The RBI’s task is to stabilise inflation and interest rate and expectations in order to incentivise spending especially investment... Business spends to increase production and inventory or stocks by keeping the price expectations in mind... Higher price expectations increase investment demand which could further increase the prices... Though, consumption demand for durables could also depend upon price expectations and could reinforce higher prices... Too much high/low prices could lead to appreciation/correction in perception and expectations due to the base and debase effect...
Though the stock market valuation shows the investors believe in the INDIAN story, it is the fastest growing economy... Everyone is bullish on INDIA...
In the short run NEWS, on the local and global economy, and incentives affect the stock indices more than the earnings and book ratios, though they are important... Now there is no big bad news in sight that may trigger a big correction and reallocation... 5-10% correction is possible anytime, but 5-10% appreciation could also be not ruled out...
The market would first return to normalcy before any significant correction... People talk about extremes, when the time is to stabilise the markets and any significant dip would be a buying oppourtunity... We are in the midst of a secular bull run, see after 2008 till 2017, when there is a lot of ground to recover due to the base effect and expectations are high... The economic rebound is underway...
Markets are not correcting much because of margin expectations, higher margins expected due to unlock and resumption in the economic activity... But, correction cannot be ruled out in stocks as people would wait for a cheap deal where valuations are too high... Nonetheless, investors shall buy lowest price range, the bottom for the day it may go and sell at highest price range, the top for the day it may go... to maximise gains for the day... If everybody follows the above rules of thumb everybody would gain... The top and bottom is given, why buy dear when it could be cheap buy and as sell less when it could be more...
"Keynes said in the long run we die..." A set of good stocks throw the oppourtunities to buy on significant corrections and sell on significant appreciations and do it repeatedly in the short run... This could increase returns manifolds...
If the market meets popular expectations correction/appreciation it is good for the investment... Uncertainty and (negative) surprises are bad for investment... The stock market is a forward looking system which could factor in bad/good news through price expectations... Low price expectations would delay demand and increase supply which further reinforces lower prices and high price expectations could delay supply and increase demand further pushing prices higher...
In INDIA unorganised sector mainly comprise the agriculture economy, 70% of the labour is seasonally utilised in the agriculture of which we have no official account... During covid agriculture flared better than the broader economy because it was not locked due to quarantine... INDIA is no devoid of demand and growth, but only inflation and expectations are the real constraints... If we pump money nominal growth is bound to increase both growth and prices and it is nowhere full employment... Lower inflation would increase real gdp growth rate and would increase real wages and demand and growth which could increase demand and price expectations, because everybody would demand at the same time...
Informal economy mainly comprise of the agriculture sector which has performed well during the lockdown and covid waves... Informal sector has flared well and better than the formal economy...
The low base for inflation in the year of the covid in all the economies is responsible for higher current inflation and expectations and higher inflation would lead to the debase effect next year means lower inflation and expectations...
The high growth and inflation in the US and other countries is due to the statistical glitch, the base effect... They are, because we have chosen a low base year to compare growth and inflation which is likely to fade as the growth and inflation would normalise... and so the base year... The base years formally chosen are over a quarter and a year ago... If we change the base year it directly affects the measure of current growth and inflation... low growth and inflation base would show high growth and inflation when the growth bounce back and vice versa... A negative growth means that growth and inflation is lower than past quarter or a year ago and not negative...
As far as data and stats are concerned, we are more concerned about what has happened in the past, like last quarter and or last year same time... The indices use a base year to calculate the index either for growth and or inflation... If the base year is low then recovery in the growth and inflation would be high and vice-versa... What happened in the past decides the current value for growth and inflation...
4.91 % is the rate of increase or growth in the inflation with a base year... the actual inflation on 2012 base year is 69 and if we divide for inflation per year for 10 years the average would be close to 6.9% or we can say that inflation has increased 70% in the last 10 years, with a rate of 7 % per year... As far as inflation is concerned we never step in the same water... Data is veiled by the percentage and ratios which is beyond the common man understanding... Policy makers should reveal the proper nominal figures which are easy to understand and take more informed decisions while budgeting and investment...
Almost all countries exchange rate has appreciated with time, but INDIA's exchange rate is depreciating which is a colossal policy mistake that reduces domestic demand by increasing inflation... INDIA should follow others and let the rupee appreciate gradually which would help lower domestic inflation and increase domestic demand, investment and consumption and growth... Stronger currency means cheaper imports and lower imported inflation...
Depreciation and expectations, as the trend shows, would delay demand for exports and inflation and expectations would reduce real wages and domestic demand and demand for imports... Though, (gradual) appreciation and would increase demand for exports and domestic demand and would mean cheaper imports... The US-INDIA interest rate differential or arbitrage would also disappear as the money-supply (inflows) would increase which would lower interest rate and would increase interest rate in INDIA... Investors themselves (un)consciously create booms and lows through the EXPECTATIONS channel...
Outflows would affect the equity market only through selling in debt market and the resulting depreciation in the currency... Depreciation is more responsible for FIIs selling in the equities... Though this time INDIA has a huge foreign exchange buffer and the situation is far from depreciation...
Strong exchange rate and expectations could increase demand and lower supply, thereby resulting in stronger rupee... This could be a virtuous cycle... Low and stable inflation and depreciation could increase demand and price expectations... This would not lower exports because of lower inflation and competitive prices...
Interest rate hike expectations due to high inflation and expectations could lower price expectations and increase supply which would reinforce low price and and demand...
All the taper and rate hike forecasts could only be true as long as the US economy remain resilient and achieve its potential growth rate... Otherwise, the Fed would continue its easy money policy, if the unemployment rate is high and growth goes down...
Little inflation is not bad, the US is trying to woo inflation since the last decade and the Japan since three... INDIA is lucky to have inflation within the flexible inflation target... Though little inflation expectations are good for spending both consumption and investment, people would not delay spending...
If income is increasing faster than inflation, it is ok to have some inflation... Monetary policy normalisation means that the economy is in line with its long term objective...
The major observation of the Phillips Curve is that there is a tradeoff between inflation and unemployment after the full employment or the natural rate unemployment or Frictional Unemployment or inflation increases after full employment... 5% unemployment increases inflation by 5%...
If the Fed would use nominal GDP and inflation numbers while calculating qoq and yoy results, instead of percentage, it would probably do much better forward guidance to shape up expectations... People do not understand percentage and ratios...
The US CPI is showing 2% MoM inflation which is close to its inflation target and yoy inflation is also close to 2% if we use 2012 as the base year... The US economy is close to achieving its inflation target since the last year... Inflation prior to covid was at 1.6% yoy now it is near to 2%... deflation has never been there, albeit inflation was low...
