Inflation Watch – RBI Q3 credit policy jan 2011

Rbi has chickened out again ...Here is a great piece from R Jagannathan who sums

What Subbarao seems to be saying is that he cannot tackle inflation purely with monetary policy when the finance ministry is running amok on petroleum and fertiliser subsidies. While the fiscal deficit is looking better this year due to one-off revenues from spectrum auctions, this is unlikely to last. In short, Subbarao is suggesting that Pranab is not doing his job, but in more diplomatic language.

Ajay shah has good advise  in How serious is the fiscal situation?

Net net Interest rates are running below inflation rates and much below Real Consumer Inflation rates more so for Food.

As the RBI is now subservient to the Finance ministry it will toe its line and interest rates wont go up substantially in near term but will inch up by the slow formula of baby steps or 25 basis points.

RBI has all but given up on one of its key jobs  ie Inflation Control, by not increasing interest rates in line with inflation and doesn’t mind the debasing of currency and eroding of purchasing power of the rupee.

Jahangir Aziz the Mumbai-based chief economist at JPMorgan Chase has said

We have been running loose fiscal and monetary policies for the last two years now. The rest of the world is doing much more of the same. But the rest of the world, including China and the US, has substantial excess capacity. We don’t. And this combination has often ended in tears if persisted for long.

This year’s fiscal deficit will likely end around 5.2% of gross domestic product (GDP), much better than the budgeted 5.5%, and sharply down from last year’s 6.9% and well on track to reach the projected 4.8% target for next year. But compare apples with apples. Take away the one-off 3G licence sale and the deficit looks more like 6.7% of GDP. Suddenly this year’s fiscal consolidation looks apologetic and next year’s 4.8% target a tall order.

More importantly, persistently high food inflation has become entrenched in expectations and wages. RBI’s own survey suggests households expect inflation to be around 11%, not 5%, while input prices in the Purchasing Managers’ Index survey has been growing relentlessly in recent months as have all labour-intensive services in the Consumer Price Index basket.

So summing up :-

The govt cannot/ is not interested to  increase supply of food and agri commodities, because middlemen and mandis are part of political culture, and give it  substantial political strength.There will be no substantial investment in infrastructure and supply lines, in roads,  in cold chains and in agriculture to increase yield because of skewed govt policy of oil and fertilizer subsidy and PDS which benefit the big agriculturist politicians and their cronies.

The cost of  Real Estate, all commodities , metals and goods will go up. FD Interest rates may creep up eventually depending upon money supply.

The great gold run would still continue, and gold has still some way to go but it wont be very spectacular.

Most likely the country can face an interest rate shock sometime in future , once the fed and eu change their loose monetary policy stance.

Next fiscal would likely be a very tough yr on the consumer as things are likely to worsen on the inflation front.

See this Video interview with Aziz on the need for reform.

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