Productivity, lower interest rate and stability...

Higher productivity or production means lower prices which increases competitiveness, demand and market share... Lower prices further lead to lower nominal interest rate and higher real interest rate, lower prices or inflation increases real interest rate and higher savings and investment and expectations... Lower cost of capital increases its productivity or productivity lowers cost of capital... The oppourtunity cost of using capital or capital intensive techniques is low which lowers unemployment upto full employment, after which wage cost and inflation increase... Full employment is the real constraint on productivity, higher wages would limit expansion or higher wage cost also increases price and price expectations and interest rate and expectations, but if cost of capital is kept low it could compensate the wage cost and increase supply, also through (international trade)... In this situation, a higher nominal or lower real interest rate and expectations because of inflation and expectations would set the contractionary forces double when we need stability and not the next slowdown... A higher ratio of cost of capital and labour would make the economy uncompetitive when higher wages would lower the capital and labour cost ratio... A lower cost of capital and higher wage cost would increase demand competitiveness and demand and growth, means more competitiveness and growth...

A stable or lower interest rate and expectations or lower money that goes for interest payment cost/prices could help slow the deleveraging and would also promote demand for loans and spending and growth... It would also contain fiscal debt...

The objective of the monetary policy is to stabilize inflation and inflation expectations at full employment ie the goal of price stability and full employment... And, not to lower demand and prices and expectations, but keep them stable, to increase supply and prices and expectations to keep growth and growth expectations high... The RBI's neutral stance or real interest rate is just right to keep prices and unemployment stable, if not accommodative... and a stable natural real interest rate and expectations could help more to increase investment employment and growth, than rate hike and rate hike expectations... INDIA's woes due to volatile food and fuel prices could be directly attributed to low investment in agricultural and fuel or oil production... and a low borrowing cost would help increase supply...

Fear and Anxiety... Trade Wars...

The current environment of the global economy is of uncertainty and fear and anxiety due to the protectionist waves and trade wars that are likely to hurt competitiveness and productivity and demand due to higher tariffs and retaliatory tariffs and setback to the supply value chain which might increase unemployment due to disruption and would precede or followed by higher prices and price expectations which could lower demand and growth and expectations. In short, trade wars would be costly and contractionary for the global demand and the stock market around the world, we have seen a fair amount of correction in the stock market since the US President announced tariff on the Chinese products and violation of the patents rights on technology.

Moreover, the strong US economy and higher inflation and inflation expectations have increased the interest rate hike and hike expectations, though gradually, but the withdrawal of the quantitative easing accommodation could further drag the already recovering slow global growth. The gradual reversal of the monetary accommodation after the 2008 crisis is yet to play out since it would increase both interest rate and expectations and strong dollar and expectations and would hurt the domestic and external US economy and lower investment would afflict the other economies, and together the global growth.

The job of the Federal Reserve is not only to restore equilibrium, price stability and full employment within the economy, but also the outside world which are attached due to capital flows after the quantitative easing and ultra low interest rates which, now, have an upward bias due to tight labour market and higher wage cost and inflation and would slow the fragile recovery in the investment partners or borrowers economy and growth, globally. A higher interest rate and rate expectations and currency demand could further aggravate the problem, out flow of the dollar would increase inflation and depreciation in the trading and investment partners’ economy which would also increase imports and current account deficit in the US too…

The RBI might try to stabilize expectations when the inflation has an upward bias to the upside target at 4.44% percent within 4 +/- 2% band, lower than 5%, nonetheless, a 25 basis point cut could prove to be a booster for the market, especially when the stock market is reeling under the trade war and uncertainty... but, the expectations that the income and pay push by the government could increase inflation, notwithstanding a lower borrowing cost could also help increase supply and contain prices... Sometimes, the reverse monetary policy also works, when the central bank increases money supply it reduces the borrowing cost and increase supply and lowers the price level before full employment....