Competitiveness/Productivity/Lower-Prices and Demand/Supply/Growth...

Capital has no intrinsic value because the central bank could print money and lower the borrowing cost and no feelings or emotions unless it is combined with labour which eventually increases productivity of labour...

On the otherhand, labour has feeling and emotions therefore wages cannot be cut because it would be unjust, but inflation is used to cut real interest rate and wages to increase investment and exports which lowers domestic demand, but increases exports...

Nonetheless, lower inflation could increase, both, domestic demand and demand for exports, at lower prices industry would sell more... INDIA needs to scale up its level of economic activity to make itself competitive to get place in the global supply value chain and increase profits... Increasing exports could help create jobs in the economy...

To increase demand the Corporate Tax Cut may be passed on to the consumers which might increase Real Balances or Real Incomes with the Public... Lower prices would increase demand and price expectations when everybody would buy at the sametime at low prices...

A 7% reduction in prices could be attractive enough for spending decisions, even for the stock-holders, demand for inventories may goup, too... Corporate could themselves help increase demand and supply...

The Monetary Policy interest rate cut transmission has been too weak and too slow, due to high NPAs, which means liquidity has been lagging and not letting banks to pass on rate cuts to the consumers/borrowers which may increase demand and supply and growth in the economy...

Economists often point that lower interest rate discourage savings in fixed interest rate income or deposits or assets which are worst kind of investments, especially in banks, which pay too low compared to other savings in bonds and equities and also subject to inflation and inflation expectations...

The Govt must encourage investment in G-secs instead of plain fixed deposits through bank deposits... Higher interest rate discourages investment and demand and real incomes and wages and spending... The commercial banks could themselves help increase demand in the economy, if they pass on previous rate cuts by the RBI, which could increase revenue and earnings...

Both, the Govt and the RBI need to clear uncertainty from the growthpath and make the rational expectations about prices materialise and stabilise... Lower prices mean that demand and supply or GDP and price expectations may goup, whereas higher prices mean that the same all would go down...

Nonetheless, if people expect lower prices they delay demand and increase supply and further lower price and GDP expectations, but when people expect higher prices and growth they increase demand and lower supply which further increase price and growth expectations... But, too much volatility on the eitherside could taketime to restore price and GDP target at full employment... The objective is to stabilise prices and growth at full employment...

Taxes are also tool, just like interest rate to manage demand and spending in the economy by the way of incentivising competitiveness and productivity and prices... Policy makers should adopt a counter cyclical approach to stabilize demand/supply and prices and growth at full employment.

Slowdown and Policy Transmission to Demand and Growth...

Low inflation and interest rate are the right time to invest, when the cost is low and as the firms would invest that could increase demand and price and expectations, but high inflation and price are time to increase supply… if everybody does the same that could help stabilise prices and interest rate and expectations...

Nonetheless, lower prices and interest rate expectations could reinforce lower prices and interest rate and expectations... Lower price and interest rate expectations could delay demand and spending and increase supply further lowering price/interest rate and expectations, but higher price and interest rate expectations would delay supply and increase demand further increasing prices/interest rate and expectations...

The market has still space to climb further as it is lower than the past peak... Stimulative commentary from FM could further increase the investment in the stocks... Correction expectations could be self fulfilling because people would hold buying which could increase offer/supply... Lower price expectations increase offer or supply of stocks which further lower prices...

Too high NPAs have resulted in limited transmission of rate cuts by the RBI by the commercial banks... Though government has recapitlised banks and resolved NPAs though IBC we still have considerable NPAs due to demand slowdown too... If the RBI and Govt use $ 50 billion or Rs 4 Lakh Crores from foreign exchange reserves to recapitalise banks that would help transmission by commercial banks...

Selling $s could increase expectations of higher $ demand by the country in the future which could be avoided by communication to deter too much speculation on dollar demand and price expectations... A strong rupee and lower interest rate and higher investment and employment and productivity and lower inflation could increase consumption and investment demand and growth expectations...

Raising foreign money through rupee denominated bonds and investment in infra could create ample jobs for its large unskilled workforce which could sooth the bond market... A strong rupee would increase foreign capital inflows... lower borrowing cost would increase demand supply prices and growth...

Lower inflation and real interest rate expectations mean people could hold spending to reach bottom to increase demand and spending... In INDIA inflation expectations has picked up from the bottom after demonetisation and near the rate cut cycle end could further increase demand and inflation expectations...

Nobody can exactly tell the bottom of real interest rates... But, INDIA has almost reached to the rate cut cycle end which would be cheapest to increase demand and spending which increases price and growth expectations...

Depreciation in the rupee and hardening of bond yields or lower bond prices show that expectations of the two markets are different... Foreign exchange market expects higher money supply demand and inflation and lower exchange rate while the bond markets expects lower money supply and higher bond yields or lower bonds prices...

Expectations affect current prices and growth and the market continuously corrects current and future demand and price and expectations... Many times expectations are already factored in the current price if everybody is thinking or expecting the same, but may correct due to risk or uncertainty or change in expectations, too...

The Corporate Tax Cut must be passed on to the consumers to increase real wages and incomes and demand... Similarly rate cuts must also be passed on to the borrowers to increase demand... Likewise GST too must again be passed to consumers to increase demand... These all together could be a big boost to private consumption and private investment too...

Demand Stimulate...

The Finance Minister has reduced corporate tax, withdrawn enhanced surcharge on superrich and FPIs and further removed tax on share buybacks for companies which pushed the stock market to record intraday high of more than 2000 points and analysts have forecast further momentum in the stock prices in the near to medium term in the expectation that it would continue to add to the competitiveness of the Indian Industry and corporate earning and profits.

Nonetheless, GST rate cut expectations may further delay demand... People would hold spending....  The GST rates are not something cast in stone... During low growth lower GST rates could boost demand and growth through lower prices and during high growth they could control demand and prices by using higher GST...

The govt needs to adopt a flexible viewpoint... Similar to interest rate management to manage competitiveness, price, demand and growth expectations...  The government could impose 5% GST on cereals to support farm prices and increase revenue by choosing a large base...

INDIA''s Public Debt is low compared to other countries like US and China which is not a issue... It's fiscal deficit and debt are not a problem for spending and growth... though to increase productivity and demand supply and growth... when demand and supply both would increase prices could remain stable...

Atleast, there is no news about INDIA''s Public Debt, it has one of the lowest Fiscal Deficit in the world... Rating Agencies have artificially maintained a lowest investment grade or rating for INDIA... despite favourable fundamentals....

Growth is decided by increase in the workforce per year, if the workforce is increasing at 9% peryear then the economy must grow at 9% to keep everybody employed... It is the potential growth rate ie growth of the work/labourforce or the natural rate of growth...

INDIA should maintain and use its strategic oil reserves to increase supply and stabilise demand and oil prices during high prices... In a recent report it has been pointed out that oil prices could go as low as $25 per barrel in the hindsight of the advent of the EVs...

During the previous monetary policy regime, the RBI did not help when inflation has had been low... Year 2015-16 is the best from the point of view of inflation and growth... But, when demo hits the RBI never cut interest rate even with low inflation, except a cut in the late 2017, and then two back to back rate hikes due to higher oil prices and then a course correction when the oil price fall again...

It confused the investors and then resumed rate cut cycle which delayed investment in the expectation of lower interest rate ahead... It also confused the stock market... Moreover, LTCG and the global tariff war have also added to the uncertainty... Urjit Patel''s resignation was totally unexpected; during his tenure the RBI overexpected inflation expectations and maintained a hawkish stance...

Equity investors may take a longrun approach for investment because equities may provide better returns than bonds, 10-15 yrs... Big corrections are oppourtunity to buy for the longrun and sell after holding for long when prices are high... Consistency in performance is a sign of good stocks... Equity can normally give 10x returns in 10-15 yrs... Longrun investment could help form stable prices and expectations in the stock market...

There is a limit to reduce interest rates because people would save less if they have to pay banks or interest rate becomes negative or they would move to risky assets for income or inflation adjusted income... Negative bond yields could reduce the inflation adjusted returns and savings and investment and growth... Lower borrowing cost has limits to increase productivity and competitiveness of capital and investment...

The lower prices and expectations in the US economy could be attributed to automation and increased productivity of labour and excess supply... and lower inflation and interest rate and expectations... A tight labour market would put brakes on lower price expectations and increase price expectations by increasing the wage cost and interest rate cost...

The US economy has increased the supply of labour by using automation, probably, which is responsible for lower prices and interest rate and expectations... Lower interest rate could further increase supply and lower price and interest rate expectations… The US should subsidise its exports with the tariff money to make them competitive or cut their tax equal to the revenue from tariff...

Recently there has been a debate on the Universal Basic Income (UBI)… UBI is not economically feasible because of huge fiscal cost, but unemployment benefits claims help support livelihood during recession and unemployment, the US has had it which supported demand and prices during the last lowdown...

Lower Interest Rate (Price) Expectations Delay Recovery...

The best use of the RBI’s dividend transfer of Rs 1.76 Lakh Crore would be to build dams and irrigation, 50% of the agricultural land has no irrigation facility dependent on uncertain rains... Higher productivity of agriculture is good for low and stable inflation and interest rate...

The RBI has around $ 500 billion in the foreign exchange reserves which is idle and doing nothing since CAD is under control... which might be lent to the govt on lower interest rates... to increase productivity by investing in infra and improve the quality of life by investing in health and education...

Including oil, real estate, electricity and liquor in the purview of the GST could prove to be a radical reform going forward... The govt has been only delaying it... To contain revenue the Govt may impose a neutral tax on food items which would be a larger base for tax collection...

The industry may also try to balance demand and supply on the production frontier by adjusting prices themselves; lower prices increase demand and supply or increase in scale and profits instead of poking government to make them competitive by short run stimuli...

Competitiveness is brought by innovation and increase in productivity, though; the govt could lower tax to increase in demand and could increase them back when demand and inflation are high back to control demand and prices... Industry are rolling back production when inflation and interest rates are low, cost of investment would be low... and supply when prices are high...

Higher oil prices would make people go for EVs lowering oil price expectations... INDIA has also incentivised EVs on a scale basis to reduce oil import bill and domestic inflation... also because EVs are sustainable... further lowering oil price expectations...

The growth could bottom out when the RBI stops cutting interest rates, means no further lower prices and interest rate cut expectations and it is cheapest to borrow, during this rate cut cycle, both the consumption and investment demand and spending could bounce back fast because its profitable to buy when price-cost is lowest possible and sell when prices are highest possible... that would stabilize prices and growth... The RBI shall end its rate cut cycle soon to kick-off spending and growth...

If one is investing for 10-15-20 years you can buy lumpsump that in the longrun the difference would be marginal, but if you are buying for less than 5-years then SIP is good. The stock market largely moves in tandem to the monetary policy cycle... Buy when economy and prices are low and sell when the economy and prices are high... that would keep the economy and market movement and price stable... leading to higher demand and price expectations...

The govt should repeat its commitment towards investment and growth from different aspects and reform it envisages to achieve on a regular basis to give positive news to the market... Government should make its spending plans public to increase demand and investment and growth expectations...

Low and stable inflation and interest rate are important for financial stability at full employment, than lower inflation and interest rate expectations which might delay spending... The Fed during 2008 set higher inflation and price expectations to avoid deflation and liquidity trap, but shifting goal posts by extending easing in several rounds did not let price and interest rate expectations increase leading to more spending, due to longer lower demand, price and interest rate expectations...

The Fed (US) now could drop the inflation targeting which was only adopted during the last downcycle... which has lowered inflation expectations since people would believe the Fed would increase interest rates if inflation increases above 2% and would lower demand and increase supply lowering price expectations... By increasing inflation target the Fed could increase price expectations...

Expectations and Growth...

The economy is one the Knife-edge... Anything people would do to gain from expectations may reinforce the prices and the economic condition... For example, if there are expectations that the economy and prices would fall investors would supply more leading to the outcome, itself, low price and the economy, and vice-versa...

Notwithstanding, if people are nudged to change expectations that the prices and the economy would grow through stimuli it also creates problem, for example if the monetary policy increases interest rate expectations it also reduces supply by increasing unemployment and prices vice versa...

The objective of monetary policy is to stabilize prices and economy at the full employment by maintaining neutral or zero real interest rate or nominal rates equal to inflation... any deviation from the neutral interest rate would be self-fulfilling...

The RBI must educate people about real interest rate or the actual interest rate after accounting for inflation or the inflation adjusted interest rate... Currently real interest rate in INDIA are high compared the outer economies, the real interest rate is 2.3% and inflation is 3.1%, the RBI has set the reporate at 5.4%, adding the above two...

The RBI is compensating for inflation and above that it is giving 2.3% to maintain savings and investment... Lower real rates could definitely reduce deposit rates, but people should save and invest in G-secs or the Govt bonds instead of fixed deposits...

A bond has both a bondyield and a bondprice, when the yield goes down bond price goes up and vice-versa... If you buy bond at 8% it would help contain the real value better... it is a misconception that bond works only during slowdown, because during growth yield also goes up which is also profitable...

The rate cut bottom-out could help the economy grow... Lower interest rate expectations delay demand... Simply lower growth, demand, prices and interest rate expectations delay spending, both, consumption and investment, people wait for growth, prices and interest rate and demand to bottom-out...

GST on oil, real estate and electricity would decide the real collection and revenue growth... INDIANS pay 50% tax on oil, and higher tariff/tax on real estate and electricity which if lowered to 28 percent GST could have expansionary effect on demand and growth...

Lower prices increase demand and price expectations and growth expectations, too... Lower inflation or higher productivity and interest rate increase domestic investment and also increase capital inflows due to strong and stable currency, which would also lower oil prices and transport prices kickstart the investment cycle...

Most of the two-wheelers and small cars are not luxuries; Govt should reduce GST to 5% on two wheelers and 18% on small cars... from the highest tax rate of 28%...

Consistency in growth and returns helps form better expectations, but that is not all... you need to buy cheap, hold, and sell higher... It is quite convincing... if you buy low, even average stocks with consistent past returns, could give you decent returns in 3-6 months... may be double...

Paul Krugman knows that 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)...

Lower longrun yields in the US are in line with inflation and interest rate expectations, lower inflation and interest rate expectations have lowered longrun bondyields, it means the bond market expects lower inflation and interest rate expectations and people could delay spending which could further aggravate recession. 

Lower inflation and interest rate are good for demand and spending, but lower inflation and interest rate expectations after tightening and slow growth could lower spending because people would wait for prices and interest rate cut to bottom-out further reinforcing lower price and interest rate expectations and recession and slowdown....

Uncertainty, Prices, Expectations and Policies in a Slowdown...

Uncertainty or risk and price or inflation expectations play important roles in the determination of interest rate, wages and exchange rate, both the short and the longrun and lower prices mean higher real interest rate or return on capital, more savings and investment, higher real wages, more consumption and demand, and higher real domestic exchange rate and exports, lower prices mean strong currency and more imports and foreign country inflows…Higher price level or inflation would do the opposite…

Today the RBI cut repo rate by 35 bps and also the reverse repo rate, but revised the growth forecasts downward, nonetheless the central bank should revise growth expectations upward due to lower borrowing cost and improved demand and supply... If RBI says the same it means demand is expected to remain low and people would invest less...

The RBI may cut real interest rate below the neutral interest rate of 1.5% to address slowdown... Moreover, it shall use its foreign exchange reserves to capitalise PSBs which is likely to lower oil prices and imported inflation...

The Govt may also borrow abroad to capitalise banks... All these could increase productivity of capital by lowering the borrowing cost and increase competitiveness invigorating virtuous cycle of investment... Nonetheless, strong rupee would attract capital inflows...

The Govt could also reduce limit of FDI in PSBs to capitalise them and increase interest rate cuts transmission... Lower borrowing cost means that cost of land and labour would also go down in the economy which could increase demand...

If Rajan had also promoted considering full employment besides just price stability and inflation targeting for more informed monetary policy settings it had made monetary policy more predictable for investment decisions... Higher unemployment means that production could be increased and lower prices by adopting a accommodative stance and vice-versa... The objective of the monetary policy is to achieve the non-accelerating inflation rate of unemployment, by maintaining neutral or zero real interest rate and nominal interest rate equal to inflation to balance savings and investment and demand and supply and prices and growth at full employment and potential... Rajan in his tenure has rarely spoken of full-employment objective of the monetary policy.... The stock market investors are crazy people... They sell in a falling market and buy when prices are high which is called exuberance that increases risk for everyone when they should exactly do the opposite... Buy when prices are low and sell when they are high... Investors should bid same lowest price for buy, lowest price could fall each day depending on offers to sell, and offer at same high price to sell, high price also increases each day depending on how much people are buying the stock... Price of the stocks move on excess bid and excess offers. Excess bid would move price up and excess offers would drive prices down... If everybody follows same lowest bid price to buy and highest offer price to sell stock prices would be predictable and money would be safe... Otherthings remaining constant, more bids would increase prices and more offers would lower prices... But, if everybody sets same bid and offer prices reasonably markets would be stable... bid and offer prices are not the same... There is a buying price and then there is a selling price... bid price is lower than the offer price... The LTCG has the roots of the corrections since the start of 2018, investors are more conscious of saving 10% in LTCG... Moreover 1 year time is not the longrun (over 5years) ... 1 year is the shortrun... 2-4 years are the medium term... The Govt should extend LTCG to 5 years... Moreover, tax on buy back has further deteriorated the situation... it is a tool to share profits with the shareholders... The Central Banks and the Govt may cater the public expectations, but definitely avoid exuberance... The Govt has revoked Art 370 on 6th Aug., 2019 which seems quite reasonable. If Kashmiris are not abstained from acquiring properties in other states why stop people of others states acquiring property in J&K... J&K people must also support removal of Art 370 and ensure security to others to get property rights in other states... Moreover, the Govt must use plebiscite in POK to claim that it is also a part of INDIA... Next one would be to make Kashmir safer and promote as tourist destination... Deploying more troops is a step in the right direction... On July 31, 2019, the Fed (US) cut interest rate by 25bps and promised for halting it balance sheet reduction programme, a step in the right direction, it would keep the longrun and shortrun borrowings cost low or lower due to higher commercial bank reserves... It is a big and good news for the stock market... Tradewars cause currency depreciation directly and also due to retaliatory tariffs, when US imposes tariff on China, China too imposes tariff on US' products which reduces demand for US' products and dollar and since it’s a safe haven currency people increase its demand and prices... But, US' tariff on Chinese exports again reduces dollar demand and prices, because of settlement of China exports in dollars and yuan too... Since people prefer dollar for investment they bid its prices higher, but not with yuan... Higher tariff on China products increase their prices and reduce demand and price expectations, yuan too...

Slowdown and the Central Bank...

Big corrections are an oppourtunity to increase profits by lowering the rupee average cost and increase investment, lower prices shall increase demand and price expectations...

The stock market people yet need to grow up and not respond to every bad news and stay invested till the market reaches high price... They should invest slowly at least till a stock price reaches its high price and buy when the stock price is lowest possible or the gap between current price and the high price is higher...

If everybody sets a same limit price for buy and sell, everybody would gain... bid price should be low and the offer price should be a high price... It is like giving some bargaining power to the investors if investors bid and offer at same prices...

Moreover, if the nominal gdp growth is 11-12% then the real gdp must be 8-9% if we have deflator or inlation of 3-4%...

Indian businesses should think of increasing capacity and economies of scale to increase growth (of sales) by increase in exports, since inflation is low and wages (labour) are cheap in INDIA it could increase demand by increasing productivity and competitiveness... Lower real interest rate could further reinforce demand and growth...

Flexible labour laws pertaining to hiring and firing of labourers require a good social security system or unemployment benefits or claims system as in the US to support during no work, otherwise lower demand and employment could reinforce lower growth and slowdown during crisis.

Both food and fuel affect real wages and the cost of living because, higher prices of food would lower real wages and demand and higher fuel prices are translated into higher transport prices thus again lower real wages and incomes and profits because of pricier goods and services and lower demand... Lower real wages lower demand and growth...

The central bank must match nominal interest rate equal to inflation or loss in the value of money savings to contain the value of money and demand and growth and savings and investment...

At too much higher interest rate savings would increase and then lower the interest rate and at too much lower interest rate people would save less and then increase interest rate, therefore the goal is to neutralize interest rate at zero real interest rate and balance savings and investment...

Since money could be printed we cannot say that it is scarce, but it is scarce because of less production or productivity, therefore the real interest rate on money should be neutral or zero and nominal interest rate must be equal to inflation to contain price and demand and supply and quantity of money...

Oversupply of real estate has been further aggravated by higher interest rate on home loans and lower demand, a price correction is all due which could increase demand and price expectations due to slowdown in the economy and slow recovery from the last trough... This has resemblance with the shadow banking crisis in the US and China...

The RBI must better regulate the shadow banks... If home loan rates are lowered that could also help increase demand... There could be a real estate bubble in the economy which should be controlled to help maintain demand and price expectations...

The most important reform Trump may bring to the US and the emerging markets is to unload some of the weight behind the dollars status as a reserve currency and settlement of oil exports in the dollars... The US has done extremely well as far as oil production is considered which has lower price expectation in the US...

The US imports are higher because of the US dollars and a strong currency means cheaper imports... To increase exports the US must increase supply of dollars to increase devaluation and exports... Lower inflation in US has been offset by a strong dollar and has not turned exports... Cheaper dollar would help in terms of oil prices to the emerging markets...

People would buy more dollars at dips which could keep the dollar stable... US dollar is the world's reserve currency because it is more stable than others... The dollar kept its stable nature despite the three rounds of QE...