Stabilise Expectations...

The RBI’s task is to stabilise inflation and interest rate and expectations in order to incentivise spending especially investment... Business spends to increase production and inventory or stocks by keeping the price expectations in mind... Higher price expectations increase investment demand which could further increase the prices... Though, consumption demand for durables could also depend upon price expectations and could reinforce higher prices... Too much high/low prices could lead to appreciation/correction in perception and expectations due to the base and debase effect...

Though the stock market valuation shows the investors believe in the INDIAN story, it is the fastest growing economy... Everyone is bullish on INDIA...

In the short run NEWS, on the local and global economy, and incentives affect the stock indices more than the earnings and book ratios, though they are important... Now there is no big bad news in sight that may trigger a big correction and reallocation... 5-10% correction is possible anytime, but 5-10% appreciation could also be not ruled out...

The market would first return to normalcy before any significant correction... People talk about extremes, when the time is to stabilise the markets and any significant dip would be a buying oppourtunity... We are in the midst of a secular bull run, see after 2008 till 2017, when there is a lot of ground to recover due to the base effect and expectations are high... The economic rebound is underway...

Markets are not correcting much because of margin expectations, higher margins expected due to unlock and resumption in the economic activity... But, correction cannot be ruled out in stocks as people would wait for a cheap deal where valuations are too high... Nonetheless, investors shall buy lowest price range, the bottom for the day it may go and sell at highest price range, the top for the day it may go... to maximise gains for the day... If everybody follows the above rules of thumb everybody would gain... The top and bottom is given, why buy dear when it could be cheap buy and as sell less when it could be more...

"Keynes said in the long run we die..." A set of good stocks throw the oppourtunities to buy on significant corrections and sell on significant appreciations and do it repeatedly in the short run... This could increase returns manifolds...

If the market meets popular expectations correction/appreciation it is good for the investment... Uncertainty and (negative) surprises are bad for investment... The stock market is a forward looking system which could factor in bad/good news through price expectations... Low price expectations would delay demand and increase supply which further reinforces lower prices and high price expectations could delay supply and increase demand further pushing prices higher...

In INDIA unorganised sector mainly comprise the agriculture economy, 70% of the labour is seasonally utilised in the agriculture of which we have no official account... During covid agriculture flared better than the broader economy because it was not locked due to quarantine... INDIA is no devoid of demand and growth, but only inflation and expectations are the real constraints... If we pump money nominal growth is bound to increase both growth and prices and it is nowhere full employment... Lower inflation would increase real gdp growth rate and would increase real wages and demand and growth which could increase demand and price expectations, because everybody would demand at the same time...

Informal economy mainly comprise of the agriculture sector which has performed well during the lockdown and covid waves... Informal sector has flared well and better than the formal economy...

The low base for inflation in the year of the covid in all the economies is responsible for higher current inflation and expectations and higher inflation would lead to the debase effect next year means lower inflation and expectations...

The high growth and inflation in the US and other countries is due to the statistical glitch, the base effect... They are, because we have chosen a low base year to compare growth and inflation which is likely to fade as the growth and inflation would normalise... and so the base year... The base years formally chosen are over a quarter and a year ago... If we change the base year it directly affects the measure of current growth and inflation... low growth and inflation base would show high growth and inflation when the growth bounce back and vice versa... A negative growth means that growth and inflation is lower than past quarter or a year ago and not negative...

As far as data and stats are concerned, we are more concerned about what has happened in the past, like last quarter and or last year same time... The indices use a base year to calculate the index either for growth and or inflation... If the base year is low then recovery in the growth and inflation would be high and vice-versa... What happened in the past decides the current value for growth and inflation...

4.91 % is the rate of increase or growth in the inflation with a base year... the actual inflation on 2012 base year is 69 and if we divide for inflation per year for 10 years the average would be close to 6.9% or we can say that inflation has increased 70% in the last 10 years, with a rate of 7 % per year... As far as inflation is concerned we never step in the same water... Data is veiled by the percentage and ratios which is beyond the common man understanding... Policy makers should reveal the proper nominal figures which are easy to understand and take more informed decisions while budgeting and investment...

Almost all countries exchange rate has appreciated with time, but INDIA's exchange rate is depreciating which is a colossal policy mistake that reduces domestic demand by increasing inflation... INDIA should follow others and let the rupee appreciate gradually which would help lower domestic inflation and increase domestic demand, investment and consumption and growth... Stronger currency means cheaper imports and lower imported inflation...

Depreciation and expectations, as the trend shows, would delay demand for exports and inflation and expectations would reduce real wages and domestic demand and demand for imports... Though, (gradual) appreciation and would increase demand for exports and domestic demand and would mean cheaper imports... The US-INDIA interest rate differential or arbitrage would also disappear as the money-supply (inflows) would increase which would lower interest rate and would increase interest rate in INDIA... Investors themselves (un)consciously create booms and lows through the EXPECTATIONS channel...

Outflows would affect the equity market only through selling in debt market and the resulting depreciation in the currency... Depreciation is more responsible for FIIs selling in the equities... Though this time INDIA has a huge foreign exchange buffer and the situation is far from depreciation...

Strong exchange rate and expectations could increase demand and lower supply, thereby resulting in stronger rupee... This could be a virtuous cycle... Low and stable inflation and depreciation could increase demand and price expectations... This would not lower exports because of lower inflation and competitive prices...

Interest rate hike expectations due to high inflation and expectations could lower price expectations and increase supply which would reinforce low price and and demand...

All the taper and rate hike forecasts could only be true as long as the US economy remain resilient and achieve its potential growth rate... Otherwise, the Fed would continue its easy money policy, if the unemployment rate is high and growth goes down...

Little inflation is not bad, the US is trying to woo inflation since the last decade and the Japan since three... INDIA is lucky to have inflation within the flexible inflation target... Though little inflation expectations are good for spending both consumption and investment, people would not delay spending...

If income is increasing faster than inflation, it is ok to have some inflation... Monetary policy normalisation means that the economy is in line with its long term objective...

The major observation of the Phillips Curve is that there is a tradeoff between inflation and unemployment after the full employment or the natural rate unemployment or Frictional Unemployment or inflation increases after full employment... 5% unemployment increases inflation by 5%...

If the Fed would use nominal GDP and inflation numbers while calculating qoq and yoy results, instead of percentage, it would probably do much better forward guidance to shape up expectations... People do not understand percentage and ratios...

The US CPI is showing 2% MoM inflation which is close to its inflation target and yoy inflation is also close to 2% if we use 2012 as the base year... The US economy is close to achieving its inflation target since the last year... Inflation prior to covid was at 1.6% yoy now it is near to 2%... deflation has never been there, albeit inflation was low...

Low and stable inflation and interest rate are important for low and stable inflation and interest rate expectations...

The current growth rate is 10% when the base year's growth rate was -24%, so the total growth rate would be 24% plus 10% equals 34%... Though using the same base year to calculate future growth rate, a 4-5% growth rate would mean 40% growth rate...

Low and stable inflation and interest rate are important for low and stable inflation and interest rate expectations and spending, both, consumption and investment...

Prices or inflation expectations depend upon current price or inflation... If investors see high prices or inflation they expect higher inflation and demand more and hold or lower supply, which reinforces higher prices or inflation or if they see lower prices they expect lower prices or inflation and increase supply and hold or reduce demand, which reinforces low prices or inflation...

People should sell stocks only if they need the money... Investors’ expectations themselves are creating highs and lows, if they expect a correction they either wait to buy or sell which actually lowers the stock price and if they expect appreciation they buy or hold supply which again increases the stock price... 

And, investors shall buy low and sell high, only then it would be profitable... Both, low and high price expectations movements are important for investment decisions and returns... Estimated or expected earnings due to higher prices or inflation and margins are pivot for increasing investment demand... Any significant correction would be an oppourtunity to lower average cost and increase returns in the short run and longrun, too...

Moreover, any big correction is very unlikely in the short run... we have limited time period... Long run has moretime to be uncertain and for deep corrections...

Bitcoins and others fate would be decided by how many countries and ultimately markets and people accept it as a medium of exchange and investment... It could be a cost effective way facilitating exchange... The fear that it is an easy way for illegal transaction is overdone as it has foot-prints on the worldwide internet... like digitsation of bank accounts... It is still out the purview of tax, and regulation and tax is important and good for its future ... The US has not ban cryptos and the Fed itself is likely to introduce its digital currency...

BJP won the last election on the pyres of Martyrs' of Pulwama and the action taken after that which was an acute failure in intelligence, how did they got so far in the country (terrorists)...? No one is safe as far as corruption is not weeded... Terrorist attacks are still normal in Kashmir... Cease fire violation continues...

Modiji must improve human capital infra by imparting skills and specialisation which are likely to improve competitiveness and productivity and more demand without which the demographic dividend would be lost... The government must liberalise FDI in education and skilling...

Low Prices Increase Demand and Price Expectations, too...

 Supply creates demand and demand creates supply, too... Demand side economists favour inflation to increase demand and supply and growth because higher inflation would mean higher demand and supply and price expectations and the supply side says that lower prices increase demand and supply and price expectations... Expectations could be reinforcing the prices as we see above... Economists says that in the longrun productivity is everything which means that business could produce more at lower cost and price... which increases demand and growth... Low prices are good for demand and supply, too, as high prices for spending... Low prices increase real wages and incomes and savings, too, though higher prices could increase nominal wages and incomes, and savings, too... It is not feasible to divide people to say that lower inflation increases debt burden and higher inflation lowers debt burden... because lower inflation also lowers cost and real wages and higher inflation also increase cost and prices and wages...

We know that the higher inflation is due to the low base during Covid because prices fell due to low demand, but they have bounced back quickly... Higher inflation in 21 could lead to the debase effect next year turning to lower inflation... Lower inflation or price expectations could increase supply that could be self-sustaining, since lower inflation expectations would make investors delay demand and/or increase supply which could reinforce lower prices.... It is true for both the stock market and the broader economy... Though savings could lead to higher investment later... savings and investments are an increasing function of time... People save more and more as the time pass and invest more, too...

Minor correction expectations are true for the short run only, but the long run trend of the stock markets across the world have shown a steady state growth, ie they are moving upwards despite corrections... People who invested for the long run have been benefitted from the investment even after corrections...

Moreover, any big correction is very unlikely in the short run... we have limited time period... Long run has more time to be uncertain and for deep corrections...

This isnt true that this is not the right time to put fuel and electricity in GST... which have heightened inflation expectations... There is a need to raise the productivity in these sectors to stabilise the price level and interest rate and expectations... which is important for the financial stability... Lower prices would increase real wages and exports too due to lower domestic exchange rate...

All countries want large markets for their produce at lower cost... A strong exchange rate would help attracting investors... If a country borrows in its own currency the risk of default goes nowhere... Settlelling exports/imports in own currency would also lower the exchange rate risk and demand for foreign currency and lower exchange rate expectation which could delay demand...

INDIA has a federal structure... Few years' back following the decentralisation tax devolution has moved in the favour of the States... More revenue has been deployed to the States, now...

INDIA is lucky that it has a low and stable inflation, business costs including the interest rate are low and relief from the lockdown... It increses the asymmetry in equality... The govt must help bring liquid equity saving deposits... The labour must have a share in the the top companies to reduce inequality...

Banks may introduce savings deposit linked with equities which may outdo inflation and and are liquid than bonds, bonds are safe heaven investment, but to gain from bonds one must hold on longer, but there are shorter term bonds available too... But, no such limit with stocks... They should be invested in the index funds... The risk is less... They are directly significant for the index... In the long run equities have shown consistent upward rise than other asset class more than inflation... Banks shall buy only significant corrections in the index funds...

A slowdown in China like the Global Financial Crisis 08 would benefit INDIA due to lower global commodity prices... especially oil prices... Bright growth prospects could attract higher foreign exchange inflows... INDIA would be fastest growing economy in 21 and low and stable inflation and adequate foreign exchange would help weather any crisis and bounce back quickly... INDIA has a lot of pent up demand due to higher unemployment and lower real wages due to skills and specialisation gap...

Cryptos are not substitute to fiat currencies, but alternative of investment assets... The meteoric rise of bitcoin has given space to hundred of coins now...

Labour Needs Skilling and Capital is Preserved by the Central Bank...

 Economics shall also concentrate on the distribution of labour according to specialisation and skills in the economy, besides just the distribution of income... According to the labour theory of value the price of something is decided by the amount of labour used... 

Adding skills according to the demand of economy could increase productivity and demand and growth... To catchup China on the growth INDIA shall skill labour to reap the demographic dividend...

The investors unconsciously create booms and busts based on price and interest rate expectations... If the majority expects that prices could increase they buy more that actually increases the prices and vice versa... 

Though if they remain invested and increase investment, at significant corrections, they could increase gains by lowering the average cost... Higher interest rate expectations in the US would increase inflows and lower the interest rate and vice versa... 

Higher inflation adjusted yields and exchange rate in the US coz of its safe heaven image could increase interest rate and exchange rate expectations in the emerging markets to stop the exodus... 

The arbitrage between the US and INDIA could equalise by the investment behaviour... Higher interest rate expectations in US could increase interest rate expectations in INDIA in a competitive global economy and vice versa...

The liquidity doesn't directly add to the financial assets' demand, but only through long-run debt and interest rate and then lower the short term interest rate and higher money supply lowers long term interest rate and then short term interest rate... which increases the productivity of capital... and profits/margins and earnings... 

The RBI during out flows could sell dollars to contain inflation and depreciation and outflows... The investors’ expectations about the central bank policy affect the investor behaviour which could be self fulfilling, rate cut expectations could delay demand and increase supply which would further lower prices and vice versa... 

If people expect appreciation they buy which further increase appreciation and vice versa... Around the globe we have evidence of convergence in real exchange rate, the long run trend has been strong exchange rate as the time pass and the economy grows... 

It could start a virtuous cycle of investment and inflows... It would increase domestic demand due to high real wages/lower inflation, higher real interest rate due to lower inflation and increase exports due to low inflation/ domestic-prices...

If the pre pandemic growth was 8% then growth in June 21 would be 8% plus 1.5% = 9.5%.... Overall this fiscal, India would be among the fastest growing large economies, a GDP of 9.5% but shorn of the underlying low-base effect, the economy will be only 1.5% above the pre-pandemic level seen in fiscal 2020... The growth rate would be 9.5%...

Higher transport cost and inflation and depreciation and higher import prices could make the export sector uncompetitive...

The Fed's message is clear that it is there to take care of people's money, during slowdown it would increase liquidity and demand/supply and investment/employment and increase prices and during high growth it would contain liquidity and demand/supply and investment/employment and prices... 

It is consistent with Fed's objective and feasible... People should not worry about their investments; the Fed would take care of their investments...

Tapering Would Help Buying At Lower Prices...

 Inflation is indeterminate when the supply and demand increase simultaneously... Higher inflation is also due to the lower base effect when the covid struck in 2019... Higher inflation this year would lead to the debase effect next year according to the chain based index... Few people understand percentage when most data is given in the same and have a base or base year to calculate the percentage and negative growth does not mean growth lower than zero, but only lower when compared to the base year or quarter... INDIA had a positive growth during covid, but lower than 2018 the base year....

A higher fiscal deficit during this period of crisis slash lower revenue from oil slash more debt could increase real wages and incomes and demand... It would reduce transport prices across the spectrum and would increase productivity and growth... Lower inflation would increase real GDP...

Raising taxes and ignoring the public's will during the pandemic is against the spirit of democracy... Give some relief to the people not accounting...

The govt is procrastinating decision on fuel prices... It could help (lower prices) and increase real wages and incomes... Increasing productivity requires cost competitiveness and lower prices to increase demand and price and growth expectations to increase spending during crisis...

Even the Fed could not gauge the prices correctly for a long time... All predictions about the prices and interest rate are nothing more than horoscope of the economy due to a variety of exogenous factors and ignorance about the top and bottom of price and growth... Though the central banks actions and the resultant expectations could become self reinforcing... For example, higher borrowing cost and expectations could further reinforce higher prices by lowering supply and lower borrowing cost and expectations could further reinforce lower prices by increasing supply...

The investors shall find relief from the fact that the Fed is reaching its goals of growth and inflation and the bull market could continue as long as prices and growth rate is stable and the Fed would continue the bond buying albeit at slower pace... Any reversal in the stimulus is still far away and possibility is that if the economy diverges from its path of full employment and growth and price stability the Fed could again provide the stimulus...

The main thing is that the Fed could gain ease quantitatively if the recovery is derailed and unemployment increases culminating in slowdown... The Fed would not want to precipitate any prolonged correction which may push it to ease liquidity to increase demand... The stock market investors were encouraged by the prompt action by the Fed after the covid hit in 2019... The Fed could continue providing stimulus in the face of adverse outcomes...

Expectations of outflows and depreciation could be self fulfilling by the way of selling financial assets in the emerging markets, outflows would increase depreciation, too... The emerging market central banks shall sell dollars in order to stabilise the situation and stop outflows... Low prices are important for spending decision coz it increases demand... Lower prices are good, but not lower price expectations coz the latter could be self fulfilling, if everybody expects the same, they would hold demand and increase supply which would further reinforce lower prices and increase volatility and vice versa...

Money and Expectations...

Investors shall learn that the Fed would just stop inducing the investors and any reversal of the QE is highly unlikely, it would just stop accommodating and not reverse the QE... The money is likely to remain in the system which should help stabilise growth and prices, in case rate hike is still years far... The Fed has also said that it would warn before any change in action... The danger is not quite imminent and is still far away by years...

Technically, the central banks would first stop and not reverse the easing abruptly, higher unemployment would make them tolerate higher inflation... 4-5 % inflation is not that high... With supply side correction inflation would remain contained... Covid has hit growth which could take time to normalise, a third wave would be only mild with 50 crore vaccines so far and lose economic policy... Nonetheless, from an economic policy view inflation expectations are more responsible for spending decisions and higher money supply is very vital, only then people could spend... Raghuram Rajan’s group with Banerjee is quite awkward coz the latter demanded unemployment transfer to poor... means more moneysupply and demand and prices... The Fed has said that any reversal in the accommodative stance is still 2 yrs away... So the current stance is to stabilise the situation...

The RBI has adopted a flexible inflation targeting and it has relaxed it during covid and low demand and low supply and higher prices... Higher prices also mean that supply and demand would revert back...

From the spending perspective inflation expectations are important... Higher inflation expectation means people would not delay spending and supply could go down which could further reinforce higher prices and vice versa... Though, lower prices also increase demand and lower supply and would increase price expectations and vice versa... As above, higher price and expectations could become self-sustaining...

Nonetheless, stable inflation and expectations at full employment could also help stabilising spending and growth...

Generally, lower inflation expectations could derail the recovery because people could delay spending and increase supply which would further reinforce lower prices and could be self propelling... Though, lower inflation or prices could increase real wages if employment remains stable... Nonetheless, lower inflation and expectations could also increase the value of money overtime which would increase demand... People would feel richer and would save less for future and could spend more... Otherthings remaining constant, given full employment lower prices would mean increase in real wages and real profits... If productivity increases and it lowers prices without affecting employment that is welcome because it would also increase demand, other than higher price expectations... It would also increase labour savings which could further be used for production; higher productivity means lower prices and higher demand and 

Maintaining status quo means that the RBI wants to stabilise expectations when gradual opening and more supply would help price correction in the broader economy... Lower prices mean that demand and prices would go up coz all would try to purchase at the sametime if got money... Higher price expectations from a low base increase demand and spending...price expectations...

Among INDIA's most pressing problems are the irrigation facilities at one place and floods at other, every year that change the inflation dynamics and uncertainty for the borrowing cost... Building irrigation and dams and reservoirs are in the priority list... Only 50% of land has irrigation facilities... The other problem is fuel... A strong rupee would lower import prices and would help, real exchange rate would increase... INDIA should try to settle imports in the rupee and also for foreign borrowing... which could increase its credibility by reducing the risk for creditors... A strong rupee would also increase foreign exchange inflows…

The vast pool of the underemployed and low productive jobs due to lack of skills and lower wages could be used to gain a competitive edge while increasing productivity...

The RBI may sell dollars to avoid any oil price induced inflation and expectations... A strong rupee could increase foreign exchange inflows, higher bond prices and equity valuation expectations could increase inflows... The RBI could recoup dollars at lower exchange rate...

Consistency and Credibility...

Stability in interest rate and employment and inflation, and not, too much higher interest rate and employment and inflation are feasible and consistent with a good economic policy and could bolster the credibility of the central banks... They need a flexible inflation targeting with in a band in which r* or the natural or neutral interest rate could remain stable... and expectations, too... Normally, higher interest rate expectations lower demand and increase supply and lower price expectations and vice versa and could be self-fulfilling, therefore stability in expectations are vital for managing inflation and unemployment... Managing expectations are important for the adaptive expectations and the rational expectations, both... Adaptive Expectations are based on current and past experiences, if people experience inflation they expect inflation, and vice versa, and Rational Expectations use the latest data and information and is evidence based...

INDIA needs value for rupee for domestic as well as foreign consumers, means we need a strong rupee for domestic and foreign exchange... It means that productivity would increase and prices relative to money would go down or with constant money supply which also increases the value of money and demand... The interest rate is a flexible price; interest rate could be changed depending upon employment and inflation or price level... Depreciation is an artificial tool to increase demand for exports, it increases nominal exchange rate relative to G&S, it makes money cheaper by increasing money inflation and reducing domestic demand... A strong rupee and higher domestic and foreign exchange rate and also higher imports due to increase in productivity and lower prices...

Prior to covid INDIA was one of the fast growing economies, though the economists say that it has a higher potential and the economy was still recovering from the last slow down... INDIA's fundamentals are sound; inflation was low and stable... If we say that INDIA could be the next china, with low wages and plenty of labour supply, though it requires skilling, it would not be wrong... INDIA has improved a lot on the ease of doing business... More over it has borrowed less in other currency and low interest rate in the developed countries could be used to finance the infra needs...

There would be recovery and that's sure... Employment has been hit hardest which is crucial for increasing both demand and supply... The inflation target has been set by the govt, but it is equally important to set the unemployment rate at the natural rate... The RBI too barely discusses the unemployment rate... Providing forward guidance about interest rate expectations and stimulating the economy activity requires clear unemployment and inflation targets... That would help consistency in the monetary policy...

If the RBI keeps buying dollar for reserves, it would make the strong dollar self-fulfilling... as the dollar becomes strong, the country would need more dollars to pay imports which could further increase dollar demand and price expectations...

INDIA is one of the big exporters of refined oil (fuel)... The govt could repeat the mistake of exporting the refined oil when domestic prices are skyrocketing, like the UPA continued exporting the cereals when domestic prices over-shooting at 20%... We are a democratic set up, taxes could be only be imposed by the public consent... Afterall, it is the public's money... When the govt increases taxes and prices its own cost increase, too... which could also be self- fulfilling...

Rising fuel and transport prices reduce spending, but increase government spending that involves a trade-off, at one place spending is going down, of people, and at other it is going up... Money is being taken from people and given to government which then again changes hand... It would make almost no difference to the multiplier and growth... Fuel is a necessity and important for managing inflation, higher taxes on oil reduces real incomes of the poor in the economy and higher oil prices also increase the cost for business and transport... It could not categorised as productive because it increases the price level and reduces demand... It lowers productivity...

Till farmers sell their crops individually they would be the price takers, though if they bargain collectively they could command prices and could release or cease supply to get a respectable income, like the OPEC... Moreover, if they deal with a large number of buyers, buyers would bid the prices upwards... More buyers/demand means more prices...

If everybody follow some rules of thumb, like sell only on the high price range and buy on the low price range everybody could gain... Moreover, if there is consensus, about buying and selling price, risk could be lowered, investors must avoid irrational exuberance, not expecting too high or too low...

Share quantity is also important... If all investors invest in staggered amounts/quantity, stock prices would increase in the shortrun... Returns would be multiplied...

Stock prices depend upon the growth rate, if the actual growth rate is higher than the warranted growth rate, the stock markets could be rational to continue increasing investment and demand and prices, with periodic or cyclical corrections and buying more to lower the average cost...

INDIA shall not produce goods in which it has a comparative disadvantage means what it produces at higher oppourtunity cost and/or higher prices or in which it cannot produce much or have lower productivity...

The marginal propensity to consume (MPC) of the poor’s is higher than the comparatively rich groups and inflation expectations are also important for the spending decisions and savings, too, poor people's marginal propensity to save (MPS) is also high and again also depend upon the inflation expectations, if the cost of living would increase people would also save more for the future, out of an increase in income... If people expect lower prices they delay demand and increase supply which actually lowers prices and vice versa... Though, it is also true that in the shortrun there is alimit for income and demand...