Inflation Management, Even During Low Demand and Gradual Unlock...

The RBI needs to bring the market rates down, the psbs and the private commercial banks, they are not lowering the borrowing cost, but inflation has cut the real interest rate close to zero to negative which is the right time to increase spending, any attempt to lower inflation by rate hikes would reinforce inflation (and expectations) by restricting supply, since INDIA is supply constrained and demand is already low and could increase unemployment...

 

If it cuts rate of interest it would increase supply and demand by reinforcing disinflation or deflation by increasing supply and demand as long as there is unemployment in the economy, lower prices increase demand... Therefore, the RBI must commit the inflation target by lowering the borrowing cost and increasing the supply till the output gap closes with full employment...

 

The RBI may further cut as long as there is unemployment and possibility to increase supply and demand... with the natural real interest rate... Higher supply would help lower inflation and nominal or market interest rate and also increase demand....

 

Food inflation is a seasonal phenomenon, it could only be controlled through removing supplyside bottlenecks by the Government, it cannot be controlled by the higher borrowing cost by the RBI... The Govt could also lower oil prices when uncertainty and oversupply has lowered the international oil prices, somewhat...

 

Notwithstanding, if the lower prices are passed on to the consumers it would increase real wages, when food inflation and higher remuneration to the farmers, are used to control overall inflation and demand... If agricultural prices are not allowed to go up then core inflation must be brought down to increase real wages and incomes of the agricultural labourforce which accounts for a large part of the unoragnised sector and is around 60% of the total...

 

If manufactured products, oil and stocks prices are determined by demand and supply then why not the agricultural prices which could increase real wages and incomes of a large part of the population... US has subsidised the agriculture, INDIA too could help increase productivity by lowering the cost of the farmers and increase competitiveness...

 

The govt could also allow higher investment in water and irrigation (dams and reserviours) infra 'coz flood and drought add to the volatility of food prices and uncertainty for growth...

 

The underlying recognition of all the unholy alliances and allies is that no single party is able to provide a better and right substitute of the BJP and PM Modi... When all would become one it would lead to a sharp polarisation of voters, all vs BJP the probability of the BJP winning becomes 50%, other wise 1/all parties...

 

Post election alliance is a sign of thirst for winning anyhow... Congress joining the Seperatists in J&K would mean loss of its image only for the sake of win... Abolition of Article 370 is good for Kashmiris since it would increase growth and development and jobs and incomes and higher property prices and more wealth and prosperity...

 

Jean Dreze has included the training programme in MGNREGA... The govt cannot provide all the jobs on its own, it must use a mix of expenditure on the employment gaurantee scheme and training, skills and specialisation...

 

The govt may subsidise crops that are sensitive to inflation, provide da to wagers and import more, partly... and also let some price hike to help demand in the economy...

 

Additional incentive and spending about Rs 9 trillion would create employment and demand in the economy...

 

Spending on infra could help the blue collar workers who have a high propensity to consume, corporate tax cut would be saved, who have a high propensity to save, unless competitive gains and higher productivity are passed to the consumers, which could further increase real wages and incomes and demand.... Poor people are more likely to spend than their rich counterparts... spending is important during the lowdown... They also need more help...

 

If we pass on lower prices, lower corporate tax, to the consumers, banks too, lower interest rate that would increase real wages and incomes and lower cost and higher profits when money supply is increased... Majority would increase spending which could increase demand and price expectations, cheaper dollars and lower domestic exchange rate would also increase exports...

Reforms could Kickin the Economic Activity...

So far in a sense the govt has exploited the farmers by not letting agriculture prices market determined and by buying at low MSPs, it was the sole player in the market... It has bought produce on a price it wanted... Market would help determine prices by demand supply or quantity and if all farmers quote one price they would gain, poor farmers, too... Tax on the agricultural income is negligible which could prove out to be a profitable venture...

The NPAs have been a problem since the start of the NDA govt back in 2013, though the govt has recapitalised the PSBs few times in the past and also tried to lower NPAs through the Insolvency and Bankruptcy Code, but low demand and growth during slow recovery has further added to the new NPAs eversince the demonetization hit the money supply and supply chains... 

The NPAs handheld the RBI to lower the interest rate eventhough the banks were flooded with liquidity... Nevertheless, INDIA has a war chest of the dollar reserves which could be used to capitalise banks, lower dollars would help lower imported inflation and more competitive economy or the RBI could start quantitative easing to capitalise banks... The govt could also allow higher FDI limit in banks...

Spending that increases productivity and employment is quite welcome, though the govt has promised productivity linked incentive or pli to some sectors that is employment intensive and has capacity to shore up productivity and lower inflation to increase the economy's competitiveness and exports too... 

The virtuous cycle could soon kickin as investors wait the lower demand and price expectations to bottom out and increase demand and price expectations by spending more on investment and consumption, higher demand and price expectation could further increase spending and thus reinforce demand and price expectations as the lockdown fades... 

INDIA's growth rate contracted 24% in the first quarter and it is expected that in the second quarter growth rate would be 10% lower, but could soon recover at a healthy growth rate of 20% or more due to low base effect...

Infra directly add to development and growth... It offers job oppourtunity in the process of development of an area and prices like land, labour and capital by the way of construction and real estate development which is employment intensive... During 2008 Dr Rajan advised more investment in construction which led to the idea of priority sector lending which is followed by too much investment in construction and oversupply and loss which also created too much employment, demand and inflation, but of wagers which consume more food without food security and which resulted in food inflation and lower real wages and income and higher borrowing cost and the NPAs... 

MGNREA created more employment in rural areas and demand and too high food inflation without food security... Productivity increasing spending is quite welcome, it is a sign of innovation and increased competitiveness in the market... Lower prices increase competitiveness... 

But, the real estate never reduced prices to increase competitiveness which increases real balances with the public and demand... Same with banks they don't pass productivity gains and lower prices to the consumers when they are incentivised by the market, govt and RBI... Lower prices increase demand and price expectations...

Inflation is increasing more than wages which has depressed demand and growth... Inflation is a problem for everyone, those who have it and also for those who do not have it... It is also because it is in the demand model used by the economists, they expect inflation (and expectations) based on the Quantity Theory of Money as a result of the Money Supply and expansion when the truth is that as long as there is unemployment lower interest rate would reinforce lower price 'coz of increase in productivity of capital and labour and higher supply... 

The neo classical synthesis accepts that higher money supply lowers interest rate and increase supply and lowers the inflation and inflation expectations... The latter is observed in much of the developed world, overtime higher money supply and lowered the borrowing cost... The former the QTM is observed in the developing economy because of higher borrowing cost and supply side bottlenecks... Both, lower prices and higher prices and expectations play an important role in investment decisions and economic cycle... 

Lower prices increase demand and price expectation, but lower price expectations delay demand and increase supply which further reinforce lower prices, and, higher prices increase supply and delay demand, but higher price expectations increase demand and delay supply which further reinforces higher prices... Both lower prices and higher prices are followed by eachother is the economic cycle... It is profitable to invest when prices are low and sell when prices are high that would help stabilise the cycle... 

Both, little inflation and little deflation are good for consumption and investment and spending decisions... Lower prices increase real balances with the public and higher inflation increase nominal income... Lower prices increase demand and higher prices increase supply we need to balance, but at the highest which would also maximise growth and expectations...

Real bond returns depend upon bond yield and bond prices and inflation, too... Higher yield means lower bond prices which is the right time to buy bonds... Lower or cheap bond prices increase demand and bond price expectations and when people increase demand it further lowers bond yields and reinforce higher bond prices, when people buy a specific bond more money supply lower the demand for funds and reinforce lower bond yields... when the bond yields topout it increases demand... and vice versa...

Unlock and Stimuli...

 Compared to the US and other major economies the INDIAn policy makers have been little conservative in bolstering the economic growth that is a key variable for the investment decisions…

 

INDIA has a supply side induced inflation, lower borrowing rate could help reinforce lower prices due to lower demand... Higher supply, productivity, competitiveness and lower prices could increase demand and price expectations... Demand is low due to unemployment which could be increased through lower borrowing cost and higher investment... Economy is past the lockdown mostly both demand and supply would increase which could help maintain financial stability...

 

Unlike the inventory market, in the stock market people's average costs and prices vary significantly, they buy and sell continuously at different costs and prices, they buy low and sell high. in this if they are able to maintain the average cost lowest during their time horizon or frame they would be winners... Lowest average cost help you sell when you need; it is true for short-medium and long runs...

 

INDIA further needs to liberalise FDIs and FPIs or its capital account and protect (full)-employment by allowing only raw materials instead of finished goods... Especially in PSBs which are sitting on loads of NPAs and interest rate transmission and on their own growth, lower market interest rates could boost credit growth... During booms they (banks) hike which lowers demand and price expectations ... during bust they lower borrowing cost which increases price expectations and recovery... Low stable interest rates are simple and easy rule for financial stability... How INDIA could compete with nations that have low interest rates which negatively affect its productivity...

 

Protecting jobs for the domestic economy is important, by liberalising the capital account and allowing imports that increase competitiveness and productivity of the economy and increase real wages and real domestic exchange rate...

 

Without a good unemployment insurance system that is important for social security INDIA could not afford flexible labour laws, it would be a hit to demand... A major reform would be setup INDIAN Labour Organisation to protect employment and demand and real wages in the economy, it could ensure higher real wages and demand in the Economy... If the Govt provides security from inflation, in the form of higher dearness allowance and real wages and incomes and shares the goal of price level and Financial Stability with the RBI to achieve low and stable interest rates would help achieve full employment and growth...

 

Higher money supply means more interest rate cut transmission which could mean lower market interest rates... LTRO by the RBI of 1 lkh Cr is an equivalent of the quantitative easing in the US, but not in the magnitude...

 

If the industry pass on the lower borrowing cost, wages and taxes to the consumers they would be able to gain margins once again the growth bounce back they may adjust prices according the demand, during low demand lower price may help increase the scale and profits and during higher demand they could increase prices again... This time we need to increase demand by lowering the prices... Lower prices would help increase demand and price expectations...

 

In this unprecedented situation deficit monetisation seems plausible and feasible if it improves the supply side and lowers unemployment, it would have the stabilising effect on prices (interest rate, wages and exchange rate) and finance and investment and expectations and growth...

 

Lack of irrigation and farmers’ plight, Congress owe a lot answering... Farmers of Punjab and Haryana are rich compared to the other regions like UP and Bihar where the majority hold less than 1.5 hectare there is so much inequality in the Farmer fraternity... Poor farmers must be united inorder to gain some bargaining power when livelihood dependent on agriculture are slowly losing... The Govt may help set up Farm Unions...

 

Still more than 60% population lives in rural areas and about the same are dependent on agriculture and MGNREA which has received most of the stimuli, and has been devoid of lockdown and gained on higher prices and more activity... Congress won back to back elections riding the employment guarantee in rural areas... and BJP lost seats in rural areas during past elections...

 

Low Prices Vs High Prices and Spending...

 People’s expectations about prices reinforce prices and spending, higher price expectations could increase investment and consumption demand and supply on hold, given people are employed and have money which could further reinforce higher prices through higher spending. Similarly, lower price expectations increase supply and hold on demand which could further reinforce lower prices through higher supply, given people have money. 

Prices affect demand and supply in the sameway demand and supply affect prices, though we have demand and supply side models, but prices do help manage demand and supply, in the stock market prices and expectations are important determining demand-bid and supply-offer which further reinforce prices and volatility, if demand is higher than supply, price expectation increase and when supply is higher than demand price expectations decrease which further increase volatility.

People know little about Economics and Business... It is profitable both ways when prices fall and when they increase too, though money (supply) is a must, either through external devaluation or internal devaluation... Higher inflation or ext. devaluation increase spending and lower inflation or internal devaluation too... Higher inflation means supply side would improve because higher prices increase supply, wages and profits and lower prices means demand would increase, wages and profits... But money supply is very important... If you have to increase demand you need money, if you have to increase supply you need money, too...

Higher inflation means lower real interest rate good for borrowing.... if nominal interest rate remains stable... lower real wages too, lower domestic exchange rate too... Higher competitiveness...

Relative to other countries INDIA is doing quite fine.... Not even 1% of the population is affected by corona.... death rate is very low, recovery rate is high... We should point at China for GDP reduction... INDIA would recover fast... The worst is behind us...

Disruption and correction in growth and prices are oppourtunities to invest or buy at low prices and supply or sell at high prices... Generally, low growth coincides with low prices and high growth with high prices... There is a positive relationship between prices and economic growth...

In the absence of any significant demand stimulus due to limited fiscal space and inflation expectations even in the face of structural unemployment, the RBI may accelerate the pace bond buying or some form of quantitative easing to recapitalise banks to tackle to problem of NPAs and credit growth could help faster recovery... It would also lower interest payment by the Govt on public debt... It would kick off employment and investment or demand and supply, both when real rates are negative... and labour is abundant and cheap... Rich and aging economies have pumped too much money, to increase demand, though INDIA needs a big supply side stimulus to expand recovery on a faster note... This could help reduce unemployment and the need for a demand stimulus...

Money moves from pricier markets to cheaper markets, especially in FPIs/debt... If Govt spending is productive and inflation stabilising a lot of foreign money would pour in... INDIA is a cheap financial market, a lot of value investing is likely to happen... Lower interest rates are good for the debt and stock market... Foreign investors rarely invest on Fds or fixed income class because that is illiquid and hard to withdraw that could help further lower short run rates...

Foreign capital would pourin, though they would chase corrections, at any significant dip it is a buy oppourtunity... Though INDIA has been slow in increasing money supply to the productive investment, but US is easing on a high note which would chase higher returns in INDIA, both debt and stocks due to higher prices expectations from a low base.... Higher price expectations in INDIA could bolster foreign capital inflows...

The INDIAN stock markets take cue from the US' market and the US' market also takes guidance from the INDIA market... It is like chicken and egg analogy... both, appreciation and correction... The US market would be range bound due to the US' elections and this could also affect the Sensex and BSE... Though, stock markets could see increase after the US elections... In between stock market in INDIA could still help gauge markets' performance in the US... foreign capital could also flowin... INDIA's young population and better immunity could help lower deaths due to cov19... INDIA economy could recover faster than the aging economics... INDIAN economy lockdown has bottomed out and we have observed a fast recovery, though employment has yet to reach precovid levels...

Pledging the company's shares to receive financial life line might be pursued... it could help companies to reduce average cost by increasing scale... Restructuring could further help...

A major reform would be to allow greater FDI in the PSBs... It would help recapitalise them...

Government may float unemployment benefit (according to market demand) and skill development bonds and open economy for the foreign investment... banking in INDIA is a cartel market... Higher foreign exchange and capital inflows would help maintain exchange rate... It would (bonds) would help boost productivity and competitiveness and demand... Foreign exchange is the rawest of the raw material, underscoring local sourcing would help increase domestic demand...

The Govt must launch a nationwide unemployment benefit system for the sake of social security...

APMC was scrapped to avoid the farmers exploitation in mandis because middle man chain could be cut to reduce cost if farmers sell directly to investor and consumers... If all the farmers unite under Famer Union, they could manage demand and supply and get higher returns like OPEC... If cartelisation of banks and oil industry are allowed agriculturists must also be allowed some bargaining power... Food for poor could remain subsidised... Had Congress brought Food Security on time we had not been pushed into slowdown and NPAs due to contractionary policies later and high food inflation... Too much money was pumped into the economy that resulted in higher demand with lower productivity and supply side mismangement...

Expectations Reinforce Prices and Spending...

Supply creates demand... This is the best time to increase investment spending because we are going through correction... it would increase employment and demand... Lower prices mean lower cost for business; both wages and interest rates are low... Increasing just consumption demand in a disrupted scenario would increase inflation; business cost would also go up, especially the food and fuel inflation, higher wages and interest rate... Reinforcing supply and productive investment by the Govt also would lower prices and increase real wages and demand, lower prices would also contain interest rate, and  would also increase real interest and savings and investment…

 

If supply comes first it doesn't mean its supply side economics.... It tells us how to increase demand by increasing supply, it is the goal, increasing demand... Higher supply means higher productivity (and lower prices) and higher competitiveness and demand... Higher real wages due to higher productivity would further reinforce demand and savings and investments and growth.... Nominal wages are rigid which means lower prices would increase real wages and demand... 

 

INDIA must design policies that increase, both, demand and supply to stabilise prices and growth... Any demand stimulus with supply side disruption due to lockdown could be inflationary... The Govt must increase employment and productivity, both, which would increase real wages and profits (due to low cost) and demand by lowering prices and higher supply would reinforce stable prices.... 

 

The RBI could manage to lower domestic inflation and also imported inflation by reinforcing the supply side which would also increase investment employment and demand through lower interest rate, lower interest rate would further reinforce lower prices, increase capital inflows, capital inflows would further reinforce lower interest rate and prices and strong rupee, strong rupee would further reinforce foreign cash inflows... 

 

The 50% of the population is occupied by the agriculture, the govt has helped the sector with money on a scale basis and higher food price would increase demand and spending... loan waivers have also helped... 

 

If inflation is not increasing at the full employment or falling at the full employment it means productivity and competitiveness and demand is increasing, higher real wages, due to lower prices, would reinforce higher demand and prices and expectations... in the face of lower population and potential growth rate... 

 

It should be a flexible inflation band, higher during low growth and lower during high growth... Though 8-10% inflation would help boost nominal incomes in farm and manufacturing, higher nominal incomes and lower prices due to lower borrowing cost would increase real wages and demand... Lower borrowing cost increase productivity of capital... Business lament loss when they should produce or buy stocks when prices are low and sell or supply during high prices... This is true for all business ... 

 

10% is not that high it just makes 10 11 or 100 110... It is just thin margin... If stocks are allowed 1 to 20% margin, a day… Real economy business agriculture and manufacturing must also be allowed 20% margin... and cheap credit too... 

 

Lower prices and higher demand and price expectations are important for spending, and, higher prices and low demand and price expectations could delay spending... The Fed may lower prices through lower borrowing cost and prices to increase demand and price expectations, but avoid too much higher prices through higher borrowing cost and prices to lower demand and price expectations  to achieve full employment and supply and investment and prices and economic growth and expectations and contain spending... 

 

A 2% average inflation target (US) also means that inflation expectations are also at 2%, though 2% inflation seems to be very low, it means a $ 10 good would swell only $10.20 during inflation which is a very low inflation margin which would require frequent tightening... Nonetheless, a 5% inflation and inflation expectations could help the economy build demand and wages and prices and higher interest rates... 

 

The central bank's guidance that it would tolerate only 2 -2.25% inflation would induce business to lower debt and demand when the inflation reaches the limit due to rate hike expectations... 

Notwithstanding, higher inflation target, than 2% and expectations and lower borrowing cost and prices could increase demand and prices expectations and spending. 

 

Higher bond yields mean that the bond market has factored in inflation expectations... 

 

Maintaining inflation expectations has had been pursued since the GFC, which is not new, that has been a consistent goal, but not in policy... 

 

The Fed said that the economy we are in a Wicksellian economy... means we need to stabilise prices at full employment... a neutral or natural real interest rate, wages and exchange rate to stabilise demand and employment and supply and investment and the economic growth and expectations... 

 

The productivity could and has increased and help(ed) achieve full employment... to increase demand and price expectations and spending... Higher productivity means higher production and supply which would help stabilise prices and expectations... 

 

Growth is not negative in INDIA, it has just shrunk by 30%... it has grown 70% compared to the last quarter... 

 

 

MOSPI data says that gdp is shrunk by 30% and growth is not negative, but has grown only 70% compared to the last quarter... The INDIAN economy grew 0.7% in the last quarter... trading economics . com...

United States... gdp...

People think that correction and lower stock prices are not good, but they are an oppourtunity to buy more to increase returns... If i had money i would be very happy to further increase the exposure slowly to lower average cost or increase returns... The economy and stocks have probably bottomed out, no major correction expectations are probable in the near term, until-unless a black-swan appears... 

 

Quarterly reports come after a time lag, it is the past which cannot be changed... Investors are forward looking... There is certainty that the economy would recover soon... vaccines have arrived... Moreover, the death rate in INDIA due to virus is among lowest and cure rate is high... Recovery rate is higher than the death rate... 

 

If investors follow few rules of thumb, never sell in a falling market or sell only during high prices, and buy on corrections or low prices everybody's money would be safe, it would also help stabilise prices and market... The same is also true for the real economy... invest or buy or demand when prices are low and supply during high prices... 

 

Stock market investors must not buy/sell large quantities at once... They must buy slowly as long as the average cost becomes zero that would reduce average loss, coz prices may fall and they must sell slowly to increase average returns, coz prices may increase further... 

 

INDIA has grown 0.7% in the latest quarter and the US -30%... Moreover, the US is demand constrained that's why they could choose to stimulate demand without much pressure on the supply and (muted) inflation... INDIA is supply constrained with higher inflation and expectations...  

Expectations and Consistency....

 

In INDIA it is a supply side driven inflation which might be stimulated by lowering the borrowing cost, it is not a demand induced inflation because employment has gone down... Not difficult to understand... 

 

It is true for the near term, nonetheless market rates are higher than the reporate and RBI policy is still accommodative... which could be lowered by using money injection and easing... More money supply by the OMOs and LTROs could help capitalise banks and improve credit creation... A quantitative easing could help increasing demand and supply and prices and growth expectations by lowering the market interest rates... 

 

The disconnect between the stock market and the real economy is obvious since the stockmarket has only the investment side based on expectations and spending, but the real economy has both the consumption and the investment side based on expectations and spending, the consumption side has been a laggard due to unemployment and lower investment and supply and higher inflation... 

 

INDIA is developing with mainly the consumption story and less savings and investment and higher interest rates and lower debt and demand due to higher inflation compared to the developed countries which needs (INDIA) more capital either from domestic sources or foreign... 

 

Lower consumption has resulted in lower investment in the real economy, but the stock market has no consumption side and domestic investors pour money on significant corrections and no restriction on foreign capital... 

 

The real economy has suffered due to lower consumption and investment and supply expectation and higher prices, but the stock market has soared on the back of lower prices and correction, but the prices in the real economy didn't correct much to increase demand and price expectations... Correction helped the stock market, but nothing such happened in the real economy... 

 

The inflation that followed the GFC was largely attributed to the too much loose fiscal policy and delayed roll back even when the economy recovered, all because of food inflation in cereals and the economy continued their exports which could be averted by better supply management of food, the economy didn't have the food security... Food inflation spoiled the party...

  

This time we must manage foodsupply wisely... Nonetheless, the commitment to roll back the stimulus could not increase spending due to the Ricardian Equivalence... People may think of stimulus as temporary and could not increase spending... We need consistency in the policy in order to stabilise inflation and unemployment and the economic growth.... 

 

Bond returns are calculated by using bond yields and bond prices which have a negative relationship, therefore lower yields mean higher bond prices and vice versa, which is used to contain the real value of returns overtime... Risk, holding period, inflation and inflation expectations also decide premium...Risk is often decided by a mismatch between shortrun and longrun assets and liabilities... Commercial Banks borrow short and lend long which could create liability problem coz investors could withdraw money due to uncertainty, though they may borrow long and lend short that could reduce the risk of default on liabilities...

  

Economic activity means spending which also depends upon (price) expectations about future, especially investment, profits are invested and wages are consumed... If people expect inflation they would increase spending, both consumption and investment, which further reinforces higher demand and prices and spending, economic agents are forward looking, higher interest rate would further increase the cost and prices... And, if they expect lower prices they reduce demand and spending, which would further lower prices, lower borrowing cost could further lower prices and increase supply.... if there is unemployment...

 

In the US we thought that there are no supply constraints and inflation could creep in only through full employment and higher demand of labour and wage price spiral, though imports could further lower prices, but in INDIA food inflation is the problem and less exports or more imports would help...

  

There are two main reasons for low inflation, one is lower real wages than productivity since 1970s that has resulted in lower demand and prices, and the other is lower oil prices, 11 of the previous recessions have coincided with oil price booms, which is now not a problem since the US is net exporter of oil... both have kept the inflation expectations low... If the policy makers target higher real wages that may still increase demand and price expectations... 

 

We have not seen inflation even after several rounds of quantitative easing in the US and zero nominal rates or negative real interest rates... The US has failed to increase demand, wages and prices, though the economy achieved close to full employment... The US economy tried hard to come out of the liquidity trap, but INDIA is not such trapped, nonetheless higher unemployment and lower borrowing cost could increase productivity, competitiveness and demand... Inflation could be expected if there is full employment and supply cannot be increased due to lockdown and uncertainty... Notwithstanding, demand is expected to go up after vaccine use and lockdown... Or proper treatment and recovery…

Prices, Expectations and Spending...

 When commercial banks are not passing previous repo rate cuts it means liquidity is less than adequate given the NPAs and loss to the credit creation power... INDIA market real rates are way above in the major economies which has also made the INDIAn business uncompetitive... The RBI must commit expansion till unemployment rate reaches the target 5% (the natural rate and the potential rate)... 

 

Unemployment management with the inflation target could bring consistency in the system... INDIA still needs to include low unemployment in its preamble... As long are there is unemployment in the economy there would be higher supply and low prices and higher demand and price expectations and spending... Moreover, there is also a natural real interest rate which neither inflates nor deflates the price level ie stable prices at full employment... 

 

The govt spending has had been limited in this unprecedented situation therefore the fiscal deficit is not the main concern... The RBI has still ammunition left, the market real interest rates are higher than the reporate it means liquidity has been less than required to facilitate transmission to lower market rates... More money-supply also means recapitalisation, CRR and SLR could be used besides LTRO to reduce market real interest rates... 

 

The govt must devote funds for the dams, reservoirs, irrigation and linking the rivers... Water harvesting could provide drinking water to scarcity areas ... Only 50% of the farms have irrigation facilities... Food inflation was behind the downfall of the UPA in the previous elections... Food has a higher weightage in the inflation basket which is a cost to the households, though lower prices increase real wages and demand and savings-investment and supply.... 

 

The commercial banks are marred with NPAs, in this the foreign capital could be used to increase investment by increasing FDI limit in the banks which could also lower competitive rates... Banks are holding the recovery in demand back which has also put investment and supply on hold... Rate cut would increase both demand and supply... when unemployment rate is more than normal... 

 

Elevated inflation means the RBI won’t cut in the near term which means demand pressure due to near term bottom-out (interest rate) and low supply could increase spending which may reinforce higher inflation... Higher demand due to accommodative stance would further boost demand and prices and expectations, lower supply due to higher price expectations would again push the price-level... Higher prices mean higher inflation expectations in the near term... 

 

If farm loans could be waived due to adverse conditions, business loans could also be raised or forgiven in this unprecedented situation of corona pandemic... This could provide much needed breather to the stricken business activity due to loss in employment and demand... Business loan waiver could help increase employment, investment, demand and supply and the economic growth, it would increase the ability for business expansion... One time bailout would help the recovery... 

 

Expectations are self reinforcing, if people expect lower prices they delay demand and spending, which further lower prices, moreover supply would increase, again which would lower the prices and , if they expect higher prices they hold supply, which further increase the prices and would increase demand and price... 

 

Nonetheless, any intervention to increase/decrease money supply would again reinforce the prices (too)... If there is unemployment and disinflation or deflation, more money supply would further lower prices by increasing supply and demand and if there is unemployment and inflation less money supply would further lower supply and increase prices and lower demand...