Businesses are always run on the borrowed money that
is why lower borrowing cost is very important for competitiveness and demand,
it directly adds to the cost and prices, like transport prices which are the
key costs for investment, it can reduce the cost of business investment...
It is unimaginable that imports are increasing due
to lower domestic production and more competitive imports, due to lower
borrowing cost from countries where capital cost is low... How domestic player
could compete with foreign players?
Domestic lower prices through increased capital
productivity could lower prices and increase demand... INDIAn businesses have
been unable to compete with foreign companies... INDIA's low foreign debt and
more expected inflows are likely to push domestic interest rates down…
And, the private companies could also borrow abroad
like the Govt which could do the same; lower capital cost... and increase
competitiveness and demand and growth expectations... Though hedging through
derivatives would be important... Savings import could further facilitate
interest rate transmission...
The government has tried to involve savings of
Europe, Japan and US where interest rate are close to zero... which could lower
borrowing cost in INDIA and increase supply or productivity and lower prices
and increase real wages and incomes and demand and growth and expectations...
If the Govt borrows abroad in the domestic currency
and/or hedge the currency risk and the interest rate risk it could help lower
prices, especially the interest rate and increase productivity, capital, too
and demand and growth expectations... means higher demand/supply {and growth (EXPECTATIONS)}...
And, by opening FDI in banking the Govt could
further openup channels for foreign money flowing in, more inflows would make
the rupee strong further reinforcing foreign capital inflows...
Nonetheless, the commitment for fiscal prudence
has further lowered borrowing cost expectations for the private sector
investment... The stock markets have been slow to recognise it... Moreover,
Rs 100 Lakh-Crore infrastructure investment and boost to affordable housing
through bank recap and liquidity assurance to NBFCs and HFCs are great
cursor for investment demand spending...
The Govt has tried to double the size of the
economy to $5 Trillion form currently $2.7 Trillion which also means that
wages and incomes would also increase to double which would increase demand
and growth...
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India Inc. thinks that liquidity is a major problem
for the economy, but, RBI Gov thinks that there is adequate liquidity... To
revive spending reviving earning expectations are important by cutting cost and
prices to increase productivity, demand and price expectations... Lower prices
increase demand and price expectations, overdemand and higher prices are common
after lower prices and higher demand...
'The government had changed base year from 2004-05
to 2011-12 for prices or inflation which is responsible for a lower GDP
deflator and higher real-GDP in the subsequent numbers... Nonetheless the Govt
supplyside reforms have also kept inflation undercheck increasing real GDP by
lowering interest rate…
Though, there are claims that the economy has not
completely bottomed out form the last interest rate hikecycle and still
reflecting some slack amidst the renewed rate cut cycle... Changing base year
has definitely increased real-GDP to some extent...'
INDIA's population growth rate, as in every other
case, decides its potential growth rate which is 120 Crore/tenyear or 12%
pertenyear, therefore to get everyone employed the economy must grow 8%,
after accounting for the natural rate of unemployment at 4%, on an average
basis... INDIA's potential growth rate is 8% and the economy should add 80
million jobs a year to achieve the potential growth rate... The growth in
labourforce decides the potential growth rate...
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A 2% inflation target (by the Fed) has lowered the
economywide prices expectations below to an average of 2%... The policymakers
have set a price increase of 2% on each product in CPI, including food and
fuel, and whenever average inflation (CPI) reaches over 2% investors would
start selling stocks/inventories, because of tightmoney by the Fed and lower
demand and price expectations... which could further reinforce lower price and
interest rate expectations and delay in demand and growth (expectations)...
Probably the Fed would like a fast recovery in the prices
and growth by avoiding lower interest rate or interest price/cost expectations
that could delay demand and growth, people would hold spending in expectation
of lower cost/price... Either the Fed could reject market rate cut expectations
to revive growth or it should deliver a rate cut soon to increase demand and
price and growth and expectations...
Moreover, recovery could take 2 to 3 quarters... It(the
Fed) and, everybodyelse would like a quick recovery to potential or full
employment growth... The Fed could probably try to neutralize real interest
rate at 0% that would bring balance in savings and investment and price and
growth expectations... means 1.6% inflation and 1.6% interest rate... 1.6%
interest rate is to compensate 1.6% loss due to inflation...
Incentivising or inducing the subjects/agents have
been popular in Economics for a longtime, now... Actually, any economicpolicy
either induces or deduces or disincentivises or incentivises the agents in the
economy for a particular outcome...
We should probably cut glaciers to get fresh water
and export; water could be costlier than oil in the future... Rain harvest is
difficult, but snow harvest is easy, for water...
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