Investors shall learn that the Fed would just stop inducing the investors and any reversal of the QE is highly unlikely, it would just stop accommodating and not reverse the QE... The money is likely to remain in the system which should help stabilise growth and prices, in case rate hike is still years far... The Fed has also said that it would warn before any change in action... The danger is not quite imminent and is still far away by years...
Technically, the central banks would first stop and not reverse the easing abruptly, higher unemployment would make them tolerate higher inflation... 4-5 % inflation is not that high... With supply side correction inflation would remain contained... Covid has hit growth which could take time to normalise, a third wave would be only mild with 50 crore vaccines so far and lose economic policy... Nonetheless, from an economic policy view inflation expectations are more responsible for spending decisions and higher money supply is very vital, only then people could spend... Raghuram Rajan’s group with Banerjee is quite awkward coz the latter demanded unemployment transfer to poor... means more moneysupply and demand and prices... The Fed has said that any reversal in the accommodative stance is still 2 yrs away... So the current stance is to stabilise the situation...
The RBI has adopted a flexible inflation targeting and it has relaxed it during covid and low demand and low supply and higher prices... Higher prices also mean that supply and demand would revert back...
From the spending perspective inflation expectations are important... Higher inflation expectation means people would not delay spending and supply could go down which could further reinforce higher prices and vice versa... Though, lower prices also increase demand and lower supply and would increase price expectations and vice versa... As above, higher price and expectations could become self-sustaining...
Nonetheless, stable inflation and expectations at full employment could also help stabilising spending and growth...
Generally, lower inflation expectations could derail the recovery because people could delay spending and increase supply which would further reinforce lower prices and could be self propelling... Though, lower inflation or prices could increase real wages if employment remains stable... Nonetheless, lower inflation and expectations could also increase the value of money overtime which would increase demand... People would feel richer and would save less for future and could spend more... Otherthings remaining constant, given full employment lower prices would mean increase in real wages and real profits... If productivity increases and it lowers prices without affecting employment that is welcome because it would also increase demand, other than higher price expectations... It would also increase labour savings which could further be used for production; higher productivity means lower prices and higher demand and
Maintaining status quo means that the RBI wants to stabilise expectations when gradual opening and more supply would help price correction in the broader economy... Lower prices mean that demand and prices would go up coz all would try to purchase at the sametime if got money... Higher price expectations from a low base increase demand and spending...price expectations...
Among INDIA's most pressing problems are the irrigation facilities at one place and floods at other, every year that change the inflation dynamics and uncertainty for the borrowing cost... Building irrigation and dams and reservoirs are in the priority list... Only 50% of land has irrigation facilities... The other problem is fuel... A strong rupee would lower import prices and would help, real exchange rate would increase... INDIA should try to settle imports in the rupee and also for foreign borrowing... which could increase its credibility by reducing the risk for creditors... A strong rupee would also increase foreign exchange inflows…
The vast pool of the underemployed and low productive jobs due to lack of skills and lower wages could be used to gain a competitive edge while increasing productivity...
The RBI may sell dollars to avoid any oil price induced inflation and expectations... A strong rupee could increase foreign exchange inflows, higher bond prices and equity valuation expectations could increase inflows... The RBI could recoup dollars at lower exchange rate...
No comments:
Post a Comment