can not be sure about the rupee reaching 66-67 because Dr Raghuram has increased repo-rates and reduced MSF and CRR. We have a mixed reaction... In the first instance (repo-rates) money supply is going down and in the latter two (MSF and CRR) money supply is going up. Therefore it is upto the market to decide what the exchange rate will be... Higher repo-rates will also attract foreign inflows in search of higher yields which the QE will well provide... The chances are that foreign exchange rate will appreciate more than a depreciation because the inflow of foreign capital will keep exchange-rate less volatile and strong...

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Interest Rates (INDIA)...

Article;
RBI hikes repo-rate to7.5, reduces MSF rate to 9-5.

Comment

What a 25 basis point will do when inflation is in double digits? To be precise, the RBI, for every extra percentage of inflation, should increase interest rate by more than one percent (The Taylor-Rule). Therefore, if the RBI inflation-target is 5% and we have inflation rate of 10% we, at least, need to increase interest rate by 500 basis points. This is not unimaginable… Way back during 1970s, in the US, the Fed’s head Paul Volcker raised interest rate from 11% to 21%... But the unemployment rate rose to 10%. I do not know way back, then, in the US had the kind of unemployment-benefits it has, now. These benefits show our tolerance towards unemployment… Unluckily INDIA has no such mechanism that decides our tolerance towards inflation and luckily real-unemployment (deducting after the various types of unemployment) is not a big problem. It is near 6% (as per our FM), manageable. Therefore unlike the US, in the absence of any unemployment benefits, INDIA can tolerate less unemployment to let the prices cool down. I’m not expecting a knee-jerk reaction but during a slowdown when the source of income dries-up a lower inflation is like an ointment… I can easily expect the RBI to raise interest rates some more. Capitalists will be benefited by the action and the lay man’s relief due to lower prices.  Economists have a good image of “the” Paul Volcker…

To let the air come out of the bubble...

Article;
Concentrated wealth only 3 taxpayers are costing real-estate sector dearly.

Comment;

To let the air come out of the bubble (i think) the RBI needs to increase interest rates which will also bring the demand down due to lower interest rates on home loans. Fiscal policy has pumped so much liquidity in the system that the economy has reached its limits pushing the prices above the roof in the face of higher wages/income. Both monetary and fiscal can give demand a boost... Therefore liquidity is coming out of fiscal policy. The RBI while manipulating interest rates should also take into account the Fiscal-Deficit. Everybody is admitting that it (the deficit) is high including rating agencies… The rate of inflation may be gauge of liquidity in any system, we even make use of the notion that “more money supply, more inflation”. Therefore, money supply can also be increased/decreased through fiscal policy, too... I’ve heard many people saying that there is a problem of liquidity but when we see the rate of inflation (above 10%) we have a “ real-gauge of liquidity” too. I think our (new) Governor will take fiscal deficit (too) into account before deciding for interest rates. I think we have case for increasing interest rates…

We have only one zero, because real wages may still rise (US)...

Article;
License to stagnate.

Comment;

Falling inflation is not just sufficient to cut interest rates; it is true if deflation is a problem with low level of employment, not just deflation, as happens after the demand shock… This will reduce the price-level; people will consume more and will save more. When they will save supply of loan-able funds will increase which will be a factor responsible for lower interest rates and not just falling prices and unemployment. Nevertheless, they may too add to the pressure... But full-employment remains our bigger concern. The central bank, almost automatically, reduces the interest rates after a fall in the level of employment, as it happens, and the economy will gravitate to the equilibrium. But it would not happen if we have reached zero lower bound (ZLB) and are fighting deflation as happened in the US during the great recession. But why we fight deflation? It is good for real wages, and, consumption and saving/investment, and could be the stabilizing factor because it would stoke demand by increasing real wages. And, for this we do not need downward rigidity but upward flexibility in terms of real wages which i think is possible to achieve without any policy intervention. In this sense the economy is self-correcting... In this scene if the central bank reduces interest rates it will be a double gain in terms of demand. A reduction in the interest rate will also increase investment demand, and increase employment and income. Therefore we do not need to fight deflation…

Inflation target for an unknown...

Article;
Auto-correct not working, wonkish (US).

Comment;

When demand goes down after the shock, prices will come down which will increase real wages relative to prices which will, again, push the aggregate demand that restores full-employment. Interest rates in this scene will go down because people will save more because of low prices. People will save more and the economy will invest more. This how market works to restore full-employment... Precisely called Pigou-Effect... And if interest rates are at zero it will push real interest rates in negative where the central bank should literally be paying for new investment (may be the government too) which is what the negative interest rates suggest... In this situation when we try to increase monetary base it increases expected inflation which in a liquidity trap situation is difficult to achieve because people are hoarding cash and expecting that prices will come down once the Fed's policy to target inflation is over. Short-term inflation targeting will not help; we need to target prices for an unlimited period of time to break liquidity-trap…