Lower Interest Rate (Price) Expectations Delay Recovery...

The best use of the RBI’s dividend transfer of Rs 1.76 Lakh Crore would be to build dams and irrigation, 50% of the agricultural land has no irrigation facility dependent on uncertain rains... Higher productivity of agriculture is good for low and stable inflation and interest rate...

The RBI has around $ 500 billion in the foreign exchange reserves which is idle and doing nothing since CAD is under control... which might be lent to the govt on lower interest rates... to increase productivity by investing in infra and improve the quality of life by investing in health and education...

Including oil, real estate, electricity and liquor in the purview of the GST could prove to be a radical reform going forward... The govt has been only delaying it... To contain revenue the Govt may impose a neutral tax on food items which would be a larger base for tax collection...

The industry may also try to balance demand and supply on the production frontier by adjusting prices themselves; lower prices increase demand and supply or increase in scale and profits instead of poking government to make them competitive by short run stimuli...

Competitiveness is brought by innovation and increase in productivity, though; the govt could lower tax to increase in demand and could increase them back when demand and inflation are high back to control demand and prices... Industry are rolling back production when inflation and interest rates are low, cost of investment would be low... and supply when prices are high...

Higher oil prices would make people go for EVs lowering oil price expectations... INDIA has also incentivised EVs on a scale basis to reduce oil import bill and domestic inflation... also because EVs are sustainable... further lowering oil price expectations...

The growth could bottom out when the RBI stops cutting interest rates, means no further lower prices and interest rate cut expectations and it is cheapest to borrow, during this rate cut cycle, both the consumption and investment demand and spending could bounce back fast because its profitable to buy when price-cost is lowest possible and sell when prices are highest possible... that would stabilize prices and growth... The RBI shall end its rate cut cycle soon to kick-off spending and growth...

If one is investing for 10-15-20 years you can buy lumpsump that in the longrun the difference would be marginal, but if you are buying for less than 5-years then SIP is good. The stock market largely moves in tandem to the monetary policy cycle... Buy when economy and prices are low and sell when the economy and prices are high... that would keep the economy and market movement and price stable... leading to higher demand and price expectations...

The govt should repeat its commitment towards investment and growth from different aspects and reform it envisages to achieve on a regular basis to give positive news to the market... Government should make its spending plans public to increase demand and investment and growth expectations...

Low and stable inflation and interest rate are important for financial stability at full employment, than lower inflation and interest rate expectations which might delay spending... The Fed during 2008 set higher inflation and price expectations to avoid deflation and liquidity trap, but shifting goal posts by extending easing in several rounds did not let price and interest rate expectations increase leading to more spending, due to longer lower demand, price and interest rate expectations...

The Fed (US) now could drop the inflation targeting which was only adopted during the last downcycle... which has lowered inflation expectations since people would believe the Fed would increase interest rates if inflation increases above 2% and would lower demand and increase supply lowering price expectations... By increasing inflation target the Fed could increase price expectations...

Expectations and Growth...

The economy is one the Knife-edge... Anything people would do to gain from expectations may reinforce the prices and the economic condition... For example, if there are expectations that the economy and prices would fall investors would supply more leading to the outcome, itself, low price and the economy, and vice-versa...

Notwithstanding, if people are nudged to change expectations that the prices and the economy would grow through stimuli it also creates problem, for example if the monetary policy increases interest rate expectations it also reduces supply by increasing unemployment and prices vice versa...

The objective of monetary policy is to stabilize prices and economy at the full employment by maintaining neutral or zero real interest rate or nominal rates equal to inflation... any deviation from the neutral interest rate would be self-fulfilling...

The RBI must educate people about real interest rate or the actual interest rate after accounting for inflation or the inflation adjusted interest rate... Currently real interest rate in INDIA are high compared the outer economies, the real interest rate is 2.3% and inflation is 3.1%, the RBI has set the reporate at 5.4%, adding the above two...

The RBI is compensating for inflation and above that it is giving 2.3% to maintain savings and investment... Lower real rates could definitely reduce deposit rates, but people should save and invest in G-secs or the Govt bonds instead of fixed deposits...

A bond has both a bondyield and a bondprice, when the yield goes down bond price goes up and vice-versa... If you buy bond at 8% it would help contain the real value better... it is a misconception that bond works only during slowdown, because during growth yield also goes up which is also profitable...

The rate cut bottom-out could help the economy grow... Lower interest rate expectations delay demand... Simply lower growth, demand, prices and interest rate expectations delay spending, both, consumption and investment, people wait for growth, prices and interest rate and demand to bottom-out...

GST on oil, real estate and electricity would decide the real collection and revenue growth... INDIANS pay 50% tax on oil, and higher tariff/tax on real estate and electricity which if lowered to 28 percent GST could have expansionary effect on demand and growth...

Lower prices increase demand and price expectations and growth expectations, too... Lower inflation or higher productivity and interest rate increase domestic investment and also increase capital inflows due to strong and stable currency, which would also lower oil prices and transport prices kickstart the investment cycle...

Most of the two-wheelers and small cars are not luxuries; Govt should reduce GST to 5% on two wheelers and 18% on small cars... from the highest tax rate of 28%...

Consistency in growth and returns helps form better expectations, but that is not all... you need to buy cheap, hold, and sell higher... It is quite convincing... if you buy low, even average stocks with consistent past returns, could give you decent returns in 3-6 months... may be double...

Paul Krugman knows that a 2% inflation target (by the Fed) has lowered the economywide prices expectations below to an average of 2%... The policymakers have set a price increase of 2% on each product in CPI, including food and fuel, and whenever average inflation (CPI) reaches over 2% investors would start selling stocks/inventories, because of tightmoney by the Fed and lower demand and price expectations... which could further reinforce lower price and interest rate expectations and delay in demand and growth (expectations)...

Lower longrun yields in the US are in line with inflation and interest rate expectations, lower inflation and interest rate expectations have lowered longrun bondyields, it means the bond market expects lower inflation and interest rate expectations and people could delay spending which could further aggravate recession. 

Lower inflation and interest rate are good for demand and spending, but lower inflation and interest rate expectations after tightening and slow growth could lower spending because people would wait for prices and interest rate cut to bottom-out further reinforcing lower price and interest rate expectations and recession and slowdown....

Uncertainty, Prices, Expectations and Policies in a Slowdown...

Uncertainty or risk and price or inflation expectations play important roles in the determination of interest rate, wages and exchange rate, both the short and the longrun and lower prices mean higher real interest rate or return on capital, more savings and investment, higher real wages, more consumption and demand, and higher real domestic exchange rate and exports, lower prices mean strong currency and more imports and foreign country inflows…Higher price level or inflation would do the opposite…

Today the RBI cut repo rate by 35 bps and also the reverse repo rate, but revised the growth forecasts downward, nonetheless the central bank should revise growth expectations upward due to lower borrowing cost and improved demand and supply... If RBI says the same it means demand is expected to remain low and people would invest less...

The RBI may cut real interest rate below the neutral interest rate of 1.5% to address slowdown... Moreover, it shall use its foreign exchange reserves to capitalise PSBs which is likely to lower oil prices and imported inflation...

The Govt may also borrow abroad to capitalise banks... All these could increase productivity of capital by lowering the borrowing cost and increase competitiveness invigorating virtuous cycle of investment... Nonetheless, strong rupee would attract capital inflows...

The Govt could also reduce limit of FDI in PSBs to capitalise them and increase interest rate cuts transmission... Lower borrowing cost means that cost of land and labour would also go down in the economy which could increase demand...

If Rajan had also promoted considering full employment besides just price stability and inflation targeting for more informed monetary policy settings it had made monetary policy more predictable for investment decisions... Higher unemployment means that production could be increased and lower prices by adopting a accommodative stance and vice-versa... The objective of the monetary policy is to achieve the non-accelerating inflation rate of unemployment, by maintaining neutral or zero real interest rate and nominal interest rate equal to inflation to balance savings and investment and demand and supply and prices and growth at full employment and potential... Rajan in his tenure has rarely spoken of full-employment objective of the monetary policy.... The stock market investors are crazy people... They sell in a falling market and buy when prices are high which is called exuberance that increases risk for everyone when they should exactly do the opposite... Buy when prices are low and sell when they are high... Investors should bid same lowest price for buy, lowest price could fall each day depending on offers to sell, and offer at same high price to sell, high price also increases each day depending on how much people are buying the stock... Price of the stocks move on excess bid and excess offers. Excess bid would move price up and excess offers would drive prices down... If everybody follows same lowest bid price to buy and highest offer price to sell stock prices would be predictable and money would be safe... Otherthings remaining constant, more bids would increase prices and more offers would lower prices... But, if everybody sets same bid and offer prices reasonably markets would be stable... bid and offer prices are not the same... There is a buying price and then there is a selling price... bid price is lower than the offer price... The LTCG has the roots of the corrections since the start of 2018, investors are more conscious of saving 10% in LTCG... Moreover 1 year time is not the longrun (over 5years) ... 1 year is the shortrun... 2-4 years are the medium term... The Govt should extend LTCG to 5 years... Moreover, tax on buy back has further deteriorated the situation... it is a tool to share profits with the shareholders... The Central Banks and the Govt may cater the public expectations, but definitely avoid exuberance... The Govt has revoked Art 370 on 6th Aug., 2019 which seems quite reasonable. If Kashmiris are not abstained from acquiring properties in other states why stop people of others states acquiring property in J&K... J&K people must also support removal of Art 370 and ensure security to others to get property rights in other states... Moreover, the Govt must use plebiscite in POK to claim that it is also a part of INDIA... Next one would be to make Kashmir safer and promote as tourist destination... Deploying more troops is a step in the right direction... On July 31, 2019, the Fed (US) cut interest rate by 25bps and promised for halting it balance sheet reduction programme, a step in the right direction, it would keep the longrun and shortrun borrowings cost low or lower due to higher commercial bank reserves... It is a big and good news for the stock market... Tradewars cause currency depreciation directly and also due to retaliatory tariffs, when US imposes tariff on China, China too imposes tariff on US' products which reduces demand for US' products and dollar and since it’s a safe haven currency people increase its demand and prices... But, US' tariff on Chinese exports again reduces dollar demand and prices, because of settlement of China exports in dollars and yuan too... Since people prefer dollar for investment they bid its prices higher, but not with yuan... Higher tariff on China products increase their prices and reduce demand and price expectations, yuan too...