Europe's inflation-target...

Recently Ben Bernake, the former Fed-chief, pointed-out in the Economist (magazine) that inflation targeting in the US failed to reinforce inflation and inflationary expectations despite more money-supply and the zero-lower-bound when the GDP is still undershooting the potential growth. An important question that comes to the mind that why the Fed has committed inflation? From my side, inflation is a signal for wage and demand increase which would attract more investment and employment, and growth. However, inflationary-expectations make people expect inflation which increases their savings and more savings turn spending or consumption (today) low. People would save more and inflation would go down. However, if people expect deflation they would save less and it might increase inflation. Therefore, the Fed so far has committed inflation when its inflation-targeting is working against spending now. In another way, the Fed has committed itself for more money-supply and income, but it has also targeted inflation. Therefore, it is giving both signals, of increasing income and of inflation, which might create confusion among the agents and when the future is uncertain you save more. The signals are mixed. The Fed is doing and undoing its job at the same-time. Nevertheless, deflation would make people spend also because supply is limited and might increase inflation when demand overtakes supply. ECB is trying to repeat QE in Europe but this time it should abandon inflation-targeting to make people spend and save little with a little deflationary bias in the economic-policies. Deflationary-expectations would also infuse confidence in the economy’s budgets, both, micro and macro. It would increase demand when money-supply and wages increase...

Domestic demand in Japan...

Inflation increases when wages and income and demand increase after full-employment which constrains domestic supply... And, when demand outstrips supply it is controlled by raising interest-rates... But, in Japan inflation is down... Full-employment shows that demand is not a problem... Then we might expect supply to be responsible for low prices... But, lower prices may not be sufficient to attract demand... money-supply is important to increase wages and demand... actually, real-wages and income... Japan's low real wages are a major reason for low demand... Actually, it has cut wages to make the economy competitive... But, domestic competitiveness, lower prices has been neglected by adopting inflation targeting... People in Japan might think that inflation would go up so they save more for future... Nonetheless, if people expect that prices would go down they might save less today... Nevertheless, economists argue that lower prices or deflation would delay spending, but lower prices are an opportunity to buy soon and not delay because supply is limited... Therefore, deflation is an opportunity to buy now and not delay... If policy-makers commit deflation instead of inflation people might save less and spend more... Deflation would increase real-wages... Increasing money-supply may not be important... Real wages might go up without increase in money-supply because prices would go down...

Black-money, disinvestment and rupee...

Any policy is a dis/incentive for a particular outcome... It is true that the black-money is a product of tax-evasion... But, the money flows to other countries' banks... However it may have entered the country from other channels... anyway FDI, FII... foreign banks do invest in g-secs of other countries... The government could incentivize return of the money to the Indian-banks which would increase their lending capacity to lend low... The government might offer zero-tax on the condition that money will be lent to the Indian banks at zero interest rate... Taxes might be sacrificed to lower interest rate... There is always a trade off...

Disinvestment should be calibrated; otherwise it would reduce investment and growth... Timing of public-investment is also important... Disinvestment during downturn might weaken demand and growth... However, timely reallocation to other uses may help growth... Infrastructure is important... Re-capitalizing PSBs could lower interest-rate but more investment in infrastructure would also crowd-in more private investment to improve supply and reduce inflation... Inflation constrains demand and economic-growth by increasing interest-rates... Money from disinvestment must be purposefully deployed...

Rupee depreciation might be sensitive to other factors than a mere increase in money-supply... Like devaluation in dollar due to Fed's rate hike delay... UK may also increase only in 2017... Easy money-policy for longer than expected might increase depreciation of their currencies too... Things have changed alot after China... Everybody is trying to stay afloat... Strong rupee shows the strength of the INDIAN economy... It means money is flowing in...

Explore deflation tactfully...

Corporate also demand resources in the market... Lower prices of resources would lower cost thereby more profits... Deflation has not been explored properly since we assume that in the long-run increase in population would increase demand and prices with scarcity of resources... But, the conclusion seems to be reversed with decreasing population growth rate in many developed countries... In the light of this evidence we might conclude that slowing population growth-rate could lower demand and increase supply which could also lower prices and probably deflation... As observed in the US, Japan, Europe... In these developed countries deflation shows that supply-side is not a problem with zero-nominal interest-rates... Economists know that deflation is good for the poor and not for Capitalist... But lower input cost might help save more to invest more for the Capitalist... However, after full-employment prices or inflation might increase because wages could increase to attract labor... Central bank can lower capital-cost to zero to incentivize supply but it can not cut wages unless it cuts real-rates with inflation, but not to zero... Deflation with downward nominal wage rigidity is likely to increase real-wages which is good for demand... Low prices may also increase savings...  

Real-life is complex...

Analysts are wondering that even after 50 basis points cut in the repo-rate and increase in money-supply has not depreciated the rupee (in INDIA) as explained in the economics text-books... Nevertheless, the same is true for inflation... because inflation and inflationary expectations are down even after increase in money-supply... But, it is true that inflation and depreciation have not been increased by higher money-supply... This discrepancy in the text-book and real life situation might be ascribed to the conditions under which theory has been constructed... Real-life situation is different and far more complex because of a variety of variables... Nonetheless, we are here talking about a real situation in INDIA... where even a higher money-supply has resulted in a stronger currency... However, depreciation is normally worked-out through inflation... To understand this we need to understand what is depreciation or devaluation? Depreciation is higher inflation to cut the real wages compared to other countries... So, has inflation actually increased to cut real-wages? It has not... So, how depreciation might increase? Depreciation is actually the result of inflation... Unless inflation increases it would not increase depreciation and exports... Cut in real-wages makes you competitive, but inflation has not increased... Therefore, there is no depreciation in the rupee... Inflation also increases nominal exchange rate which also increases exports demand... Exports might not respond without inflation and depreciation... Moreover, slowdown in many parts of the globe has made their central-banks pursue easy money and depreciation, and increase exports which also might be a reason for a stronger rupee... Notwithstanding, if the RBI directly purchases dollar in the market, it would also increase its demand and price making it strong and the rupee depreciated... It is another way of increasing depreciation... apart from more inflation... INDIA’s strong prospects of growth when other countries are faltering has increased demand of the rupee to invest in the economy and thereby making it strong instead of depreciated...      

High rates to lower demand might also reduce supply...

IMF has recently declared INDIA a hot-spot for global investor and even better among emerging markets due to its equanimity underscored by its reliance on domestic demand for growth, low global commodity price regime because it is mainly an importer, its upcoming rate-cut-cycle, the idea to explore manufacturing and exports possibility with low wages compared to the peers, its high rate of population growth rate, a reservoir of labor and demand, low fiscal and current-account deficit and its pace of expansion and growth, both actual and potential, present best investment and business returns... However, regulations still constrain the ease of doing business... Nevertheless, INDIA has improved alot on competitiveness in a recent rating-report and the government is conscious about problems of doing business, both foreign and domestic... Businesses employ people which is good for demand in the market through multiplier which creates income and tax to improve human-lives... Notwithstanding, the burden of a large number of poor-people, also due to high population  growth-rate and unskilled and unproductive labor-force could not be underestimated... Nonetheless, unprecedented public-spending in a developing economy would increase demand and prices (inflation)... The supply of money either by fiscal or monetary-policy should match or increase availability of goods and services... If the policies only aim at increasing money it would not solve the problem, but might lower demand-supply and growth by increasing inflation and interest-rate... The economy might start de-accelerating... Higher prices keep demand and supply low because interest-rate will increase... The question naturally arises that if inflation is high then why the central-banks restrict supply by increasing interest-rate when they may actually increase supply by cutting rates? Low cost of capital might help improve supply and lower prices... lower cost will also lower prices and inflation... When central-banks try to decrease demand to lower inflation it also lowers supply which puts the economy on a down-path... a contraction... Demand and supply are not independent from each-other rather they are different names to address the same economic-activity... When central-banks try to regulate demand by increasing interest-rate it also decreases supply and thereby worsening inflation... However, zero-lower-bound (of interest-rate) is the limit for interest-rate-cut to increase domestic supply after that foreign supply comes into play which might help to store supply and demand and price-stability, actually lower prices to increase economic-activity and growth-rate... So far economists have attributed high inflation to high money-supply and demand, and, not to the actual supply and demand of goods and services which might be positively correlated with low interest-rates... 

Rajan cuts repo-rate...

Raghuram Rajan, our RBI Governor, keeps-up with his surprise element in the decision making process. Rajan said he is expecting inflation to remain benign, close to 5.8% in the September, even without the favourable base- year effect, lower than the target (6%) set by the government and the RBI... Nonetheless, the government’s commitment to stick to fiscal-deficit target would keep inflation low giving more room to easing... Low global commodity prices have given Rajan confidence of lower domestic and imported inflation... Lower crude-oil prices would keep the current account deficit in check by lowering demand for foreign-exchange and inflation... However, rate cut might increase depreciation and export-competitiveness in an adverse demand situation globally which the governor tried to supplement with increase in domestic demand when he cut-rates... Lower global and domestic demand has probably made Rajan to try to increase both... Interest- rate movements do affect exchange rates, too...  Exports have also tumbled recently... Lower growth projections in a subdued global scenario resulted in a near aggressive rate-cut by the RBI... Rajan has cut double than the expectations... According to the Taylor-Rule a 50 basis points cut in rate by the central-bank may increase growth by 1% which could improve ahead... INDIA is in a rate-cut cycle but that would continue to depend upon inflation... Rate-cut cycle ends when inflation starts growing more than wages, and, hurt demand and growth... If both inflation and wage increase equally then its effect on demand will be negligible... Growth depends upon demand and supply which are interdependent and should be incentivized to gain more growth with price-stability... Both, price-stability and full-employment is important for domestic- demand because price-stability affects the value of money and therefore demand, and, full-employment signifies that everybody is employed and has an income... Price-stability lowers demand for wages and interest-rates hike which also help to contain cost and price, and ultimately demand, domestic and external... Lower-prices are imminent for economic-expansion and growth; otherwise it will increase cost and price, and, hurt competitiveness... Lower interest-rate today could reduce prices by lowering capital-cost and increasing supply...