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...

Competitiveness, Foreign-Debt, Liquidity, GDP and the Fed...

Businesses are always run on the borrowed money that is why lower borrowing cost is very important for competitiveness and demand, it directly adds to the cost and prices, like transport prices which are the key costs for investment, it can reduce the cost of business investment...

It is unimaginable that imports are increasing due to lower domestic production and more competitive imports, due to lower borrowing cost from countries where capital cost is low... How domestic player could compete with foreign players?

Domestic lower prices through increased capital productivity could lower prices and increase demand... INDIAn businesses have been unable to compete with foreign companies... INDIA's low foreign debt and more expected inflows are likely to push domestic interest rates down…

And, the private companies could also borrow abroad like the Govt which could do the same; lower capital cost... and increase competitiveness and demand and growth expectations... Though hedging through derivatives would be important... Savings import could further facilitate interest rate transmission...

The government has tried to involve savings of Europe, Japan and US where interest rate are close to zero... which could lower borrowing cost in INDIA and increase supply or productivity and lower prices and increase real wages and incomes and demand and growth and expectations...

If the Govt borrows abroad in the domestic currency and/or hedge the currency risk and the interest rate risk it could help lower prices, especially the interest rate and increase productivity, capital, too and demand and growth expectations... means higher demand/supply {and growth (EXPECTATIONS)}...

And, by opening FDI in banking the Govt could further openup channels for foreign money flowing in, more inflows would make the rupee strong further reinforcing foreign capital inflows...

Nonetheless, the commitment for fiscal prudence has further lowered borrowing cost expectations for the private sector investment... The stock markets have been slow to recognise it... Moreover, Rs 100 Lakh-Crore infrastructure investment and boost to affordable housing through bank recap and liquidity assurance to NBFCs and HFCs are great cursor for investment demand spending... The Govt has tried to double the size of the economy to $5 Trillion form currently $2.7 Trillion which also means that wages and incomes would also increase to double which would increase demand and growth...

India Inc. thinks that liquidity is a major problem for the economy, but, RBI Gov thinks that there is adequate liquidity... To revive spending reviving earning expectations are important by cutting cost and prices to increase productivity, demand and price expectations... Lower prices increase demand and price expectations, overdemand and higher prices are common after lower prices and higher demand...

'The government had changed base year from 2004-05 to 2011-12 for prices or inflation which is responsible for a lower GDP deflator and higher real-GDP in the subsequent numbers... Nonetheless the Govt supplyside reforms have also kept inflation undercheck increasing real GDP by lowering interest rate… 

Though, there are claims that the economy has not completely bottomed out form the last interest rate hikecycle and still reflecting some slack amidst the renewed rate cut cycle... Changing base year has definitely increased real-GDP to some extent...'

INDIA's population growth rate, as in every other case, decides its potential growth rate which is 120 Crore/tenyear or 12% pertenyear, therefore to get everyone employed the economy must grow 8%, after accounting for the natural rate of unemployment at 4%, on an average basis... INDIA's potential growth rate is 8% and the economy should add 80 million jobs a year to achieve the potential growth rate... The growth in labourforce decides the potential growth rate...

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)...

Probably the Fed would like a fast recovery in the prices and growth by avoiding lower interest rate or interest price/cost expectations that could delay demand and growth, people would hold spending in expectation of lower cost/price... Either the Fed could reject market rate cut expectations to revive growth or it should deliver a rate cut soon to increase demand and price and growth and expectations...

Moreover, recovery could take 2 to 3 quarters... It(the Fed) and, everybodyelse would like a quick recovery to potential or full employment growth... The Fed could probably try to neutralize real interest rate at 0% that would bring balance in savings and investment and price and growth expectations... means 1.6% inflation and 1.6% interest rate... 1.6% interest rate is to compensate 1.6% loss due to inflation...

Incentivising or inducing the subjects/agents have been popular in Economics for a longtime, now... Actually, any economicpolicy either induces or deduces or disincentivises or incentivises the agents in the economy for a particular outcome...

We should probably cut glaciers to get fresh water and export; water could be costlier than oil in the future... Rain harvest is difficult, but snow harvest is easy, for water...

Bank Recap, Export Model, Price Expectations, Taxes, Foreign Debt and Stocks...

We have close to $ 500 billion in Foreign Exchange Reserves, if the RBI infuses $ 100 billion to capitalize PSBs which would be close to Rs 7, 00, 000 Crore it could help transmission of interest rate cuts and credit take-off...

NBFCs would also be benefitted due to credit flows... Liquidity is also important for the stockprices... People have also delayed spending in hindsight of Budget announcements...

Internal devaluation pursued by Germany is another model, except China''s external devaluation model which looks inferior when considered from the point of view of domestic real wages which increases in the internal devaluation as inflation goes down... and also reduces the domestic exchange rate and increase exports...

Since, the RBI has set an inflation target of 6% (max side) it has restricted the average movement of prices or inflation in the economy which also means atleast 7% wages and incomes growth would be necessary to sustain real wages/incomes and demand and growth...

Nonetheless, price expectations are the major determinant for investment decisions in the economy... The 6% inflation target binds price expectations at 6% on an average basis... and returns/profits... The inflation in core-manufactured items or CPI has also been restricted at 5-6%... except stockprices...

Both, low CPI and core-CPI tells that price and expectations are low (due to inflation targeting) and people have delayed spending due to lower price and interest rate expectations... Higher inventories and low demand have also resulted in lower price expectation...

To increase demand and spending the govt should try to reinforce higher price expectations, but not so much to reduce demand and growth...

Rate cuts by the RBI could be the appropriate response for lower price expectations..

As some claim... revenue is also dependent on the demand and growth and may increase as the economy bounces back... Lower tax and a big base or scale might be possible going ahead... Taxes also add to competitiveness domestic demand, exports and growth...

The government has reduced the corporate tax rate just like the US, but imposed tax on the buyback of shares... Paul Krugman says companies would increase buyback of shares instead of passing tax benefits to the consumers...

But, INDIA has tried to disincentivise shares buyback... Lower prices to consumers might increase real balances with the public and demand and growth...

INDIA should borrow foreign only in its own currency... dollar denominated foreign debt would increase the demand for dollars, resulting in strong dollar and higher imported inflation... and depreciation in the exchange rate and outflow of dollars...

To attract foreign capital a strong rupee is must... rupee denominated foreign loans would increase demand for rupee...

If people set same buy price, a lowest (low price) to buy and a sell price, a highest (high price) to sell, it is possible to make markets more predictable... All should buy at lowest price and sell at highest price... PEOPLE SHOULD QUOTE SAME PRICES, BUY OR SELL...

Niveshkon ko ek daam par kharidna aur bechna chahiye... nuntam par buy aur adhiktam par sell... demat mein pehle se set kar dein...

Also, the people (investors) who have money need not to worry much because they can always buy more to reduce the average money cost and add to sell capacity in terms of time horizon...

But, equities or shares are also a popular form of getting investable funds by companies... Lower investment in the stock market would mobilise less funds for investment... Budget has discouraged equity investment...

What is the rationale after increasing tax during a slowdown? Slowdown is not the right time to increase tax, it is the fastup or the upcycle, then it would also lengthen the expansion by stabilising expectations... by avoiding exuberance... or too much volatility in prices on the either side...

Higher taxes could lower demand and prices during higher prices... and help stabilise prices... and vice versa...

One cannot directly compare a millionaire in the Rupee in INDIA and that of a millionaire in the Dollar terms in the US... INDIA has less rich than the developed countries... Like poverty defining wealthiness is also difficult... 

Budget Highlights 19-20...

The Budget our FM outlined in her speech was one of the commitment for fiscal prudence, besides ensuring liquidity to continue investment and demand especially for the real estate and affordable housing, it has reduced corporate tax on 99% of the business form a turnover of Rs 250 Crore to Rs 400 Crore to 25%, the aim was gaon, garib, kisan…

NBFCs would be regulated by the RBI to reduce the risk of excesses and given lending assurance to genuine NBFCs… But, it lacked on popular expectations like less LTCG burden and increase investment and tax exemptions… The budget has targeted the fiscal deficit of 3.3 % of GDP…

The government has reiterated its plan to upskill youth in language, automation, artificial intelligence, internet of things…

The budget has sought to increase demand for affordable housing by providing interest rate benefits upto Rs 7 Lakh on a loan of Rs 45 lakh for 15 years…

The govt has pledged Rs 100 Lakh Crore for the infrastructure in the next five years which is likely to give investment and employment a big push, though construction has been saddled with NPAs…

Both, investment in real estate and infrastructure could crowd in private investment and employment…

The govt has promised to connect every household with piped water, water has been among the most pressing problem facing the INDIA economy and also for irrigation purposes…

The budget has failed to attest its interest to follow public’s expectations without pushing harder for growth, inflation and interest rate expectations, through limited borrowing plans and more space for the RBI to reduce cost of capital and increase productivity of capital and competitiveness, demand and growth…