Data paint a healthy picture...

Recently, the revised estimates of the Wholesale-Price-Index (WPI) and the Index-of-Industrial-Production (IIP) data, with a revised base year from 2004-05 to 2011-12, were out which showed a good improvement over the last data in terms of the macro economic conditions that might help increase investment and growth, because lower inflation may push the Reserve-Bank-of-INDIA to lower the key-rates and increase investment, and, higher industrial production may increase employment, demand and growth. According to the latest data, the WPI fell to 1.7% from 3.7% earlier and the IIP has increased to 5% from 0.7% in the past, and the Consumer-Price-Index data, revised few months back, is already near 2.99%, a full percentage lower than the RBI’s medium term's target which might increase the real rate or the natural real rate target set by the RBI somewhere between 1.5-2%, to bring equilibrium in investment and savings, that is higher than the current real rate, nominal repo rate minus inflation, i.e. 6.25% - 2.99 equals to 3.26%, which is a high real rate which might increase saving, but may lower investment demand. The RBI might try to equalize demand and supply of money for which it may try to converge nominal interest rate to the natural real rates, because it would be difficult to increase the real rate to the nominal rate to achieve stability, since higher real rates would discourage investment, in equilibrium nominal rates would be equal to the real rates. However, it is still a question that which inflation index would be followed to deflate market rates, whether it would be WPI or CPI or Core-CPI because different people use different index, nonetheless the standard practices is to take gauge of consumer-prices because it is the inflation a common man experiences in the market, it includes the cost of food and fuel, determinants that decide cost of living and transport cost for a layman in a big-way, moreover poor people use few things included in manufactured-goods-inflation index or the Core-CPI, higher inflation would cut real wages, demand and growth. The revised estimates have brought credibility and consistency in the data since they are now directly comparable because of the same base year. The RBI must see it as an oppourtunity to provide cheap credit to an already slow recovery in businesses from the previous down cycle and lower the residual Non-Performing-Assets due to low demand. Notwithstanding, it (the RBI) can tighten whenever inflation overshoot its medium term target, the RBI still have to find the rate at which there is neither inflation nor deflation, the natural real rate of interest to bring price-stability and maximize employment. Moreover, the policy makers should target a GDP of 10% in the coming years, since INDIA is currently using only one firepower, it domestic demand, but it should also strive for more exports to provide gainful employment to its labourforce which is cheaper than the other major countries, and that would help maintain competitiveness…..