I want to irritate a good virtual space friend of mine – she visits my blog posts quite often! She is a highly qualified economist in the upper levels of the government and as though that is not enough, has recently undergone intense training abroad. On the other hand, I am one of those who ask, “Economics? How much for a kilo?” And, I want to post my thoughts on what today’s edition of Hindustan Times says what RBI wants to do (Reserve Bank puts inflation control above GDP growth, July 26, 2011).
Some nerve! (I am telling myself)
The Repo rate is set to go north. As I am writing this, it may already have because RBI has scheduled its monetary policy review meeting for today. But I am not into real time news. I will wait till tomorrow morning.
The reason behind the rate increase? “[S]acrifice growth in order to tame inflation.” Good, isn’t it? The high and mighty like the RBI is interested in common folks like me. They care that we suffer not too much from inflation.
But, is that all to the story? I think not.
Reading between the lines one may see that RBI’s thinking is being driven perhaps by the bond market. Inflation in India is having a smooch session with annualized 10%. That means the fixed income for bond holders is going down in value. This has to be corrected. Hence the increase in the repo rate, to rein in the money supply, reduce economic activity, “sacrifice growth.”
If you do not do this, the bond market will ask for more blood; money will become expensive. Even given that the corporate paper is not much developed in India, the government will not be able to sustain itself at higher demands on government bonds.
The RBI may or may not be concerned about the “common man”, but it sure is doing its bit to help the bond holders.
How much of economic ignorance I have outed here will underline TV news today, after the RBI meeting!
I am rushing to my TV, notwithstanding my aversion to getting my news from it!
Has my good friend started gagging on her spoon yet?
Raghuram Ekambaram
P.S Now you understand why I have called this blog “nonexpert”!
Some nerve! (I am telling myself)
The Repo rate is set to go north. As I am writing this, it may already have because RBI has scheduled its monetary policy review meeting for today. But I am not into real time news. I will wait till tomorrow morning.
The reason behind the rate increase? “[S]acrifice growth in order to tame inflation.” Good, isn’t it? The high and mighty like the RBI is interested in common folks like me. They care that we suffer not too much from inflation.
But, is that all to the story? I think not.
Reading between the lines one may see that RBI’s thinking is being driven perhaps by the bond market. Inflation in India is having a smooch session with annualized 10%. That means the fixed income for bond holders is going down in value. This has to be corrected. Hence the increase in the repo rate, to rein in the money supply, reduce economic activity, “sacrifice growth.”
If you do not do this, the bond market will ask for more blood; money will become expensive. Even given that the corporate paper is not much developed in India, the government will not be able to sustain itself at higher demands on government bonds.
The RBI may or may not be concerned about the “common man”, but it sure is doing its bit to help the bond holders.
How much of economic ignorance I have outed here will underline TV news today, after the RBI meeting!
I am rushing to my TV, notwithstanding my aversion to getting my news from it!
Has my good friend started gagging on her spoon yet?
Raghuram Ekambaram
P.S Now you understand why I have called this blog “nonexpert”!
11 comments:
I try to talk about small operations which I comprehend.I do not comprehend India as a nation and economics as a subject.America triple AAA rating is a sham was known to me years back not as an economist but as a 'nonexpert'.
Similarly RBI never acts for a common man is known to me for years.They are bothered about their predictions and are willing to tweak (even a common man's nose), to reach their predictions.I dabble in astrology and sometimes feel that astrology has better answers to economic problems..
DS sir, Thanks for giving the low down on RBI! And, it is simply great you rate astrology higher than RBI and the rating agencies!
Raghuram Ekambara
After being sufficiently provoked and irritated, (but not by your blog, hahahah but by the many interruptions since I read the blog last hahahha) I thought let me mark my presence at least.
About your conspiracy theory that RBI latent agenda is to keep bond holders happy, it sounds exciting no doubt, but there is really no reason for RBI to go out of its way to do this. RBI’s objective is to tackle inflation while pushing the boundaries to take care that sustained growth is not stymied by its action. So if the bond holders are happy with the rate increases, it is a happy coincidence. Good for them.
Last year, till December, inflation was kind of moderate. But commodity prices became very volatile in early 2011, year on year it was higher as much as by 30%. It is indeed legitimate to wonder why the monetary policy should be aggressively contractionary now, why was it not so earlier in the year when inflation was at a peak. The answer to this is that the rigorous assessment of risk associated with an aggressive contractionary policy is possible only on a quarterly basis and not in a month/six week’s time. On the basis of the rigorous exercise, in RBI’s assessment, while at present the downside risk to growth is bounded, in contrast, inflation risk is unbounded, and this was the time to take aggressive action to tackle inflation.
RBI has also projected that, with business as usual, and a reasonably good monsoon ( July rains are 98% normal) , growth in GDP will be 8% even with this increase in interest rates, though it is a comedown from the Government’s expectation of at least 8.5% growth rate this fiscal.
Aditi,
Thanks for marking your presence; I got to learn a lot. What I wrote was culled from Paul Krugman's columns from NYT, about inflation bothering bond holders, and they working their magic through the rating agencies.
I just floated his thoughts in India, not knowing the things I must be missing. What you say I do understand, but deep down I think there is much to this fear of inflation than price of onions.
Raghuram Ekambaram
Raghuram, first of all congrats on your becoming a prophet. The RBI actually did what you foresaw. The Repo rate did "go north".
I also agree with you on Economics, how much a kilo? The biggest frauds I have come across after the religious are the economists. I have been both amused and amazed by their ability to bring up statistics for all their claims. [Also by their ability to charge for each of their services!]
2 farmers committing suicide every hour in India, according to the 3rd Conference of the Trade Union International, Paris (July 2011), will remain beyond all economics, I guess.
Matheikal, the famour caricature of an economist is the statement, "Show me an economist with one hand." The dig is it is impossible to pin down an economist on any thing. She (with due apologies to Aditi!) will always start off, "On the one hand ...," laying the foundation for the "other hand"!
There are welfare economists and the Bank of Sweden offers its pseudo-Nobel prize to one such economist every two decades or so! Those are the guys who try forcing mainstream economists to think about farmer suicides. Alas, they fail more than they succeed.
Raghuram Ekambaram
Matheikal, the famour caricature of an economist is the statement, "Show me an economist with one hand." The dig is it is impossible to pin down an economist on any thing. She (with due apologies to Aditi!) will always start off, "On the one hand ...," laying the foundation for the "other hand"!
There are welfare economists and the Bank of Sweden offers its pseudo-Nobel prize to one such economist every two decades or so! Those are the guys who try forcing mainstream economists to think about farmer suicides. Alas, they fail more than they succeed.
Raghuram Ekambaram
Though I am an economics student, I am at loss to understand why high prices cannot be managed by increasing supply of commodities ? If the food grain that is rotting is released into open, would inflation not be contained automatically? What is the need to play with interest rates? Maybe somebody like Aditi can enlighten on this subject
Balu, you are a genius, because this is exactly how Robert S. McNamara handled a cartel of aluminum barons many decades ago - threatening to release the stock with the government!
No, the parallels will not be exact. Here the problem is one of money supply and the government is doing exactly what the conventional prescription says it has to do. The cost of money has to be increased.
Raghuram Ekambaram
A virtual space friend told me that I can find you here...good...catch you later...
NNE, I couldn't escape from you, could I? :)
Welcome to my den!
Raghuram Ekambaram
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