The central banks are committed to maintain stability in prices and full-employment... If the economy responds negatively and prices go too low and unemployment goes too high, they start cutting the interest rates... The point is that the central banks are there to minimise the risk and people shall not worry... Higher interest rates and lower demand and price expectations would reward people to delay spending and increase savings which could reinforce low prices... When we say that rate hikes would bring demand down, at the same it also means that supply would go up... Demand and supply have a negative relationship...
Higher interest rate means lower prices which are
good for real wages and incomes, which also mean lower business cost, though
borrowing cost has increased which involves a trade-off, which is good for
investment. Most investors miss that low prices increase demand and price
expectations and vice versa...
If the RBI commits that interest rate in the short,
medium and long run would increase gradually and investors expect the same then
it could increase investment demand and lower supply, which could reinforce
high prices... Therefore, higher interest rate could be self reinforcing and
vice versa... Though, higher interest rate could lower demand and increase
supply lowering prices and vice versa...
Rate hikes have failed to stop depreciation and
outflows and are already factored in by the markets... Preemptive actions to
stop outflows have not worked... To stop or increase inflows the RBI may try to
use the foreign exchange reserves... Strong exchange rate expectations could
increase inflows and lower imported inflation could reduce domestic inflation
and increase competitiveness and exports...
The economists wanted to cut the value of debt and
lower real wages, interest rate and exchange rate with inflation to increase
investment demand and profits, but they forgot that it would reduce real wages,
income, profits and demand... Inflation means less spending... Lower interest
rate and inflation has only helped the capitalists, though higher borrowing
cost could also increase the value to money and demand and investment...Lower
interest rate has increased demand for riskier assets... Poor people must be
made able to save plenty and higher interest rate would also help lower
inflation gradually and increase supply...
Higher interest rate and expectations are also good
for the economy when inflation is high, because it leads to lower demand/increase
supply and lower prices or inflation which could increase real wages income
profits and returns on savings and investment... Higher interest rate in the
long run could increase poor peoples' savings and investment and returns due to
low prices or inflation and could also help increase spending, both consumption
and investment... The Pigouvian view... Higher interest rates are good during periods
of high inflation... People are induced to save more and spend less due to
lower price expectations...
Lower domestic prices or inflation means higher real
wages, incomes and profit and demand... Higher food prices could get translated
in higher living cost especially for the vulnerable, the poor and result in a
wage-price spiral... Lower food prices could lower the cost of living and
increase domestic demand...
Low prices could increase demand and lower supply,
but low prices expectations could lower demand and increase supply reinforcing
low prices... Nonetheless, high prices could increase supply and lower demand,
but higher price expectations could increase demand and lower supply
reinforcing higher prices... There are three key prices in the economy --
interest rate, wages and exchange rate... Higher interest rate, wages and
exchange rate decrease demand and increase supply due to lower price
expectations, but higher interest rate, wages and exchange rate expectations
increase demand and lower supply reinforcing high prices... Notwithstanding,
low interest rate, wages and exchange rate increase demand and lower supply,
but low interest rate, wages and exchange rate expectation delay demand and
increase supply reinforcing low prices... High interest rate in the INDIAN
Economy could lower demand/increase supply reinforcing low prices, but high
interest rate expectations could increase demand and lower supply and price
expectations...
High interest rate in the INDIAN Economy could lower
demand/increase supply reinforcing low prices, but high interest rate
expectations could increase demand (and lower supply) and price expectations...
Higher interest rate is to induce the investors to
save or delay demand spending due to lower price expectations, to increase
returns, which is also likely to increase supply spending, which, together,
could reinforce low prices... People who could hold would be rewarded better in
the future when they deploy fresh invest at low prices which could increase
demand and price expectations due to the low base effect... and, vice versa...
Therefore, higher interest rate is to reduce or delay spending due to lower
price expectations... Real Balance effect could increase wealth and spending...
Lower inflation expectations could help delay demand and increase supply which
could further reinforce low current prices... What is widely expected could become
self fulfilling...
Investment spending is done by keeping price
expectations in the mind, which depend upon earnings expectations... In order
to maximise returns the investment is done when prices are low during
significant market correction and sell when prices are high during significant
appreciation... If everybody does the same the markets would be a lot stable
and risk would be low and returns would be high... Nonetheless, expectations
about prices could be self-fulfilling... Commentators and analysts shall help
build consensus among investors on a single buy price and a single sell
price... Divergent views could confuse the investors...
From the investors’ perspective, the rate hikes
could go as high as the pre pandemic levels in the medium term, though too much
tightening could backfire because defaults could increase... The last time when
Urjit Patel increased interest rate in 2018 the NBFC's flourishing on banks'
money started defaulting... NBFCs have advanced more loans than the regular
banks which could turn out to be a shadow banks fiasco...
Investment depends upon price expectations... Higher
price expectations from a low base increase demand/lower supply and lower price
expectations from a high base increase supply/lower demand... Investors try to
maximise profits... Investors' expectations behaviour and actions affect
current prices...
If everybody follows profit maximisation behaviour,
returns for everybody would increase... Means that people shall set buy limit
order lowest of the price range and set sell limit order highest of the price
range... If everybody does the same profits would be maximised...
Everybody wants to invest in the stock markets, but
very few know that if they follow the profit maximisation behaviour they might
be able to get the maximimum returns… Yes, if everybody set same buy limit
price (lowest) and set same sell limit price (highest) according to price
range, profits could be maximised and everybody would gain…
If everybody follows profit maximisation markets
could stabilise because when prices are significantly low investors could buy
which could increase prices and when they are significantly high investors
could sell which could lower prices...
This kind of reaction, like we are seeing today,
could be categorised as irrational exuberance, when market has corrected 10,
000 points and people are expecting more correction... Doing this kind of
prediction is a kind of disfavour to the existing investors... Though, it could
be a good time for the new generation investing in the stock market and lower
average cost... Telling people to delay demand could lead to self fulfilling
correction...
As far as inflation and value of rupee are concerned
this govt is as good as the past govt... Inflation has increased more than
incomes... In a sense the Congress govt was better, in case of oil the past
govt did not let prices increase too much by borrowing more through oil bonds
while Modi govt reaped rich dividend from lower oil prices, but put 50% tax on the
public and lowered taxes when there was no solution left under pressure... The
grain Modi govt is distributing to the poor instead of jobs is actually owed to
Food Security Bill passed during the past regime... The Modi govt is anti-poor,
but pro-business and the Congress is good as far as poor people are
concerned... Higher prices of cereal during UPA actually helped the
agriculturists... The growth UPA left never recovered at full employment level
even after 8 yrs of power... Inflation is increasing; the growth rate of
inflation every month is 1% and yearly 10%... Real wages and incomes have gone
down... Even the inflation targeting regime we have today dates back to Congress...
Modi is trying to claim that that all the change we see today is only the
result of BJP and that is hard to digest... His way of criticising others for
votes and power has yielded nothing yet to the common man... his real wages are
going down and down and inflation is going up and up, no difference, and no
relief during 8 yrs of rule...
When we were hit by demonetisation and the economy
suffered yrs and then hit by covid and lockdowns which were shocks for demand
and supply, both, then how he could claim that his regimes outshone the past
rules... when the INDIAn economy's growth rate never fully recovered from the
lows it touched during the past interest rate hikes ... The growth rate
increased in double digits under Dr Manmohan Singh...
Demonetisation made all the black money white and
was an extreme example of corruption during the current government which
involved all the banks... Religion is opium for the public and the govt
understands this very well, it is resorting to appeasement of the Hindus...
Public shall not be emotionally exploited and fooled...
The present govt done nothing to stop the rate of
increase in inflation and depreciation in the rupee... which has lowered and
eroded real wages, incomes and profit... The average household has become
poorer since 2014 as inflation adjusted per capita income has come down... The
situation of employment is even worse... which has made the govt to provide
record food grains... The govt has made poor people poorer by increasing
unemployment... Even agriculturists has not been spared and govt has put a lid
on their incomes by administering agri prices and let other prices increase
which has lowered farm incomes... Agriculture is no longer a profitable
venture...
Food inflation is due to mismanagement of the supply
side when storage is a big problem which leads to a lot of wastage and higher
prices... INDIA is a net exporter of cereals with huge stockpiles, therefore
the problem is mishandling of the stock... The next inflationary item is fuel
which is also in the hands of the govt and RBI, the govt could further lower
taxes on fuel and the RBI could commit a strong exchange rate to lower fuel
prices which is also likely to increase foreign exchange inflows and increasing
dollar reserves at lower prices...
This govt is concentrated on talking lot, but does
little to achieve its plans; it only shows dreams about future, but doing
nothing to implement its plans... The $5 trillion dollar economy by 2025 looks
a distant dream and doubling farm incomes by 2022 has already back fired...
This is the time to evaluate the promises made during 2014 polls and what the
public has achieved...
No matter how much schemes have been implemented,
but their effect could only be gauged by lower prices or inflation and higher
employment and productivity which are missing, but the situation is opposite
higher prices and lower employment and productivity...
INDIA's productivity has been severely hit by demo,
covid and, now, war on Ukraine, which is reflected in higher prices and
expectations and high interest rates... Higher cost of capital means lower
productivity and considerable delay in $5 trillion economy...
MGNREGA brought win to the Congress two consecutive
terms and is still very helpful in providing employment in rural areas... The
chances of win in next term would depend upon the Congress' ability to think
and implement an employment scheme that provides employment to all according to
their capabilities...
We need 8 million or 80 lakh jobs every year keep
the workforce fully employed or to achieve full employment... It’s just a
piece-meal effort to tackle the problem of unemployment...
In the macro-economic perspective, price stability
and full employment are the twin objectives of the policy making; on both INDIA
has a negative record... Too much Fiscal Spending in a demand dominated economy
could further increase inflation... During Modi government the productivity of
the INDIAn economy has been severely hit by DeMonetisation and covid and now
tension between Russia and Ukraine, which has led to higher prices... So this
was (Modi's term) a very tumultuous period... UPA had only one disruption, 2008
recession...
