The RBI should devise a
mechanism to push banks pass on full rate cuts while maintaining the existing
margins... which is doable... to stoke investment and growth... Higher
liquidity too could increase scale of business and profits... Atleast banks are
better-off even with full transmission of rate cuts...
The growth and
inflation relationship is weak and is dependent on the excess capacity and
output gap... Higher unemployment means prices might go down as a result of
production and growth...
A neutral stance may
help avoid rate cut expectations and delay in consumer and investment spending
as people are less sure about rate cut expectations... When people expect lower
prices they delay spending... Nevertheless, lower household inflation expectations
could further reduce spending... To avoid this, a neutral stance is good... It
means both rate cut and rate hike depending on the inflation and expectations…
Price and demand-supply
or quantity of commodities are like bond price and interest rate or bond yield,
income is decided by both bond price and yield, likewise income from oil or a
commodity is decided by both price and quantity, either quantity goes up and
prices go down or quantity goes down and prices go up, nevertheless returns or
income remains same and lower prices mean higher quantity demanded and supplied
and higher prices lower quantity demanded and supplied, revenue or income
remains same...
It is a mirage that
higher price would increase income... Moreover, lower prices further lower
price expectations because either supply and demand or quantity increase or
people delay spending if they expect lower prices, similarly higher prices
further increase price expectations 'coz people demand and supply or quantity
decrease or people increase spending if they expect higher prices...
Lower price
expectations delay demand and increase supply which further lowers price
expectations... Higher price expectations increase demand and delay supply
which again increases price expectations...
Higher oil prices and
inflation expectations and back to back rate hikes stroked the slow recovery
from demonetisation and GST which were implemented in the backdrop of recovery
from the past rate hike cycle, NPAs and slowdown... INDIA still needs to
achieve the best... in terms of demand and growth when expectations from INDIA
are high, especially by the investors, domestic and foreign, from a long run
perspective... The investment cycle is still to kick in fully with lower
inflation and rate cuts...
When oil prices were
low, imports fell when investors ought to import or invest more... to create
reserves to sell at higher prices later and contain prices and demand...
Volatility in oil
prices add to the uncertainty... Transport prices are an important part of
global trade... When global growth is expected to go down oil prices are
expected to be lower... Nevertheless, low and stable inflation and interest
rate and expectations when growth expectations are low could support oil
prices, but inflation and interest rate expectations and higher oil prices
would be contractionary...
Like interest rate is
to reduce domestic inflation, exchange rate could be used to reduce imported
inflation... Cheaper exchange rate or at discount could help reduce cost of
foreign exchange and prices or inflation, especially through oil imports...
Lower interest rate
may increase depreciation or nominal exchange rate increasing real exchange
rate and demand for exports by lowering the price level... Lower inflation or
higher productivity increase demand and supply or quantity, exports, too...
In exchange rate
parlance increasing means lowering or depreciation in the exchange rate, true
for real exchange rate, too... and decreasing means increasing or
appreciation in the exchange rate... real rates, too...
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BJP has promised more
public investment to increase productivity which would increase competitiveness
and demand and growth or lower cost/price to increase demand when Cong has
promised more demand directly, which may increase fiscal deficit and inflation
without increasing effective distribution (market) of labor (employment) and
production... Lower AND stable prices have been the attributes of the BJP...
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