Money Policy...

The US is nearing the end of the rate hike cycle after the Fed chair Powell uttered that it is close to the neutral rate since prices are stable with full employment, the real interest rate consistent with full employment and price stability, after keeping it negative and zero for near a decade that lifted all, emerging markets (EMs), too, including the US, especially the bonds and equity markets, across the globe, nonetheless, the markets remained jittery on the account of rate hikes and expectations and quantitative tightening coupled with tariffs war and standoff between the US and China and rising uncertainty in the oil market and strong dollar, all have inflation and inflations expectations, also due to depreciation and capital outflows and depreciation expectations in the EMs. 

Higher inflation and inflation expectations due to higher oil prices and strong dollar and depreciation and expectations have given rise to rate hikes and expectations in the emerging markets alongwith the US, also a strong dollar and expectations, have made finance costly and have made businesses postpone spending due to higher interest rate and lower demand and price and expectations, however as the Fed delays rate hikes and posit a more stable stance on interest rate that would give the emerging markets a breather from outflows insearch of higher bond yields and lower bond prices and stronger dollar and expectations as the right signals for investment in safe heaven US on higher return expectations, the Fed is equally responsible for stability in the emerging markets as so to the stability in the US, a strong dollar and higher oil prices are also problems for the US trade deficit and stock and bond markets as to the EMs.

Notwithstanding, lower prices increase demand and investment, but lower price expectations might delay spending, since people would postpone spending in expectations of lower prices, ahead, that could delay recovery in demand and supply and prices, however, if people expect higher prices as a result of higher demand, recovery in demand and supply and prices could be fast or prompt, but in the real world prices and expectations might change depending upon demand and supply and expectations and intervention through prices and expectations, themselves, demand and supply and expectations affect prices and expectations and prices and expectations also affect demand and supply and expectations.

Nevertheless, lower prices are good for demand and investment, but not lower price expectations, since that would delay demand, and, similarly, higher prices are bad for demand, but good for supply, however, higher price expectations from a low demand and price base could increase demand and investment, but not lower price expectations, which delays or slows demand, consumption and investment.   

Therefore, lower prices are good for demand and spending, but not lower price expectations for recovery from a slowdown and higher prices are bad for demand and good for supply, but higher price expectations could increase demand and delay supply further increasing prices.

However, lower prices could increase demand, which increase price and supply expectations and excess supply and lower prices could increase demand and price expectations, again, the economy moves between excess demand and excess supply in the absence of data, that’s a cycle, the economy moves between lower prices and lower demand and low supply and higher prices, higher demand and higher supply, however stability in demand and supply and prices at full employment is good for stability in growth and expectations, therefore, the economists have visualized the neutral real interest rate for stability in the economic system, which aims to neither boost nor discourage demand, supply and prices and expectations at full employment.

Nonetheless, during excess demand and inflation the central banks increase real interest rate which could further reduce supply and increase price and expectations due to higher unemployment and lower production and higher borrowing cost, on the other hand, excess supply and deflation makes the central bank to reduce the borrowing cost, which could further lower price and expectations upto full employment because of higher production, therefore, deviations from the neutral interest rate are self reinforcing through the demand, supply, prices and expectations channels and the effects on inflation and unemployment are often cumulative.

The central banks might try to avoid the trap by limiting rate cuts and rate hikes to a very few around the neutral real interest rate; however, rate cuts and rate hike expectations could increase uncertainty for demand and supply and prices and investment and employment and growth and expectations…..   

      

INDIA, US, China, Oil...

Recently, we witnessed war of words due to change in the base year and its effect of on the GDP rates under different regimes. Nonetheless, the idea of base year is to find a year in which leading macroeconomic indicators growth, inflation and unemployment and others behaved normal... Like after adopting inflation targeting and growth that followed.... We may find that the year 2015 – 16 could be a good point to view inflation in a proper perspective; inflation was low and growth rate close to 8%...  

CRR is just one way of increasing liquidity, however, SLR has been cut and RBI is also conducting OMOs... However, the past two rate hikes, without much thought, even with a neutral stance contradict and confused the investors... The inflation target band of 4% +/- 2% is to give the RBI flexibility not to act in haste... if inflation is within the range, it must wait to let the situation (inflation) stabilize following a neutral stance.... Limit is not 4% it is 2 - 6 %....

INDIA offered China to settle exports in yuan, but it declined… China fears that settlement of exports in yuan would increase yuan demand and value, would make yuan strong, which could make it uncompetitive and lower demand for exports... However, it is also concerning that China itself withdraws from accepting yuan, its own currency... How others would take it? That China is not manipulative...

The US has delayed tariffs on Chinese imports by 90 days in hope of a negotiation which shows that the US and China know that tariffs and trade barriers are bad for the investment and economic growth including the stock market... China’s stock market is down much due to trade war and tariff fears and the US is conscious that higher tariffs could increase inflation and interest rate that is likely to affect the stocks in the US...

Ideally (or mathematically) a zero nominal and real interest rate signify that the Fed is neither reinforcing savings nor investment, it is neutral, when it offers less than zero (real interest rate) it means it is inducing investment... The Fed has recently increased real rates above the zero real interest rate after keeping them negative and zero for a long time when growth is high and unemployment and prices are low and stable… 

Oil producing countries may try to stabilize prices at levels they see consistent with supply without discouraging demand... They are concerned with slowing global demand; supply cuts and higher prices could further lower demand and price expectations... Lower prices, though, encourage higher demand and price expectations.... especially, the investment demand to sell at higher prices, but not lower price expectations which might delay demand… 

Had the OPEC+ delayed supply cuts it could increase lower price expectations based on adaptive expectations… Lower prices increase lower price expectation and vice versa, until intervention…  Nonetheless, expectations of supply cuts and higher price expectations have increased the demand for stock or inventory at lower cost or value expectations… 

In a market low price means supply has outpaced demand or demand has been low, on the other hand higher prices point supply is low or demand is higher, however to achieve stable prices we need informed decision of future investment or output or prices which is a matter of uncertainty due to inconsistent or stable economic policies based on data, most data are estimates extrapolated on samples which might differ with the population, atleast there is a case, and to the same extant due to global uncertainty…   

Capital, Data, Oil, Prices......

When the Central Bank can print money, then, why capital is scarce (?) which is not, if followed could increase investment and supply and lower unemployment and prices, more employment would also increase production and reduce prices.

The only problem is that credit should increase both demand and supply, [lower prices would increase demand and then prices and then supply (oversupply happens due to lack of data)], or productivity in the areas where we have higher price and price expectations to increase supply and keep prices stable which is likely to further reinforce lower and stable prices due to stability in the monetary policy.....

At lower prices oil producing countries would sell more... Higher prices lower demand... They fear depleting resources even when oil production curbs have been the issues behind higher oil prices... when population growth has been going down and more investments are following, effect of renewables are the contributing factor... to lower oil prices... higher oil prices are not natural...

When price falls it means supply relative to demand has increased, people would get more and would demand less than before especially the investment demand, consumption demand might also delay, which may further reduce price until all the stock is consumed and price stop falling...

When people expect lower prices in the short run they also increase selling, which further reduce prices as in the stock market or any market, the same short sellers...

Lower price increases lower price expectations bcoz more will be supplied to adjust profits, people would supply more... Lower price expectations would delay investment demand and consumption demand...

Inflation lowers demand, both, consumption and investment by reducing savings, higher interest rate further increases inflation through higher borrowing cost that also lowers supply and increase prices.....

Prices move between higher/lower supply and high/lower demand and higher/lower prices or demand supply and price bands amid lack of exact demand, supply and price data or equations... Lower prices do the opposite, and further reinforce lower prices...

We also need data on demand to manage supply and prices, since land is scarce, to increase productivity in agriculture and industry...

Notwithstanding, stable prices and full employment are the goal...

The rupee has appreciated in the month. The RBI might adjust interest cost of exporters to the loss in the exchange rate in order to sustain competitiveness...

Last time when oil prices were at 30 Saudi arab declined to cut production because it might make it lose market share since its cost is too low to keep shale out ... higher prices could make it uncompetitive...

The economic growth in INDIA has faltered in Q2 to 7.1% from 8.2% in Q1. Hope the RBI at the next monetary policy review oblige us with a 25 basis cut in the sight of low inflation due to lower oil prices and imported inflation due to appreciation in the rupee in the month of November (we can easily expect the data), also in the face of higher real interest rate and less than potential growth rate...

Raghuram Rajan promised 1.5 - 2 % of real rates... Higher real interest rate would restrict demand consumption and investment...

Current real rates are too high in the economy which has made capital less productive and business lose competitiveness...

The governor is doing right to conduct dollar selling and OMOs the same time... it would not let hardening in the bond yields and lower bond prices and exit leading to depreciation... leading to further outflows...

Higher interest rates are not good for FPIs...

The US has deferred tariffs on the exports from China which shows that the US and China know that tariffs and trade barriers are bad for the investment and economic growth including the stock market...

China''s stock market is down much due to trade war and tariff fears and the US is conscious that higher tariffs could increase inflation and interest rate that is likely to affect the stocks in the US... 

Simultaneous...

The recent fall in the oil prices around 25% and the simultaneous appreciation of Rs 2.20 in the past week have turned around the macroeconomic scene in the economy (INDIA) due to lower inflation expectation in the hindsight of the data expected in the coming months after October, which may again push the central bank to reconsider its inflation and interest rates expectations and forecasts further lowered by food price inflation.

However, retail inflation has already gone to 3.4% down in the past two months, even though, fuel prices had showed some pressure which is likely to go down in the data in the future.

Moreover, INDIA’s growth has been over shadowed by the NPAs on the private sector and the public sector bank’s balance sheets since the recognition started after 2013 under overheating and escalation in cost of businesses due to higher inflation and interest rate that aggravated to problem of NPAs which account nearly Rs 10 Lakh Crores.

Prior to 2013, both, food and fuel prices were at their highest due to fiscal profligacy which increased demand without increasing the needed production and coherent reforms and policymaking, nonetheless inflation during the present government has been mainly on the account of imported inflation, especially oil prices that restricted the growth expansion, in addition both the fiscal (3.3%) and current account deficit (2.6%) are quite low, too.

The RBI must admit that NPAs in the Public Sector Banks have grossly affected credit creation and rate cuts as not expected further subdued credit demand and growth... Banks have failed to supply loans as expected, which has put the onus on NBFCs that thrive on banks to advance loans that has increased significantly during the past years at the cost of commercial banks business, but higher interest rate and expectations have made the borrowing costly resulting in defaults...

Although, growth continued, the RBI may not refuse that NPAs did not let demand recover considerably from the last slowdown which could be improved by increasing money supply to promote loans and growth by reducing CRR and other options...

The RBI may not admit, but INDIA is going through, although, a mini crisis which demand contingency funds to be used to sustain growth... RBI must follow the international norms like Basel to decide capital adequacy which requires lower capital ratios than used by it...

Handing excess reserves to the government could increase inflation and expectations if it directly increases employment without increasing the productivity, which lowers inflation and expectations,

However, if it is used to recapitalize banks it would be just since it would channelize investment where we have low supply and higher prices and expectations, like oil, which could increase supply and lower inflation and interest rate and expectations....

The fiscal spending directly increases employment and demand and inflation and expectations, whereas lose monetary policy increase investment, employment and supply where there is higher price or return expectations...

But, the RBI is very slow to recognize this and deliver rate cuts to reduce borrowing cost and increase productivity of capital and competitiveness of the economy, when the job creation is low compared to addition in the workforce, we need 10. 2 million jobs every year to keep all employed, which is also (FULL EMPLOYMENT) the goal of monetary policies besides price stability, when inflation and fiscal deficit and CAD are contained it is prudent to lower unemployment, nevertheless exchange rate control is also responsible for depreciation and imported inflation for the domestic economy and foreign investment outflows.

Nonetheless lower oil prices and cheap dollar have lowered inflation and depreciation and expectations, which have renewed interest in the economy by investors, both, domestic and foreign investors, evident in increased foreign exchange inflows and domestic investors may also follow if inflation and interest rate and expectations continue downward and remain stable at lower levels, which might extend the current trade cycle or expansion in the growth that started after 2014 during the current government owing to favourable food and fuel prices.       

    

Stable Interest rate and Exchange Rate and Inflation...

The Indian economy has been under pressure, on the monetary policy and interest rate fronts, despite low inflation, partly attributed to low food prices, but inflation expectations had been on the upside due to pick in fuel prices since March 18.

Nonetheless, they have been on a down trend after October which has considerably altered the expectations about inflation and chances of an accommodative central bank if inflation remains within the target in a world of low real interest rate that has affected the supply side in INDIA even in the face of less than full employment situation and when exports failed to increase inspite of depreciation in the exchange rate that has also contributed to inflation because of higher oil prices and foreign exchange price.

Recently, INDIA leaped unprecedently in the World Ease of Doing Business rating from 100^th to 77^th from last year which could mean a lot to international investors support by the demographic dividend and huge demand and supply conditions even though there is an outflow of foreign capital from the debt and equity markets in the country owing to inflation and depreciation and higher interest rate and expectations which could be averted through a prudent interest rate and foreign exchange rate management.

Nonetheless the RBI attempted to supply more dollars to rein in depreciation, but that deteriorated the rupee liquidity position that aggravated the outflows from the debt market when interest rate in the recent started hardening which negatively affected the bond prices and outflow of foreign capital further increasing the depreciation, all due to higher inflation and interest rate expectations. 

The exchange rate management is an important tool to control inflation through exchange rate targeting which could help achieve price stability when INDIA imports 80% of its oil needs and is a major source of inflation in the economy, notwithstanding lower inflation and interest rate could also help boost exports against depreciation that increases domestic inflation and lowers real incomes and demand and growth.

Moreover, higher interest rates could not let exports materialize, therefore a policy that aims to boost productivity and lowers inflation and interest rate and expectations might help increase competitiveness than just lowering exchange rate which increases domestic inflation and interest rate and expectations by increasing the price of imports, lower inflation could also increase real incomes and real exchange rate and demand, domestic, imports and exports and growth .

The one thing the government needs this time is a prudent foreign exchange rate management to wither the effect of higher oil prices and its effect on domestic inflation and interest rate and expectations which have given rise to higher interest rate and expectations...

Targeting a strong exchange rate to lower the effect of depreciation on higher oil prices could help improve domestic inflation and expectations and lower interest rate and expectations...   

Stability in the interest rate and exchange rate regimes and movements in narrow bands would also help stabilize domestic investment and expectations, and, foreign investment and expectations, the capital account, and exports, the current account...

The stable or neutral interest rate is to put the point that, both, too much tightening or loosening give rise to loosening or tightening later which are also self reinforcing means inflation would signal inflation expectations and higher interest rate and lower employment and supply further increasing inflation and would create unemployment and deflation would foster deflation expectations and lower interest rate expectations and increase employment and supply and lower prices, again, if the economy is below full employment.

Therefore, to promote stable growth it is important that interest rate and exchange rate remain stable within bands at full employment without creating inflation or deflation and expectations...

After full employment higher wages would itself control demand for labour and wage inflation through market, any attempt to increase cost of borrowing would further increase cost and inflation, in the short run...

The cost of capital is a major cost of production and supply, but the Central Banks fail to recognize it and do not include the price of capital in their inflation indices and forget that lower borrowing prices could also help to lower inflation when employment and demand are the problems...

When they increase the borrowing price they forget that they reduce both demand and supply or employment and investment which further increase price and interest rate and expectations, too...

Time Consistency Problem and Expansion in INDIA....

The expansion of the Indian economy or the trade cycles have been short compared to the Western countries like the US that expanded over 10 years since the 08 recession and China that saw an expansion of 3 long decades, the expansion in INDIA has been short lived, less than 5 years, same as in the previous cycle after 08, attributed to overheating in the economy linked to food and fuel prices and higher cost of capital and incomplete communication by the policy makers, 

Like the central bank failed to provide the right forward guidance to the agents, especially the investors, both the foreign and domestic, which point to weak supply side given higher inflation and interest rate, too, on which the trade cycles depend, during the up cycle prices or inflation and interest rate increase, which further increase inflation and interest rate by lowering supply and employment and demand, too, and set the precedent for the down cycle or recession in which inflation and interest rate go down which again precede higher inflation and interest rate, that is a chain cycle, one is followed by the other…  

Nonetheless, in the current cycle the lower fiscal deficit has kept inflation and inflation expectations low since it directly increases employment and demand, when the monetary policy increases supply and investment and employment in the sectors that are overheating or have higher price or price expectations if the economy is below full employment. 

However lack of updated data on employment has made the polices prone to frequent changes in policy stance even when INDIA is underemployed and underinvested, which may lower inflation and inflation expectations if employment and supply increase with lower interest rate and expectations, the government has underscored its commitment to lower fiscal deficit and debt, but the monetary policy is slow to recognize this and has maintained a tight policy keeping the inflation targeting in mind when INDIA is supply side weak and needs more investment…  

Even the exchange rate regime has been such to increase imported inflation in the event of higher oil prices and inflation and depreciation, notwithstanding CAD has been low compared to the past, and lower fiscal deficit has helped lower depreciation, when there is a sect that is advocating higher exports to improve the CAD and foreign exchange earnings at a time there has been a hold on the private investment because of the higher interest rate that has also not let the exports to materialize and increased outflows of foreign exchange amid inflation and depreciation, further worsening inflation and depreciation, which the RBI is trying to correct by increasing the supply of dollars and reducing rupee liquidity which has increased interest rate on debt or bonds resulting in low investment demand, in the stock market, also.

Higher interest rate and expectations are bigger worry for domestic investment, including exports, bonds and stocks, too, than worsening cad and depreciation, which are dependent on the exchange rate management through foreign exchange reserves and exchange rate targeting to keep further outflows and inflation and depreciation in check... nobody complains appreciation in the exchange rate, but depreciation, which could help lower inflation and interest rate and expectations...

The problem is when the policy makers, especially the RBI, try to stop inflation or deflation and depreciation or appreciation, based on the text-books’ theories, they aggravate the problems, for example, if there is inflation and depreciation in the exchange rate in the economy, higher interest rate would exacerbate the problem of lower supply, imports, too, in a bid to lower demand, which also reduces employment and production that further increase inflation and expectations, on the contrary, when there is deflation and appreciation in the exchange rate, lower interest rate would further increase supply, imports too, that would again lower prices or increase deflation and both are always followed by each other and in this sense we might say that inflation and deflation are caused by the changes in the interest rate cycle or monetary policy cycle, the time consistency problem of the economic policies has been identified as one the most pressing concerns by Kydland and Prescott.

However, a constant and stable interest rate and exchange rate and expectations to achieve full investment, full employment and full output, exports-imports, too, would signify a stable prices and interest rate regime and could help agents adapt to movements, when a shock hits the equilibrium, a neutral real interest rate at full employment could help lower swings in cycles and adjustments….

   

Inflation and Depreciation and the US...

In the sameway, the RBI controls the money supply and the base rates to control domestic inflation and inflation expectations; it may also try to manage the market foreign exchange rate by manipulating supply of the foreign exchange and foreign exchange rate to control imported inflation and inflation expectations since price stability is the primary objective of the monetary policy… which might further reinforce lower prices by reducing inflation and interest rate and expectations which could extend the current economic expansion of the economy…

Inflation and depreciation and expectations are the prime causes of the foreign exchange outflows from the economy leading to further inflation and depreciation and expectations resulting in higher interest rate and expectations and lower investment and growth and expectations…

If the central bank is really serious to abide to the inflation targeting framework, to contain inflation lower than 4%, it may try to provide $s at a calibrated discount rate to the OMCs, as much needed, to reduce the cost and price of oils, which could help reduce inflation and expectations and interest rate and expectations, further reducing cost and prices to increase demand/supply and economic growth and expectations...

Lower prices would increase competitiveness of the economy and exports, too..... It is the objective of the central bank to control inflation and achieve full employment...

Nonetheless, if the RBI provides the foreign exchange at a discount rate through special windows to OMCs it would help contain cost and prices of oil imports and domestic inflation and might increase supply further lowering prices or inflation and interest rate and expectations and increase real wages and domestic demand and growth and expectations…

Lower prices or domestic inflation and interest rate and expectations might also increase the competitiveness of the domestic economy and increase exports through internal devaluation…

If INDIA does not resort to inflation and depreciate to increase exports, but follow to lower inflation and interest rate and contain real wages to increase productivity and competitiveness and exports it does not have to devalue externally, but internally ie internal devaluation...

We cannot expect much depreciation or external devaluation... It would also increase domestic demand... Lower inflation could increase domestic goods and services and currency exchange rate means higher real exchange rate.......

'Higher real interest rates have held back domestic investment even, leave alone exports... I would like to invite Rajan, the former CEA and RBI governor, to comment on higher real interest rate over 3%....' that how higher real interest rate could affect investment and employment and supply and demand and growth…

Lower food inflation in INDIA would increase real wages and demand and growth in the economy at a time when oil prices are betraying, it would help balance price pressure... If this has happened due to higher supply, farmers would sell more at lower prices means higher profits...

They have produced more for which lower prices are a remedy to consume over supply... Lower prices would help correct over supply and increase demand in the economy.... There is nothing like deflation in the agriculture or the economy...

Nonetheless, Government is a big player in the market if it restricts supply it might help contain prices...

Historically.... whenever the stock market has been through big corrections it has also increased more than the previous peak... it is a trend...... This time the stock market could touch 41, 000 to 42, 000 till March 2019 if domestic economy fundamentals remain stable....

The US companies or any country’s industries must understand that protecting their specializations would give them distinct competitive advantage over the long run... Specialization is the center piece of the theory of international trade and the theory of competitive advantage and comparative advantage...

In the veil of sanctions on Iran and Venezuela Trump is protecting its (US) Shale industry... It was widely expected that the Shale industry would bind the oil prices from increasing too much, but it has not... It is now a net exporter of oil which is also benefiting from higher oil prices.....

Oil Prices, Interest rate and Exchange Rate.... (Rev.)

Lowering oil taxes and prices were now an imperative for the economy supported by lower public spending... Lower inflation and interest rate and expectations could provide relief from battering rupee... even exports might not respond due to higher borrowing cost... This time cheap money could help reduce price pressure and maintain demand and supply, which have been suffering due to higher oil prices and dollar and borrowing cost... When everything is getting pricier cheap money could help maintain demand and supply... Lower borrowing cost alone could make things alot cheaper... The RBI must take note that demand has not increased and is not a reason for higher (oil) prices, but supply side has been weak, which could improve with lower borrowing cost... The RBI must communicate well what it really thinks might work in this situation..... Cheap money could make things a lot easier...

Higher interest rates would make the matter worse for importers... Their cost would go up further increasing imported inflation... The same with tariffs... Oil prices are increasing then dollar is increasing, then borrowing cost would go up... Where is the respite...? Demand is not the problem, but lower supply of oil and dollar are increasing inflation which could be further complicated by higher borrowing cost... To control inflation it is important that oil prices come down, if not, dollar must come down and even if not borrowing cost must come down..... Demand is already suffering due to higher oil prices and dollar; higher borrowing cost would further increase suffocation....

Raising interest rates would contradict with simultaneous OMOs and SLR cuts... The RBI is infusing liquidity to reduce effects of dollar selling and less rupee in circulation and hardening yields and less investment, which are responsible for outflows from debt market and depreciation and also outflows from equity further increasing outflows and depreciation... At this juncture stabilizing yields and expectations, if not rate cuts, could help increase foreign capital inflows in debt due to higher bond prices expectations and higher stock price expectations, because of improved investment expectations..... There is a case for the RBI to cut rates or reduce CRR to support its SLR cut and OMOs initiatives.....

Nonetheless, the RBI might also help reduce the oil prices... if the RBI sells dollar at a discount rate below the market price around Rs 50 to the oil companies, they would be able to buy oil at lower cost or for less Rs which could be passed on to the consumers in the form of lower oil prices leading to further lower inflation and interest rate and expectations... So far the RBI has sold dollars at the market price that has helped little and reduced money supply and increased interest rate in the domestic economy and increased inflation and inflation expectations owing to higher oil prices... However, if the RBI sells dollar at the discount rate it would lower oil prices, inflation and interest rate and expectations resulting in higher economic growth.... RBI is no profit institution... It''s objective is to maintain low inflation....

Lower fiscal spending is good for lower inflation and depreciation, too... which could help lower interest rate and expectations... We should recognize the government’s efforts to control fiscal deficit and debt which had been a prime cause of inflation and depreciation and higher interest rate under UPA... Nonetheless, inflation under NDA is at manageable levels which could be further brought down with good policies... We need to anticipate problems of the Indian economy in order to devise proactive polices, which could help increase productivity and competitiveness... Today inflation is under 6% whereas under UPA it shot above 12%... Nonetheless, there is still a lot needs to be done to improve the supply side, from where inflation may creep in, in the economy for which lower interest rate may help improve domestic investment and supply..... Higher prices increase supply when the borrowing cost is low and lower public spending may help utilize resources, like labour and capital, by the private sector.....

Domestic oil industry is now a priority sector given higher oil prices, which might be provided interest or exchange rate subvention to increase production and supply and lower inflation and interest rate and expectations further... Higher oil prices have exacerbated dollar demand and depreciation for which increasing domestic oil production could help lower oil imports, prices and dollar demand, nonetheless domestic oil production has gone down in the past months which has also increased the demand for oil imports... The government may try to partly settle oil imports in rupees or goods to avoid dollar demand and depreciation... Oil is a priority for the lower prices and interest rates and the economic growth rate..... INDIA needs to emerge as self dependent for oil if it wants to lower interest rate and expectations and increase growth.....

Ad Valorem taxes are imposed on nominal value of oil, however higher oil prices were not expected in the estimates or higher oil prices were not anticipated, but higher oil prices must increase tax collection or reduce revenue deficit and fiscal deficit...

Interest Rate and Expectations, US, INDIA.....

Now, the Fed has increased interest rate in real terms or inflation adjusted terms by 25 basis points... 2.25% feds fund rate and 2% inflation which might start really affecting the economy... most of the companies listed in the stock market are export oriented companies, however a strong dollar has shown exports contracting and imports swelling in the recent months, which have increased the possibility of further Trump strikes on imports increasing inflation and expectations and loss in the US' competitiveness, including higher capital cost, aggravating the problem of lower exports and more imports due to depreciation in the trading partners economy... 

Depreciation and outflows and uncertainty in the EMs, due to the monetary policy in the US, could also affect growth in the US, which could increase the unemployment rate negatively in the days to come due to lower exports and higher imports... 

A strong dollar is responsible of more imports to the US and uncertainty on the global front, which would further strengthen due to the tight monetary policy and a safe haven image.... 

A stronger dollar is one of the reasons of high imports and CAD in the US and in the EMs due to dollar denominated oil… 

Trump policies are just badly timed when the economy is close to full employment… 

At this point it is just fine to stabilize inflation, interest rate, dollar and expectations at full employment and increase productivity through investment in education, innovation and skills for which lower interest rate matters, too…

In INDIA… rising inflation and inflation expectations have given rise to higher interest rate and expectations that have put brakes on the still slow recovery from the past slowdown which could be attributed to high food prices and interest rate hike during UPA, but this time higher oil prices and interest rate and expectations are the causes of slowdown expectations in the Indian economy which has cut on the current cycle of economic expansion, the UPA was constrained by food and the NDA is now restricted by the oil…

Nonetheless, interest rate hike and expectations amid higher oil prices and dollar demand and depreciation have also resulted in NPAs and default by some companies and financial companies and stock market has been going through period of correction and uncertainty that has also led to capital outflows from the both, the debt market and the stock market also owing to interest rate hike and strong dollar and expectations in the US further leading to higher CAD and dollar demand, nonetheless lower fiscal deficit during NDA has kept inflation and depreciation under check than the UPA which is quite commendable…

Notwithstanding, oil prices and the resulting inflation and expectations have been the sole reasons for interest rate hike and expectations and short economic boom and upcycle in INDIA which could be saved if the government think of ways of reducing price or inflation and inflation expectations and increase rate cut and rate cut expectations… which could lengthen the economic expansion and growth and growth expectations which could also increase capital inflows and stop depreciation and increase rupee appreciation and expectations…

Since, oil prices are responsible for the ruckus in INDIA, the solution must concentrate on oil to reduce inflation and interest rate and expectations, and oil prices could come down only if we increase supply or reduce cost, also through lower borrowing cost, but higher dollar prices have further put pressure on the oil prices which has constricted supply and expectations and are major constraints on supply, however if we reduce oil cost and prices by increasing blending of bio fuels and fossil fuels as much as possible prices might come down , although the government is aware of the idea, but INDIA has a low base for bio fuels or raw materials, nevertheless it could increase imports of bio fuels and raw materials from other countries like US, Brazil and Germany, but it has recently imposed tariff of bio fuels which could further increase the price of oil…

Bio fuels are much cheaper than fossil fuels and could reduce demand of fossil fuels and dollar and could also help reduce cost and prices of oils.....            

The Price Transmission Mechanism... rupee, oil and others and tax revenue...

There is onething missing that Masala bonds, in the discussions, i hope the minster is talking about the same NRI bonds, are likely to increase rupee appreciation by increasing its demand and not due to foreign exchange inflows alone directly, however they might increase because of strong rupee expectations but as long as there are depreciation and expectations inflows are unlikely to resume which could further worsen foreign exchange inflows unless the policy makers commit incentives to make the rupee strong... 

Masala bonds do not directly increase inflows....

Oil prices, strong dollar/weak rupee and higher interest rate and expectations have spoiled the investments and growth, all because of a weak and incomplete communication by RBI, it failed to increase investment and growth and the government is resorting to base year revisions to increase growth which is more responsible for revenue growth than just oil... 

At one side is oil and at the other all others, which also affects growth and revenue from all otherthings due to higher interest rate and expectations.... 

The Govt must refurnish the estimates and trade off between revenue from oil and from all other things..... 

RBI's communication could also help increase growth and revenue; at this point it is expected to stabilize inflation and interest rate and expectations, which the government might reinforce with lower oil prices and fiscal deficit.....  

The same is also responsible for the stock market rout in NBFCs witnessed recently......


The FNOG - finance neutral out gap - is only a proxy indicator of NAIRU - the non accelerating inflation rate of unemployment - in the absence of data on unemployment or full employment... The rate of growth of workforce or population decides the level of potential output or growth...Full employment means full output... The US does not use FNOG... at least i''ve not heard about it... they use full employment or the unemployment rate to decide the output gap..... and interest rate considerations...

The stock market investors are impatient people and less united... Investors must practice patience... They should quote a single bid price and offer price... It is the investors that make up or mar stock prices...

The 2008 financial crisis in the US was mainly a shadow banks misconduct which must be properly regulated... The bid to lend to the priority sectors could prove to be same as priority lending by public sector banks under UPA and the resulting NPAs... Government is repeating UPA...

People in INDIA do not know about the oil stock or inventories…If people would not know about demand and supply and expectations, how they would invest? Actually higher oil prices should increase supply and expectations, but it is not, because of low investment and expectations and more imports and higher dollar and expectations.... 

Trump has aired about supply cuts and higher oil prices and a strong dollar that increase exports to the US which may force oil companies to increase output and lower prices and reap economies of scale and profits... 

People think that lower prices reduce supply, but forget that higher supply also lower prices and increase demand and expectations....