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Wednesday, January 23, 2013

WPI Inflation Should Now Come Down A Little Faster......
I SEE 1st SIGNS OF WPI Inflation coming down a little more drastically.............
The reasons, are the same old ones, but in a new pack:
1. The Fiscal Deficit is expected to reduce, due to some recent fiscal steps by the GOI, including increasing of import duty on Gold and diesel price partial de-regulation. This will also reduce the chance of the government to go in for more and more deficit financing. Such kinds of deficit financing leads to what is known as "Peace Time Inflation". 
2. The Indian Rupee is hovering near three-month high, with an upward bias. 
3. The government  has decided to put a jolt on excessive spending. 
4. Disinvestment of the PSUs, which is expected to increase long term competitiveness and productivity, can also be looked as anti--inflationary. This comes under supply side policies. 
5. RBIs' constant intervention in the currency market, to prevent  INR from suddenly falling down to dismal levels can be looked as anti--inflationary to some extent. It is estimated that a 4% devaluation in a currency raises inflation by 1%. Now INR has gone  up by more than 2% from its all time low \levels and hence we can find further reduction in WPI. 
6. GOI off late has stopped taking measure which would increase the chances of falling in the trap of "Suppressed Inflation" (It is situation  where rising prices are controlled through measures taken by the government and is more dangerous than open inflation). 
7. To control inflation it is necessary to have control on over valuation of money. The introduction of new export policy by the GOI is the right step in this direction. 
8. Real inflation is also caused by peoples expectation on future inflation, reducing the expectations of inflation in the future has been one of the governments' aims during the last few months and even Dr.Subbarao, tried on the same, when he tried to project that from Q3FY13, the inflation will start to come down. 
Earlier Mr.Pratip Choudhury, CMD, SBI, cited "Stagflation", to cool off the interest rate cycle, as he advocated 100 bps cut in the CRR. If the inflation [basically sectoral inflation we  have in CPI] is due to aggregate demand then the government should take steps to increase production, by giving incentives to those industries where there is short of supply. Also, since the INR is now on an upward trajectory(means INR is appreciating) , it should go for import of food items if necessary. 
Therefore, I think RBI now has good room to cut both the CRR and Repo rates by 50 bps [both CRR and Repo rate cuts].
Whatever be the case, Indian economy now badly need stimulus and it is time one comes out of the theories, and takes note of the things at hand and do something out of the box or revolutionary. One should take the example of earlier Chairman of Fed, Mr.Alan Greenspan and how he managed the economy. Even the current Fed Chairman, does many things, moving away from the general theories. 
Economics is not a pure science and hence don't become a laughing stock............
On the flip side, Inflation is a key reason why equities are better for long-term investments. Cash and bonds may sometimes seem likely to yield a higher income at less risk, but historical returns show equities nearly always perform better over multiple decades, and so are a superior defense against the corrosive impact of inflation.