Article;
Raghuram Rajan's call for coordinated global monetary-policy -a distant dream.
Comment;
Rajan is worried about the foreign investors exiting INDIA
and the rupee depreciating beyond REER. Depreciation will further stoke inflation;
however, Indian exports have shown responsiveness. In economics many times we
have a trade-off. Lower interest rates are good for stock-market because it
indicates that investment will go-up. The capital we are seeing in the market
is mostly foreign capital coming out of developed markets central banks chasing
higher returns in the emerging markets because they are growing faster, but is
expected to retreat its base (the US ) as the economy and interest
rate improve. They have flown to INDIA following the boom, the
up-cycle started in 2004 which has now probably hit its bottom. So they have
started withdrawing their investments because following the RBI they expect
prices to go down with more tightening. All prices in the economy move in the
same direction, even price of capital, interest rate, and price of labor,
wages. Stock prices too. Economic
growth, inflation and interest rates are all positively correlated. When investors
expect economic-growth, s/he expects inflation and s/he expects higher interest
rate because the central bank would increase interest rate to control inflation..
If foreign investors expect a prolonged downturn they will exit now and will
return to the market when the easing starts, means when the next cycle begins. Japan and Europe
are still easing. Suffering is inevitable because we have reached our limits…
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