Not bad being a contrarian

So RBI unveils credit policy and sends chill down the nation’s spine revising GDP growth expectation to 7.9% as against 8.1% earlier.

Repo rate up by 50 bps is now at a record 9%. CRR is up by 25 bps and it is at 9% too.

On the back of high oil and fertiliser subsidies, farm debt waiver and the implementation of the Sixth Pay Commission recommendations, how bad can things get? Let me mangle definition of optimism, true contrarian style - wait till things get so bad that the only way for them is to get better.

I should know. The stock markets have given a thumbs down by falling around 4%. The two sugar stocks I bet on have moved up by 7% and 8% today. My portfolio inched up by 2.6% too.

Not bad, huh!

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Sack all our economists and refund all my taxes

Life isn’t getting any easier for us in India. Try telling me we’re living in one of the fastest growing emerging economies. This blog has been particularly skeptical of the inflation figures (7.82%) put out by our economists, promptly echoed in parliament by Finance Minister. All in a country headed by a veteran economist Dr.Manmhoan Singh. Now The Economist – may not be the last word, but is one journal that carries some shred of credibility amongst its vast reader base spread across the world – stands by me as it says "delays in data collection in India can mean big revisions to inflation... The latest wholesale price rate inflation rate might therefore be pushed up to 9-10 per cent," reports Business Standard.

There is no dearth for basic computing skills in India. India is a net exporter of IT services. Still our data collection methods are so archaic, full of holes and make believe. Could it be intentional to avoid being grilled in parliament by opposition benches? Or worse, do they believe what they say?

Hardly does it bode well in a country where 70% of people’s savings are through state run savings such as Provident Funds, Savings Bank, Term deposits, Post Office MIS yielding 8% returns. And a 10% inflation means they lose 2% of their savings with every passing year. In India, prices are rising much faster partly because food accounts for a bigger chunk of our Consumer Price Index and so the hit is felt way below the belt more by the poor millions. Banning futures trading in several commodities may help cap inflation and public rant. But letting prices rise is a far better way to reward farmers than waiving loans of $16 billion owed by the rich among them to the banks.

The least the government can do is, I repeat, refund all my taxes. Last thing I want is my money going to enrich another loan dodging farmer :-)

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"CYA guys.. Now..!"

Ila Patnaik makes her case why RBI should be cutting interest rates right now. (hat tip : Ajay Shah)

Her theory goes so long as there is scope for arbitrage between interest rates in US and India, dollar inflows will continue to drive the inflation and Rupee up. This relationship between Rupee rise and inflation (owing to upsurge in dollar flows) in the Indian economy – where interest rates are higher than that in the US - creates an anomaly in that a cut in interest rates will not only help rein in inflation by slowing down $$ inflows, it will also arrest the surge of the Rupee.

Ms.Patnaik has this view that since US economy is sliding into recession, Fed has more reasons to cut US interest rates. I see that move could further sex up high interest destinations like India (for not just FII/FDI/ECB flows, but also to NRI remittances) and the deluge will only accelerate. Traditional methods that soak up liquidity viz. OMO by RBI, CRR hike etc., meant to rein in inflation and arrest the rupee rise will only add to inflationary liquidity in the system. In effect, a higher interest rate regime instead of containing inflation will end up exacerbating it.

So here you have a paradox. Normally when you cut interest rates, it could lead to inflation propelled by higher credit off-take. But in our peculiar economic situation driven by excess liquidity and a rising rupee, cutting interest rates can effectively arrest dollar deluge as well as the Rupee rise – the twin goals that RBI is struggling to achieve.

Sound argument. But I say the Indian borrowers of foreign currency (ECB/FCCB) in recent times have large bets on a falling dollar to benefit from the exchange rate arbitrage. I doubt whether our CFOs are equipped with rate sensitive AWACS that scan early symptoms… A sudden reversal in RBI stance could wreck many a business and could rock the stock market sentiment as well. So RBI should give out early warnings.

The least that RBI Guv Dr.Reddy could do is to signal them “CYA guys… Now !”

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Bernanke did it, finally...

It’s a tight rope walk for Ben Bernanke, no doubt. If policy makers cut rates too cautiously, they risk a recession; if they cut them too much or too early, they risk stoking inflation.

In reducing its benchmark interest rate by an unusually large one-half percentage point, to 4.75 percent from 5.25 percent, the Federal Reserve made it clear that policy makers viewed the turbulence and disruptions of the past couple of months as too dangerous to ignore.

The reaction in stock markets was ecstatic: the Dow Jones industrial average jumped 200 points almost instantly and ended the day up 335 points, or 2.51 percent, at 13,739.39.

With a weak dollar that helps surge in American exports, for a change, the US is no longer the world’s engine of growth; the global economy could now become the engine of American growth.

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