Rates Unchanged - RBI's Dec'13 Policy Review

Well any central bank has the onus of regulating the money supply in the economy keeping a tab on the inflation. But somehow I fail to understand that, how can one tame inflation by inflation? By increasing rates the household budgets are inflated immediately. How can one tame inflation by just increasing the interest rates?

Simply stated, when RBI decides to increase rates, it tries to restrict the money supply in the economy, by making it more expensive to borrow, and thereby anticipating that the inflation will come down in prospect.

But food inflation does not exist due to excessive money supply. People don’t necessarily take loans to buy food articles, THINK! Food inflation occurs primarily due to non-existent infrastructure in the farm-to-fork logistics chain. Food inflation may also be caused due to illegal hoarding, as was seen recently in the case of onions, or due to unruly weather. The RBI can’t fight food inflation by snowballing rates. It has got only policy rates to play around with, and nothing much as a firearm to control inflation.

RBI should not meddle with INR - the new media hoopla !

As suggested earlier in my blogs that the INR should be allowed to float free and it will be best that it finds its own inherent value. Not only country’s CAD has evaporated at the levels which the INR has brushed over the period of last month, but the trade deficit too has significantly diminished.

 

This could only have been possible with the depreciation of the INR, though some would argue that this depreciation would cause inflationary pressures. But these pressures shall be short term which will subside over a longer term. The currency’s depreciation will have miniscule effect on the inflation as a whole.

It has been proved since time immortal that a weak currency always helps in the exports, whatever little may it be. It eventually adds up to the growth of a nation.

RBI - Raghuram Rajan's new joke !

The Finance Ministry recently announced that it will provide banks with additional liquidity so as to finance cheap loans for automobiles & consumer goods this festive season; to help the middle class population of our country. Though announced by the Fin-Min, but what is amusing and surprising is that this was done after taking a nod from the RBI governor. Ahem!

The RBI governor who in his previous review of the monetary policy said that it is imperative for the RBI to target and fight inflation first and then look for recovery and growth in the economy had hence increased repo rate by 25bps. This was seen as a move to reduce and contain inflation, which is still at a level more than the reserve banks comfort level. And then soon Fin-Min announces a release of liquidity into the system by providing cheap loans.

Even a naïve will know

INR @ 58 to a US Dollar

The INR touched never before seen levels against the U.S. Dollar. It touched levels of 58 today. Also there is no dearth of analysts predicting further gloom for the INR. The reasons are the same which have been repeated time and again, High CAD & Fiscal Deficit coupled with policy inaction. Also sometimes there is a talk about the worldwide recession.

These factors have been present for some time now. But has the Indian Govt. thought about it seriously. Or is everyone too busy struggling to keep their powers/posts intact, which is now evident from a recent spat in one the political party for the top spot.

Whatever the finance ministry or the RBI claim about the health of Indian Economy, the way INR has tumbled against U.S. Dollar today (close to 1.5% down in a single day)

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GDP Data - May 2013

Today’s GDP data of 4.8% hasn’t come as a shocker and is in line with what was expected. Our Prime minister’s dream must have shattered after he announced yesterday that the days of 8% GDP aren’t far away, during his Japan trip.

Today’s GDP data has made history as now FY13 will go down as the year the country clocked its slowest growth in a decade. Even after all this the government hasn’t learnt much. It is gripped with policy paralysis not to mention the corruption cases coming out in multitudes on a routine basis.

Inflation - Too early to flutter with it

The recent inflation data both CPI & WPI have come in the comfortable range of RBI, but there is need to exercise caution.

The basic cause of inflation in India is supply chain bottlenecks. The constraints that are in supply chain from farm to fork still persist. Though RBI has been able to claw down inflation by increasing interest rates at various occasions, but it has also curbed consumption. Consumption theory was the only USP, which was being showcased to the world that India had. To reduce inflation by reducing consumption is not the way to go forward. It shows RBI’s, the Finance Ministry’s and on the whole Indian Government’s short sightedness to tackle the issue.

BRICS – such a passé

BRICS (Brazil Russia India China & now South Africa) have been the center of attention for many years now, at times also viewed as an alternative which can turn the current worldwide recession. The “Analysts” had pegged high hopes on these nations as the next big thing and had forecasted that these nations will impel the world economy back to the growth trajectory. But it is unrealistic to expect the group can challenge the US hegemony.

One look at these nations and it’s easy to perceive that these economies, the developing economies, are the net suppliers to the world’s developed nations aka economic giants. BRICS are net providers of materials/goods to the big European nations and also to the US. E.g. Brazil provides raw material, China manufactured goods and India is seen for outsourcing hub for IT and ITES. There are only two big cities in Russia, Moscow & Saint Petersburg, which have been much publicized and showcased as symbols from developing nation. One close look and it is apparent that the entire growth in Russia is limited to the perimeters of these two cites.

Mixing Insurance with Investment!

Insurance is supposed to arrange for compensation in the event of damage to or loss of property or in case of death of someone. Insurance in no way gives your return on your investments. Then why should one mix up both investment and insurance.

Insurance should give a person peace of mind, that in case something untoward should

Insurance

Insure meaning arrange for compensation in the event of damage to or loss of (property), or injury to or the death of (someone), in exchange for etc.

Insurance essentially helps as a buffer in testing times in case of loss of property or life. Any individual should realize why & how much insurance is required basis his earning capacity and forecasted expenses. One should not just do insurance just for the sake of it.

It is a common myth that insurance is an investment product, whereas it is merely a cover to see through the expenses of the family during intricate times.

Now to extrapolate the myth further all the Insurance companies came out with swanky products like:

Wretched Economy in Punjab !

Political rhetoric about the upswing in Punjab’s economy aside, the state has slipped from sixth spot to twelfth in six years as per the latest edition of the Economic Freedom Index (EFI).

The Economic Freedom of the States of India, 2012, which ranks 20 states on three parameters -- size of the government, legal structure and security of property rights, and regulation of business and labour -- debunks reasons given by politicians to explain the sorry state of affairs in Punjab. It maintains that the huge power subsidy bill, fiscal crunch, tapering off of the Green Revolution, failures in agricultural marketing and inability to catch the services revolution have led to the decline in the state’s economy.

The report claims that the state sharing its border with a hostile neighbour or terrorism causing a decline in the state’s economy were mere myths created by policy-makers to absolve themselves of responsibility for the state’s steady decline.

While most other states such as Gujarat have dramatically improved their ratings, the report says that the freedom rating (indices used to rate states) has remained almost static for Punjab, showing that not much effort is being put in to improve its condition. The report, which has undertaken a study called ‘Why Punjab has suffered long, steady decline’ by noted economist Swaminathan S Anklesaria Aiyar, has said that the chief culprit for the fiscal crunch in Punjab is free power to farmers.

Taxing the Rich ..... and the poor

Well the idea of taxes has developed from the ancient times when kings used to collect taxes on the pretext of taking care of their kingdoms. When the rulers vowed for the welfare and concierge of their citizens.

Prior to seeking higher taxes from its citizens the Indian Government should consider doing its bit first. It should ensure that all the basic amenities are provided for and if not then there’s at least a plan for the same to be provided in future.

Merely by taxing people, rich or poor, and filling out the coffers on the pretext of reducing CAD (current account deficit) won’t solve the problem.

Well it appears to everyone all around the world that by merely increasing the taxes this entire problem of stagflation and higher CAD will get solved.

Here are some interesting quotes from prominent people in the business:

Diesel Price Hike

A SMALL step towards de-regulation and a BIG leap towards zero subsidy.

Everyone has to recognize, that either way the international price of fuel has to be paid for. 

Either the government pays it in terms of subsidy or the customer pays it directly based upon individual usage.

It is always better to keep financial transactions short and direct. This way there is less chance of seepage and more accountability can be sought after.

Now every individual will be responsible for their own fuel bill as per personal requirements. One way this will also reduce wastage of fossil fuels in the coming days.