{"id":691,"date":"2012-07-31T05:16:41","date_gmt":"2012-07-31T05:16:41","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=691"},"modified":"2012-07-31T05:16:41","modified_gmt":"2012-07-31T05:16:41","slug":"an-ssc-pass-understands-that-inflation-today-has-nothing-to-do-with-rbi","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/07\/31\/an-ssc-pass-understands-that-inflation-today-has-nothing-to-do-with-rbi\/","title":{"rendered":"An SSC pass understands that inflation today has nothing to do with RBI"},"content":{"rendered":"

\"\"<\/a>
\nVivek Kaul
\n<\/strong>
\nThe attempts of the Reserve Bank of India (RBI) to control inflation have been a non-starter. \u201cGrowth, particularly in the last two or three years, has been worth its weight in gold. In a global economic boom, an economic growth of 8%, 7% or 9% doesn\u2019t really matter. But when the world is slowing down, in fact growth in large parts of the world has turned negative, to kill that growth by raising the interest rate is inhuman. It is almost like a sin. And the RBI killed it under the very lofty ideal that we will tame inflation by killing growth,\u201d said Shankar Sharma, vice-chairman & joint managing director, First Global, in an interview to DNA Money.
\n\u201cIf you have got a matriculation degree, you will understand that India\u2019s inflation has got nothing to do with RBI\u2019s policies. Your inflation is largely international commodity price driven. Your local interest rate policies have got nothing to do with that. We have seen that inflation has remained stubbornly high no matter what Mint Street has done. You should have understood this one commonsensical thing,\u201d he added.
\nGiven this, Sharma feels that there is no way out for the RBI but to cut the repo rate in the days to come. Repo rate is the rate at which RBI lends money to the banks. \u201cI do not rule out a 150 basis points cut in the repo rate this year. Manmohan Singh might have just put in the ears of Subbarao that it\u2019s about time that you woke up and smelt the coffee. You have no control over inflation. But you have control over growth, at least peripherally,\u201d said Sharma.
\nGrowth is the only antidote to inflation, feels Sharma. \u201cIf your nominal growth is 15%, you will get 10-20% salary and wage hikes. Then you have more purchasing power left in the hands of the consumer to deal with increased price of dal or milk or chicken. If the wage hikes don\u2019t happen, you are leaving less purchasing power in the hands of people. And wage hikes won\u2019t happen if you have killed economic growth,\u201d explained Sharma.
\nAnd getting economic growth started again will be very difficult. As Sharma put it \u201cThe laws of physics say that you have to put in a lot of effort to get a stalled car going, yaar. But if it was going at a moderate pace, to accelerate is not a big issue. We have killed that whole momentum. And remember that 5-6%, economic growth, in my view, is a disastrous situation for a country like India. You can\u2019t say we are still growing.\u201d
\nBy keeping interest rates high the RBI has managed to slowdown credit growth of banks and thus made borrowing easy for the government of India, which has been borrowing big time to finance its fiscal deficit. Fiscal deficit is the difference between what the government earns and it spends. \u201cThere are not many competing borrowers from the same pool of money that the government borrows from. So far, indications are that the government will be able to get what it wants without disturbing the overall borrowing environment substantially. In a strange sort of way the government\u2019s ability to borrow has been enhanced by the RBI\u2019s policy of killing growth. I always say that India has 33 crore Gods and Goddesses. They find a way to solve our problems,\u201d said Sharma.
\nSharma also sees the rupee appreciating against the dollar, a prediction he made at the beginning of the year and which hasn\u2019t worked out till now. But his optimism still remains. \u201cI still maintain that by the end of the year you are going to see a vastly stronger rupee. I believe it will be Rs 44-45 against the dollar. Or if you are going to say that is too optimistic may be Rs 47-48. But I don\u2019t think it\u2019s going to be Rs 60-65 or anything like that.\u201d
\nA major reason for Sharma\u2019s optimism is a fall in oil prices and Indians buying lesser gold.
\n\u201cAt the beginning of the year our view that oil prices will be sharply lower. That time we were trading at around $105-110 per barrel. Our view was that this year we would see oil prices of around $65-75. So we almost got to $77 per barrel (Nymex). We have bounced back a bit. But that\u2019s okay. Our view still remains that you will see oil prices being vastly lower this year and next year as well, which is again great news for India,\u201d said Sharma. Also with gold prices touching all time highs in rupee terms gold imports have taken a beating.
\n\u201cYou should be seeing a much stronger rupee by the end of the year. Imagine what that does to the equity market. That has a big, big effect because then foreign investors sitting in the sidelines start to play catch-up,\u201d concluded Sharma.
\n(The article originally appeared in the Daily News and Analysis on July 31,2012. http:\/\/www.dnaindia.com\/money\/report_an-ssc-pass-understands-that-inflation-today-has-nothing-to-do-with-rbi_1721962<\/a>)
\n(Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul The attempts of the Reserve Bank of India (RBI) to control inflation have been a non-starter. \u201cGrowth, particularly in the last two or three years, has been worth its weight in gold. In a global economic boom, an economic growth of 8%, 7% or 9% doesn\u2019t really matter. But when the world is … <\/p>\n

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