Article;
Towards a more predictable, transparent RBI-policy.
Comment;
According to the Urjit Committee report we have to check
inflation at 6% because the range for monetary policy action is 4% with a band
of 2% which means we should not expect tightening between 2-6% and between the
range tightening will depend on other indicators such as unemployment. As far
as unemployment is concerned we can expect tightening if the unemployment rate
is below the natural rate or frictional unemployment. According to Keynes 5% of
our workforce is always in the middle of loosing a job and joining a new one
and considered it as the natural rate... It is true that inflation decides the
course of interest rate but unemployment rate is important for the level of
heating in the economy in form of prices. Unemployment-rate results in the
divergence of nominal and real prices and will result in bubbles, such as in INDIA in the
realty-sector and in the stock market too… stocks are overweight,
over-expensive… Looking at the scene form a monetary-policy and interest rate
perspective we can easily expect further tightening and a major correction in
the prices. An inflation rate of 6% will probably see a correction of 6% in the
prices, lower stock prices will lower income and demand and the effect will
spill-over the economy, prices of other things will also go down. We have to
weigh-down the trade-off between how much income has gone down and how much
prices have gone down to get real-prices and income. Higher real income means
higher welfare...
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