Prices and Interest Rate and Expectations...

The Fed’s job is to curb too much volatility in the either direction and keep the borrowing cost stable to stabilize demand and supply and prices and growth and expectations... But, not in the stock market, however, stable costs would help stocks... 

Higher price expectations further increases price expectations and lower price expectations lower price expectations, because when people expect higher prices they demand more in present which increase prices... 

Similarly, when people expect lower prices they again delay demand and lower prices, however lower prices increase demand... In this situation Monetary policy could further increase volatility through the borrowing cost...

Nevertheless, higher prices lower demand... Borrowing cost (here) refers to the neutral real interest rate at which the economy is at full employment...

Moreover, higher price expectations delay supply which also increases demand and price and expectations and lower price expectations would further increase supply and lower demand and price and expectations... 

Nonetheless, higher prices lower demand and increase supply which lowers price expectations, but higher price expectations increase demand and lower supply again increasing price expectations... 

Sameway, lower prices increase demand and lower supply (relatively) and increase price and expectations, but lower price expectations delay demand and increase supply which again lowers price expectations... 

The goal of economic policies is the curb too much higher or lower prices or inflation... 

Given the population growth rate of INDIA it needs to create 6-8 million jobs to absorb workforce and not 20 million or 2 Crore jobs after deducting natural rate of unemployment or full employment...

Monetary Policy increases the supply of money therefore it reduces interest rate whereas Fiscal Policy increases the demand for money for spending therefore it increases interest rate and expectations... 

The bond market reactions are different on expansionary monetary policy and fiscal policy... Higher money supply by monetary policy reduces bond yields, but higher fiscal deficit increases bond yields...

Fiscal Policy increases demand for money in the economy through taxes and debt which directly increases the demand for money and interest rate... fiscal deficit or debt increases demand through wage spending which also increases inflation and interest rate and expectations...

True RBI missed the oppourtunity to lower interest rates to boost growth after demonetisation which reduced inflation and inflation expectations too much even with an accommodative stance...

The RBI has set the benchmark rate to the repo rate, to increase rate cut transmission, which would be in effect from April 1, 2019 which is likely to reduce borrowing or lending interest rate across the board likely to increase demand for loans, consumption and investment spending, and growth and expectations.

Moreover, RBI is expected to further cut interest rate or the Repo Rate and/or adjust capital requirements since liquidity deficit might not let rate cut transmission materialize… 

The RBI might educate people about the real rates which matters and not the nominal interest rate INDIA has one of the higher real interest rate and capital requirement countries.

50% of our arable land is dependent on weather for irrigation amid water disputes among states... It is major risk for farmers' income... 

If farm prices can not be increased due to resultant inflation, costs must be brought down... 

Moreover, if prices of manufactured goes down that could also increase real wages in the farming..

The US still gives subsidies to farming... Moreover, Israel has expertise in more crop per drop which might be engaged to improve farm performance...

DF, Real Interest Rate (Cut Transmission), Inflation, Crop Insurance, US and Oil... (Rev.)

Deficit financing (DF) to increase productivity may help... Finance should flow to sectors that may increase inflation expectations... Like oil and agriculture in INDIA...

Nonetheless, market may also be incentivized through lower interest rate by monetary policy...

Lower inflation and inflation expectations were very slowly recognized by the RBI which sent confusing signals to the investors or failed forward guidance about inflation and interest rate and expectations...

A higher real interest rate did not lest investment spending materialise... so low inflation is also a problem for supply, but good for real wages or incomes, nonetheless lower real interest could help increase productivity or supply to match demand levels...

The NPAs and higher inflation and interest rate and expectations the UPA left did not let investment and employment materialize in the economy later fully...

Increasing productivity means higher production and higher investment and employment and lower prices and increase in demand and supply and growth expectations...

The slowdown during the UPA did not let demand and supply recover completely...

Private investment did not pick up due to NPAs and the resulting NPAs of banks... that stretched too long...

Lower and stable prices were a miss during UPA...

Liquidity is also important for rate cut transmissions 'coz it would increase bank's scale of business, they would lend more and earn profits...

Moreover, number of banks mostly dominated by the public sector banks and less competition among banks to sell loans is also responsible for slow rate cut transmission...

Higher real interest rate compared to the peers has led to incompetitive businesses and exports...

Nonetheless, lower inflation is also responsible for higher real rates which needs to be corrected...

Both, liquidity and competition have restricted rate cut transmissions, too....

The most appropriate response to reduce uncertainty in farm incomes would be crop insurance due to lack of irrigation and credit facilities, like hedge investment for farms...

The share of agriculture in the GDP has gone down though number of dependents for jobs has had been very high which has reduced share per person...

The average income could be misleading since income of marginal farmers could be lower given their number...

Nonetheless, 3000 Rs/month is quite insignificant for a farm family to sustain spending on the basics including education...

A recession was expected (in US) in the backdrop of the inverted yield curve and too much tightening that are likely to cut the expansion cycle...

Nonetheless, if inflation and inflation expectations are contained through a stable or neutral real interest rate, expansion could continue longer...

During the next recession the Fed does not need to harbor too much lower interest rate expectations since it could delay spending to lower cost expectations...

If people do not expect lower interest rate too much they might increase investment soon…

Too much lower interest rate and price expectations might delay spending and recovery… 

The dollar never depreciated too much to attach a tag of currency manipulator to US... It has a huge demand, within China also, and due to peg to oil prices...

Any correction in dollar increases its demand and prices or makes and made it strong and depreciation in yuan, though...

The main difference in dollar and yuan is that dollar is world’s reserve currency and has a safe heaven image due to credible US monetary or economic policy...

Too much higher oil prices may point lower demand and supply and expectations... consumers would demand less and producers would supply less...

On the contrary, at lower oil prices consumers would increase demand and producers would supply to contain profits...

Nonetheless, higher prices lower demand or increase supply and lower price expectations... and lower prices increase demand or lower supply and increase price expectations...***

But, a stable price (movement in a narrow band) is the best to manage demand and supply and prices or quantity and price... 

***correction

Some abated risks...

Lower and stable oil prices, pause in the tightening cycle in the US and, now, lower interest rate and expectations in INDIA have the ability to affect the investment sentiment positively among domestic and foreign subjects amid few obstacles like expectations of slowdown in China and Europe and the Brexit…

However, this could be the right time to increase exposure to stocks and debt since they look more attractive after a healthy correction from value perspective after abated rate hike expectations in the US and other markets and measures to keep-off the trade war disruptions, but still in doldrums…

Nonetheless, economic policies are like waves that magnify its effects like rate hikes and rate cuts through prices by the central banks, for instance inflation tends to increase inflation and unemployment due to hike in the borrowing cost and expectations and deflation tends to increase deflation and unemployment because of lower borrowing cost and expectations…

Therefore, stable prices, movement in narrow bands, and interest rate and expectations like the natural or neutral rate theory around full employment could help stabilize prices and investment and growth and expectations.    

There is little basis to support no jobs claims in INDIA... at least there is no mass resentment... We have a vast unorganised sector without any data...

There is huge service sector in towns and villages and even in cities that earn daily wages and have no EPF demand where people are ready to work at cheap wages...

INDIA''s low productive jobs and wages and demand and higher prices are very big problems...

The best thing the govt could promise youth is education and skills and jobs and increase productivity of the economy according to industry demand managing demand and supply of jobs better...

INDIA''s huge workforce is its biggest asset and a liability, too... if the supply and demand of the CS’ and CAs are controlled to help income than why not for other skills...  It would also help the rural distress... which needs skills for employment...

Fiscal deficit has been a source of inflation and inflation expectations and higher interest rate and expectations and low investment, also due to depreciation and expectations...

Notwithstanding, spend on health, education and skills would increase productivity and competitiveness and demand and supply and growth and expectations...

Interim Budget 19...

The interim budget presented by the incumbent government has been one of highlighting the fiscal prudence committed during its tenure and showing restraint it has pegged the fiscal deficit at 3.4% higher by 10 basis points which got the markets’ thumbs up by 400 points surge in the Sensex, but lowered later probably on profit booking.

As was widely expected the rural distress got much attention for our FM who has allocated Rs 20, 000 Crore towards farm support.

However, the income support to poor farmers Rs 6000 per year per 2 hectares, is not very significant given the index of cost of living, only Rs 500 hundred monthly only, but asided Rs 75, 000 Crore.

Nonetheless, it has increased allocation to MGNREGA to Rs 60, 000 which are likely to boost rural demand suffering from lower farm prices and it has pledged Rs 19, 000 Crore for road connectivity which are likely to create more employment and demand in rural INDIA.

The government has taken cognizance of landless people in rural areas which are more vulnerable due to uncertain work and wages.

Moreover, the government has increased interest subventions for farmers under few conditions and for timely repayment for agricultural loans which are likely to benefit farmers.

Nonetheless, contrary to as was widely expected FM has not indulged in too much populist measures to woo rural population vote bank.

The government has proposed pension scheme for workers in the unorganized sector. 

The government has planned to build 1 lakh digital villages.

Nevertheless, the biggest announcement of the today’s budget is to exempt Rs 5 Lakh income from tax which is likely to benefit a large number of income tax payer’s population.

Once again, the government has refrained from being too much populist and has adhered to the path of fiscal prudence which is good for the industry.

Prices and Jobs...

We must judge a regime by price stability and the level of unemployment or employment which directly affect the economic growth rate... Low and stable prices help achieve full employment or the potential growth rate... because it keeps interest rate and expectations low and stable.....

Low inflation and inflation expectations the key macroeconomic stability indicators have been quite encouraging which quashed the previous regime, but monetary policy and the legacy of NPAs and ineffective interest rate and expectations management did not let investment soar which is important for job creation, the private sector investment...

We need skill development to draw workforce from agriculture to other sectors and provide gainful employment... Employment is the best answer to poverty... INDIA has a plenty of demand, but not productive employment or jobs and income or money which are dependent on investment and supply which are dependent on interest rate and growth expectations... 

Low prices mean increased demand and supply and growth, otherthings remaining constant... however low interest rate incentivize demand, supply and growth and expectations... Nonetheless, lower interest rate expectations might delay recovery... is not good for the pace of recovery... 

It would add to the uncertainty as when ''coz people would wait for lower interest rate to lower cost... The RBI failed to manage interest rate expectations in a world of low real rates even though inflation remained under the target... 

The real dilemma for RBI is lack of the data on the unemployment rate... The goals of monetary policy are price stability and full employment... The economic growth rate is the result of trade-off between inflation and unemployment through interest rate and expectations management... The Phillips Curve theory... 

Lower unemployment than full employment increases prices and interest and expectations and higher unemployment reduce prices and interest rate and expectations which help manage business investment and growth and expectations....

Poor people, who earn wages, mainly consume food and fuel, and have higher weightage in the consumption basket, and little manufactured products than others; therefore, RBI has set CPI the official inflation index and not core-CPI... Lower food and fuel inflation also affect wage demand and prices of manufactured products therefore important for inflation, wages and interest rate and expectations...

UBI was basically proposed in the background of recession and low demand and deflation or slowdown to increase demand and growth... But, in a country like INDIA with inflation and inflation expectations is bound to generate some more inflation in the presence of supply side weakness, especially food and fuel... 

While doling out basic income the govt must work out the supply side... The economy is vulnerable to food and fuel supply shocks that could increase inflation and interest rate and expectations... and lower growth expectations...

Rs 8 lakh criterion for reservation is unthinkable or unimaginable 'coz people getting more than 3 lakhs cannot be termed as poor as they have sufficient means to invest in education and skills... And, all supported it for votes... Laughable... 

After 50% reservation to Scs/STs/OBCs plus 10% reservation for economically backward ie 60% reservation total... 30 to 40% seats are left for the rich whose income is above 8 lakhs which is only 2% of the population... how this fits into a democracy with equal rights to all... 2% will compete for 40% seats and 98% for 60% seats... it seems opposite the objective for reservation... more seats for reserved, the poor... actually it has reduced seats for the reserved...

The traditional source of inflation in the US has had been oil which has now a disinflationary effect on inflation and interest rate and expectations which would help keep borrowing cost low and increase productivity and competitiveness and demand and supply and growth..... Low prices and interest rate mean higher demand and supply and interest rate (and) expectations..... ie higher economies of scale...

Tightening, Prices, Domestic and Global Issues (Revised)...

The global environment for growth has been one of uncertainty for investors prescribed by higher inflation and interest and expectations due to full employment in the US that has also augured higher inflation and interest rate and expectations and outflows from the emerging markets due to depreciation and inflation and expectations.

However, lower oil prices have ebbed the expectations of a strong dollar which could prove to be a positive for emerging markets inflows and appreciation, but tightening in the US and strong dollar could increase uncertainty for growth inspite of lower inflation in the US and slowdown in the biggest trading partner China probably due to tariff and trade war which could be contractionary for demand and investment coupled with slowdown in the emerging markets, including INDIA, EVs have changed the dynamics in the oil market... Even INDIA''s low profile cities have now e-Ricksha....

The trade war has the potential to cloud indecision in investment which is evident in the weak stock markets across the world further aggravated by rate hikes in the US and uncertainty in the oil prices all have contributed to a benign demand and investment scene which has changed expectations about the future and delay in spending, 

Nonetheless, emerging markets have their own problems like NPAs in INDIA and higher dollar denominated debt like Turkey that could further add to instability in the domestic and global economy, but it is true that tightening in the US and emerging markets and expectations with inconcluding trade negotiations are bigger worries for the business and investment and employment and wage and demand and growth and expectations.

Higher prices or inflation and expectations signal rate hikes and expectations which lower and delay demand, but increase supply and expectations leading to lower prices and expectations, which again increase demand and price and expectations, when the interest rates are cut, as long as rate hike continues demand remains low and lowers prices and expectations, which eventually increase demand and price and expectations when the interest rates are cut, however prices or inflation and expectations could also affect demand and supply and expectations even without rate hikes and cuts.

Otherthings remaining constant, lower prices increase demand and lower or delay supply and expectations because real value of funds increase on higher returns expectations, and, higher prices reduce demand and increase supply and expectations the sameway… because the real value of funds reduce on lower returns expectations… even without an incentive or disincentive and inducement or reducement…

The idea of base year is to find a year in which leading macroeconomic indicators growth, inflation and unemployment and others behaved normal... Like after adopting inflation targeting and growth that followed....

INDIA desperately needs data on employment inorder to frame consistent policies... It has a large unorganised sector for which it has no data which could increase its GDP... Labour codes might help registration of the labourforce on a daily basis to know the unemployment rates... and... for course corrections...

Generally, WPI must be lower than CPI because traders buy from the wholesale market at lower rate, say lower prices to increase supply in the retail market after transport to selling points and unloading and storage cost... There is a margin of 10% from the wholesale market to the retail shops... normally...

True, CRR is a contingency part of the reserves which might be used to increase lending during rising NPAs and slowdown which is likely to underscore rate cuts transmissions... It is a rainy day fund to mitigate risks of defaults and low demand and growth....

The govt is a big player in the agricultural market... if it delays supply like oil companies that could contain loss... By delaying supply to the market the govt might nudge higher price expectations... when people expect higher prices they hold supply which further reinforces higher prices and expectations... Higher price expectations may delay supply and increase prices and expectations... Higher exports might also help lower domestic supply and increase price expectations... UBI could replace NREGA since both aim to supplement income... 

'The biggest benefit of demonetization was to bring black money to the banking which could help create loans since it would increase deposits or savings and lower interest rates... However, RBI did not let banks lower interest rate since the liquidity was not stable, but home loans rates were lowered... which could lead to long run effects on the behavior of people to save money in banks... It could be continued if people choose to cashless... without it... there is no guarantee that people would not again hoard money to avoid taxes...

        

Money Policy...

The US is nearing the end of the rate hike cycle after the Fed chair Powell uttered that it is close to the neutral rate since prices are stable with full employment, the real interest rate consistent with full employment and price stability, after keeping it negative and zero for near a decade that lifted all, emerging markets (EMs), too, including the US, especially the bonds and equity markets, across the globe, nonetheless, the markets remained jittery on the account of rate hikes and expectations and quantitative tightening coupled with tariffs war and standoff between the US and China and rising uncertainty in the oil market and strong dollar, all have inflation and inflations expectations, also due to depreciation and capital outflows and depreciation expectations in the EMs. 

Higher inflation and inflation expectations due to higher oil prices and strong dollar and depreciation and expectations have given rise to rate hikes and expectations in the emerging markets alongwith the US, also a strong dollar and expectations, have made finance costly and have made businesses postpone spending due to higher interest rate and lower demand and price and expectations, however as the Fed delays rate hikes and posit a more stable stance on interest rate that would give the emerging markets a breather from outflows insearch of higher bond yields and lower bond prices and stronger dollar and expectations as the right signals for investment in safe heaven US on higher return expectations, the Fed is equally responsible for stability in the emerging markets as so to the stability in the US, a strong dollar and higher oil prices are also problems for the US trade deficit and stock and bond markets as to the EMs.

Notwithstanding, lower prices increase demand and investment, but lower price expectations might delay spending, since people would postpone spending in expectations of lower prices, ahead, that could delay recovery in demand and supply and prices, however, if people expect higher prices as a result of higher demand, recovery in demand and supply and prices could be fast or prompt, but in the real world prices and expectations might change depending upon demand and supply and expectations and intervention through prices and expectations, themselves, demand and supply and expectations affect prices and expectations and prices and expectations also affect demand and supply and expectations.

Nevertheless, lower prices are good for demand and investment, but not lower price expectations, since that would delay demand, and, similarly, higher prices are bad for demand, but good for supply, however, higher price expectations from a low demand and price base could increase demand and investment, but not lower price expectations, which delays or slows demand, consumption and investment.   

Therefore, lower prices are good for demand and spending, but not lower price expectations for recovery from a slowdown and higher prices are bad for demand and good for supply, but higher price expectations could increase demand and delay supply further increasing prices.

However, lower prices could increase demand, which increase price and supply expectations and excess supply and lower prices could increase demand and price expectations, again, the economy moves between excess demand and excess supply in the absence of data, that’s a cycle, the economy moves between lower prices and lower demand and low supply and higher prices, higher demand and higher supply, however stability in demand and supply and prices at full employment is good for stability in growth and expectations, therefore, the economists have visualized the neutral real interest rate for stability in the economic system, which aims to neither boost nor discourage demand, supply and prices and expectations at full employment.

Nonetheless, during excess demand and inflation the central banks increase real interest rate which could further reduce supply and increase price and expectations due to higher unemployment and lower production and higher borrowing cost, on the other hand, excess supply and deflation makes the central bank to reduce the borrowing cost, which could further lower price and expectations upto full employment because of higher production, therefore, deviations from the neutral interest rate are self reinforcing through the demand, supply, prices and expectations channels and the effects on inflation and unemployment are often cumulative.

The central banks might try to avoid the trap by limiting rate cuts and rate hikes to a very few around the neutral real interest rate; however, rate cuts and rate hike expectations could increase uncertainty for demand and supply and prices and investment and employment and growth and expectations…..