RBI's Concerns...

Article;

RBI Rate Cut- Who Gains From Fall in Interest Rates


Comment;

There is misconception that the value of investment in bonds has increased with low interest rates because inflation has also gone up to 20% also, not long back, just two years. Has it compensated the loss in the value of money or the purchasing power of the bonds it terms of other goods and services? Because if it has not the purpose remains unsolved because the purchasing power or value of bonds has reduced between the time when bonds were purchased and time when it is en-cashed, although the amount of money has increased. To restore the value of money the return on bonds must be greater than the rate of inflation…   Article;  Monetary Policy Cannot be Eased Further Says D Subbarao

CAD is going to detoriate further because repo rate by all major economies has been reduced and that is for the purpose to infuse demand in the these economies and will increase prices if it actually increases demand and especially prices of fuel. We often hear that oil importers are demanding more dollars. Because that this time we have to shell out more dollars and we do not have enough of that. Therefore we need to find new sources to earn more dollars or we need a stronger currency so that we can buy more dollars. The RBI to earn dollar can invest in dollar denominated assets or US government bonds or the government can give impetus to our export sector by lowering tariff barriers. This is the best way to earn foreign exchange and will also increase employment within the economy. But that chain is missing either due to low demand in trading partners economy or high interest rates within our own economy. Another thing we can do is to demand with our trading partners that we will only accept Indian rupee in exchange of our goods and that would help the economy with a strong rupee because demand for rupee will go up…

Ways Out...

Article;

RBI Likely to Cut Rates for First Time in Nine Months


Comment;

We need a proper threshold of this economic stimulus otherwise purpose will not be solved. At least 50 basis point cuts. May be we can do it in parts 25 basis point this month and 25 later. But better would be to push little harder since growth rate has come down more than expected below 6. To push it 7 we need to press a little harder. If the RBI changes its base period, a little higher normal period, it can opt for a more aggressive rate cut. But that is only if 2012 prices are considered normal and base...

Article;

Federal Reserves Biggest Debate When to Slow Asset Buying


Comment;

The target is good, unemployment rate. Inflation won’t rise too much above the natural unemployment. It will resist increasing since there is too much unutilized capacity in the market. Inflation will first go up then will come down. If we are targeting inflation we need to push it back every time it comes down. How long will people keep money as asset. There are many concerns related with it like security of that money and all. And slowly they will resume spending, investment and consumption, and that will bring out economy from liquidity trap. Spending is more important even by the central bank eventually all spending will improve. Its a chain reaction. Let the economy feel it is wealthy...

 

Credibility of Words...

Credibility of the central banks is more important than backing your economy by gold. The purpose of the gold is to hedge against inflation and price rise. But that is from an investor’s point of view, the central bank needs only to make credible promises regarding inflation. Their words are more important. In today’s world where recessions are frequent and have been accepted as part of trade cycles and common we constantly need to infuse money and demand. And, in this period of crisis even if the central bank has too much gold pumping more money will erode the value of gold too as in case of money. It makes no difference whether we have gold or not. Pumping more money in the economy will only mean less value for our gold and money. It is inevitable. These days gold has a value only in the eyes of common investors. But that is a myth too. Gold can never restore the value of money once lost. It only compensates in form of the amount of money but that is subject to decrease in value of money also because inflation rises every year. The inflation we see at 2% or 3% is a gauge of increase not a constant value. It also means that gold is losing value with the same rate unless you increase your investment. It is same as depreciating currency, amount increases but value decreases if other prices rise too much. In times of high inflation central banks increase interest rates and economic activity declines and gold prices fall too and therefore it is good to put your money in inflation indexed assets that are paying higher interest rates. Any investment is just a myth as long as inflation and inflationary expectations are not properly anchored. In this world only words have value and gold has a value as long as there is a buyer…

Utility...

Article;

In Many Ways Economics has Crowded Out Politics Globally Michael Sandel


Comment;

In micro economic prices are determined by comparing them with costs and utility and market also works on the same line. This is true for normal goods but in case of public goods utility and cost is so high that a single person can not pay the price. This is called externality and here the market fails and Public Policy comes in. But the recent trend is public-private-partnership (PPP) models. Only a government agency can levy taxes for public goods and we pay prices for normal goods. As far as allocation of goods is concerned the principle remains the same utility/need. Greater the utility/need the more just distribution it necessitates. But that does not necessarily mean higher prices like in case of food grains…

Push Back the Inflation Rate...

Article;

Euro Zone to Contract in 2013 dashing ecb optimism-poll

Comment;

Inflation is going down it tells us that the union is going in recession again. But since complete price stability is more common inflation may tend towards the normal. Which is normal. But since we want a high growth rate we should again push the inflation at 2% the official target by cutting interest rates atleast we should try for it. If the growth rate has improved with such a policy we need to continue it...

The Stability...

Article;

Budget 2013 Focus to be on Economic Revival Fiscal Health and Boosting India as Attractive Investment Destination

Comment;

Stability in the sense of an economy has several meanings. There is political stability, there is economic stability and then comes the price stability which is a part of economic stability, which stability is he talking about? The growth of the economy has been held hostage by price stability which is responsible for high interest rates and low economic activity, and ultimately low profits. The RBI is continuously, except in one instance the April repo-cut, hopeful and is waiting that inflation will come down and there will be legitimate reasons to cut the repo-rates, not just profits. The macro-economic variables, nominal and real, of which employment is a real variable, a real measure of economic growth is missing out of this important stability discussion. Neither the central bank nor the government is talking about this important variable. It could be a sign that we need to reduce the repo-rates now and it could be an achievement of the government it can showcase. But since we Indians do not believe in numbers, like many, and many do not understand their meaning at all we do not think we need those numbers. But actually we do need the economy’s unemployment rate so that the RBI can decide in favor of high real employment growth, low interest rates and higher GDP growth. But then economy’s growth rate will increase and then it will not mean stability either Political or Economic. It will mean elections…

Sticky Wages and Prices...

Article;

The RBI Needs to Stimulate Growth While Containing Inflation


Comment;

Wages and prices are flexible upwards and rigid down wards. The level prices once reach provides a floor for further rise. You cannot reverse the situation just like before completely. But you can always mend it a bit by policy intervention. Prices have come down considerably but are above the natural rates. Philips Curve says that long time back when employment rose 5% in the UK it inflated the economy by 5%. If we generalize this empirical finding we can assume that in any economy 5% increase in employment will produce 5% inflation. Which is the RBI’s comfort zone 5-6% and the natural limit, and, frictional unemployment is 5%, also. Currently, inflation is at 10% and this is food and fuel inflation close to CPI and at best we can expect that the momentum remain constant, growth at 6%, and the RBI’s intervention will bring down it to 7% as happens with WPI index. And, if we rely on Keynes and his sticky prices we can not expect the inflation to come down at 5% unless an economic eruption occurs that disturbs the supply-demand scene or the real sector. But, it is true that prices and wages are sticky. Income tax is an important tool to tackle demand and we know the law of demand, high demand high prices and low demand low prices. So it tells us that we need to use income tax to bring down aggregate demand and prices. Or later we will use it and prices will not come down. The expansionary policy of the government points to a regime of high prices too. The government should revise the mandate of price stability…

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