RBI : Burnished Inflation Credentials

 

 

 

Kudos to Reserve Bank of India (RBI. Once again acknowledging the rampant consumer near double digit inflation for last four years, RBI has decisively chose to increase the policy rate by 25 bps in-order to break the back of ever rising pricing spiral. There is hardly any respite for consumers during last so many years as Government was continue to provide lip service to this vicious phenomenon. Alas, the outcome is even more disastrous on several economic fronts. 

 

Though most of the inflation is driven by supply side issues like, inadequate production of various agriculture commodities, hardly any focus on productivity and continuous increase in Minimum Support Price (MSP). All these have created self sustaining loop of increase in prices. This has enforced the psychology of the citizens that price will be keep on increasing. On the other hand we are unable to bargain higher wages with the employers as due to the slow down in the economy, employers were unwilling to cave in. 

 

Higher inflation has also set the stage for INR to depreciate against major foreign currencies. The catalyst came in May 2013, when Ben Bernanke has hinted possible tapering of purchase of securities. Consequently, foreign investors chose to walk out from the Indian Fixed Income markets, which in turn taken a huge toll on INR. The USD/INR is currently trading at 62.28 while average for CY 13 is 57.22. The point which one should understand is that high inflation differential between India and its trading partners as well as consistent high Current Account Deficit (CAD)  are the  major factors to allow INR to go down once pressure increased due to higher demand for foreign currencies.

 

Now the question is that whether RBI moves can really control inflation. Well, these efforts should be complimented by Central and State Governments. Policy makers should immediately take measures like:

 

1. Create environment for improvement in the productivity, storage & transportation of the agriculture produce.

 

2. Mechanism to control prices of agriculture produce. Right now, big producers and  traders are emboldened with consistent price rise they have witnessed for last so many years. Thus an element of hoarding is always there as reflected in the price pattern of Onion a la squeeze in financial markets. It goes up suddenly  & sharply and then come down and settle at high rate then previous one. There are savvy traders who corner the commodity and then control the price and quantity of the produce. Government should note of this activity and curb it.  

 

3. Price rise in certain commodities has spill over impact on the other commodities as well. Traders now without hesitation increasing the prices of other products as well under one or other pretext.  

 

If government walk the walk with RBI, then consumer inflation will be controlled and India can embark on the journey of sustainable globally competitive nation.

 

 

 

 

 

 

Inflation : Secretly eroding your purchasing power..

 

 

 

Well, India has never been able to overcome the perils of global financial crisis since September 2008. Tough economy has recovered between 2009- 2012 but later on due to excessive reliance on global funding of local investments has led to foreign exchange crisis in the middle of 2013.

 

India was one of the beneficiary of global liquidity unleashed by US and Euro to help stabilize their countries in the wake of financial crisis. This global float was keeping the India buoyant till such time  US FED indicated to withdraw it gradually. Current Account Deficit countries like India, Indonesia, South Africa were badly hit as global investors chose to withdraw.  This devaluation of the INR is  now the latest driver of higher inflation, which is reflected in the higher prices of the trade able goods like petroleum products and so on.  

 

Already, India is into persistent high inflation for last four years. CPI continue to be high, which is currently at 9.6%. The reasons are very clear :

 

 

1. Government has designed scheme like MANREGA to provide employment in rural areas. Certainly, this has improved the purchasing power of the citizens while paying scant attention to increase productivity of the agriculture sector. In addition, Minimum Support Price (MSP) of the agriculture commodities are raised obviously to increase  production. However, this has backfired as intermediation was further increasing the prices dis- proportionately, which has adversely impacted the end consumers. This vicious spiral is still continuing and none of the policymakers are even trying to understand it.

 

2. Increase income of the rural citizens has fuelled the demand for food. Alas, where is the productivity. Year after year, items like milk, protein rich articles like meat, cereals are in good demand as improvised citizens are now able to afford them. Result.. prices are keeps on climbing under one or another pretext as retailers have realized that people have ability to pay. Top it all, there is hardly any improvement in quality. Again policymakers have failed to realize a well entrenched trend and so far not come out with any response to break it.

 

3. Last but not least we over-selves to blame for bearing such a spiral of inflation.We are not making any noise in any concentrated fashion to be heard at any forum. Political parties now a days are indifferent to the vicious circle of inflation . Gone are the days when fortune of the political parties are decided by the price of the onions. In fact, price of onion and potato, which are the staple ingredients of the Indian household, are raising at fast clip in last so many years. Yet, citizens are unable to come out with their anguish.  Lately, price are now moving in the multiple of INR 10.00. This is also a disturbing trend. Again we as a consumer refuse to carry coins so are the retailers. Once again who is the looser : Consumer...

 

Well, how we can break this vicious circle of persisting high inflation :

 

1. Union election is scheduled next year while some states are going for election later this year. Make it a point and judge your prospective leader, who can deliver lower inflation. Make them aware, how this is very important for the whole country.

 

2. Question Reserve Bank of India (RBI), whose sole mandate is to anchor inflation while delivering sustainable growth. Unfortunately this is not happening for last so many years.  RBI comes out with quarterly review of monetary policy where anybody can interact with Governor of RBI. Question them about the policy taken by them and how it is impacting the common man of India adversely for last so many years.

 

3. Last but not least start carrying coins in small denomination and pay as per Maximum Retail Price (MRP) printed on the article. This might bring some semblance in the marketplace otherwise be prepared to pay everything in multiple of INR 10.00. Trust, this day is not far away...Look around and you will see it coming through.

 

 

 

Game Changer : Tapering

 

 

All eyes across the world are now set on the US Federal Reserve (FED) Monetary policy, scheduled on Sep 18, 2013. It is expected that the recent good set of economic data points like employment and industrial growth will prompt FED  to lay the road map for possible gradual reduction in monthly purchase of the financial assets. FED has already hinted in May 2013 that, if, current growth momentum is maintained, then they may consider withdrawing exceptional liquidity provided since 2008 to help support the US economy after financial crisis. In fact, emerging countries are so paranoid about "Tapering" that, they were urging FED to considering its implication on them in the latest G20 conclave, should they decide to go for it.  However, in all likeliness, should they consider it, is any body's guess.

 

Globally financial markets have already started pricing in such event from May 2013. Yield have gone up for "Fragile Five" countries like India, Turkey, Indonesia, South Africa and Brazil. Most of these countries are running large Current Account Deficit (CAD), which has attracted the attention of investors, off late, and they choose to walk out. This has led to sharp fall in the nominal value of the currencies of these countries against USD side by side. This problem is further complicated as they have limited foreign exchange reserve to defend the local currencies. India has announced host of measures, which include attracting funds from Non Resident Indians (NRIs), easing rules to attract flows in both debt and equities etc.  These measures, at the best, will provide breathing space to policymakers to come out with structural reforms to improve quality of foreign exchange inflow in the coming years.

 

Going forward, movement in interest rate & foreign exchange value of the developed world will decide the course of various Indian asset class. why is it so.. Well, India was one of the major beneficiary of the global liquidity unleashed during 2008- 2012. Unfortunately, we are not ready, once stage is set for withdrawal. Our complacency that "All is Well" is taken the toll of growth in India. Though warning signs were there in terms of persisting high Inflation, increasing CAD & Trade Deficit, ever increasing growth of non productive imports ( Gold, consumer goods etc.), high corruption and anemic export growth. Yet our policymakers had wished away that  good times may continue due to external financing. This time the problem is "Made in India".

 

If FED decide to onset reduction in purchase program, then obviously interest rates will further inch up in developed world. This could adversely impact the emerging countries including India, which is already facing the heat in financial markets in terms of recent fall in the value of currency, higher interest rate and low interest in equities. 

 

Well, let us wait till then & look forward that policymakers should be ready to contain any adverse fall out.