Capital...

Capital is another, apart from Labour and others, important factor of production on which investment depends to a large extent which has a cost and price, and, a demand and a supply of money or Capital, Keynes demand for money equation is popular and supply is controlled by the central-banks, there are strings of measures of money-supply (M0, M1, M2,...) which varies with investment and demand, and, inflation and full-employment and growth… Investment could be important for the economic-growth-rate. The central-bank controls the supply of money and demand for money by moving the real interest-rate i.e. by nominal interest –rate and inflation… Across the Globe, to a greater degree, now at this stage, the neutral or natural rate of  real interest-rate is around 1 - 2 %... In INDIA the RBI has said that it would target a neutral-rate of real interest-rate of 1.25 % in case of low and stable inflation, the RBI has set a band for inflation 4 +/- 2 and has committed an accommodative stance… The interest-rate is on a downward trajectory and interest rate expectations are also biased lower and we have a pickup in the investment-cycle, although tepid… The investors track the GDP growth-rate for investment decisions and lower cost and price of Capital would increase investment and growth, this has been a long practice in China, they always project a higher growth-rate… The cost of borrowing might be positively correlated with the rate of economic-growth, a recent study shows that there are evidences of low but positive significance between economic-growth and the real interest-rate, and. income and demand, and, supply and profits, and, lower income and demand expectation would lower the warranted rate of the economic-growth and investment… The supply-side may be positive for employment, income, demand and economic-growth, through the real rates offered to the businesses and investment… The businesses can borrow either from banks, bonds or equities or through personal-borrowings and for all this they pay a real interest rate for the money… All businesses have a degree of risk because of uncertainty of work and income… The economy swings between boom and busts, the trade-cycle-theory… The are several types of hedges the market has to proffer for investment, there are interest-rate derivatives, currency-derivatives, commodity-derivatives, these help to avert the risk to the series of incomes from the investment and the interest-incomes, but it is difficult to demand less money for investment when you want higher interest rate from investment… The demand cuts the supply curve at a point where demand meets supply and decides a level of real-prices or income and demand… A recent study shows that prices decide the level of demand and the economic-growth-rate… when lower prices are more expansionary because of the lower cost of borrowing… The price of Capital, i.e.the real interest-rate is one important determinant of investment and the economic-growth-rate... The supply and demand of/for money bear a real rate of interest which also depends on the rate of inflation… and inflation reduces the value of money and real-returns… Out of all the investment vehicles bonds are largely inflation protected, because for them either yields increase or prices with the general price-level… Recently, the RBI has liberalized foreign-borrowing through Masala-bonds, i.e. bonds denominated in Rupees, plus the RBI too has tried to develop INDIA’s Corporate-bond-market… the RBI has signaled expansion in the balance-sheets… So there is a lot of scope in the borrowing from abroad… moreover, if the investor wants to invest s/he can hedge the interest-rate movements by derivatives… Loans in foreign-currency could increase the foreign-exchange-reserves, meanwhile… The competition from foreign-countries to sell loans would also aggravate the competition in the domestic-market  and would push the real-interest-rate to the real marginal cost… The RBI has increased competition in the market to borrow through bonds… Historically low nominal-interest-rate-levels in the developed countries presented the opportunities to borrow since a long-time now after 2008 and negative interest-rate in a big part of the developed world signal lower interest-rate projection and expectations that would also bolster borrowing in the emerging markets… The real interest rate paid for foreign loans would be low enough, because interest rates are near zero and inflation in INDIA is around 4 %... Now, we have a minus 3-4 % of the real interest rate which should promote investment… Nevertheless, it could be hedged through interest-rate derivatives and/or currency-derivatives… However, in the last interest-rate cut cycle the RBI was also told to control capital-inflows because of overheating…