The Fm Mr PC is desperate to curb inflation and is targeting each and every component that has flared up in the WPI basket, as best as he can manage to .
Will this really help curb inflation in the short term or even the long term ?
That too, when the rupee is still pegged to the Dollar in a tight range between 39 and 40. Whatever Reddy does Bernanke is sure to undo, with his expected 25 bps rate cut tonite. The Fed is in a major dilemma and so is the RBI cause these measures are ad-hoc and will produce little results as the private banks may contemplate increase in PLR or harden lending rates.
The flow of dollars to India is showing no sign of decreasing as shown by Rbi Forex reserves figures, so is the eagerness of the RBI to hold the Rupee peg as shown by the above chart. The rupee is still pegged to the Dollar in a tight range between 39 and 40.
The growth of commodities as an asset class is unprecedented, as investors world over have lost faith in the stock markets and the bond insurers. Gold is a traditional inflation hedge and it is also close to its all time highs. Speculation in Oil is rife these days, as old timer Dan Dicker comments .
Oil is now at 120$ a barrel and OPEC President Chakib Khelil does not rule out oil prices reaching $200 a barrel, even though supply is adequate, because the market is driven by the dollar’s slide, He added: “The prices are high due to the fact of the recession in the United States and the economic crisis which has touched several countries, a situation which has an effect on the Yahoo news., and therefore each time the dollar falls one percent, the price of the barrel rises by $4, and of course vice versa,” he was quoted as saying in brief remarks to journalists on Sunday. read
I dont know what will happen of our Poor oil marketing and producing companies in that event , as the communists wont allow an oil price hike…As it is the Finance ministry is haggling over issuing last yrs oil bonds to psus like Ongc, Ioc etc
The Fiscal policy of the Govt is in Shambles and SAA is estimating the overall (central+state ) fiscal deficit at 10% of gdp, and as oil price goes up, the current account deficit balloons as we import 3/4 of our energy needs.
India’s balance of payments turned to a deficit of $2.5 billion in the quarter through December, from a surplus of $18 billion in the previous quarter, Bloomberg data show.
The central bank, battling inflation near a 3 1/2-year high, may be reluctant to let currency gains to temper prices as the nation’s balance of payments is widening, said Rajeev Malik, a senior economist at JPMorgan Chase & Co. in Singapore. The currency “appears poised to weaken further against the dollar in the near term.” read bloomberg.
This would surely mean more inflation and higher rates in the medium term, as even the pds procurement and fresh crops arrival into the markets would do little to stem the price rise problem.
The question is will the US change policy stance and move from their current weak dollar policy to the Strong Dollar policy and what point, oil and inflation will force them to rethink current strategy ?
The solution for India however lies in letting the Rupee float freely and appreciate to reasonable levels, just like Sing$ and the Ringit. No wonder Ajay says It’s the currency, stupid.