Taming Inflation


Food inflation went negative towards the end of December in India.

That is wonderful news, after a long period of almost double-digit inflation, which ensured that the interest rates were kept continually on the ascendancy by the RBI (Reserve Bank of India, the country’s central monetary authority).

The very high level of interest rates has started to finally crimp the growth of India’s economy, which hit a low of 6.9% in the July to September quarter. That, combined with lobbying by businesses, finally made the government sit up to the realities of growth necessity for India. This is one country which needs dollops of economic growth and investments for the next twenty-five years, non-stop. This is mandatory for lifting the 600 millions of people who subsist around the poverty levels, out of their misery and towards economic development. In fact, I would say that this effort is required on behalf of the entire world ! Yes, not only are these numbers mind-boggling, these are also the people who will eventually provide the workforce required and form the consumer-base for many global companies.

Given that India needs industrial growth (which has fallen to the level of 5%), and employment generation, it is inevitable that interest rates should start falling by March 2012. I do not think the RBI can hold the current level of interest rates beyond that period, without further damaging the economic growth.

Inflation has finally been tamed. It should come down further within the next couple of months. And, that drop should give the necessary impetus for the RBI to start cutting the rates, thereby reviving the economy and the markets. Of course, any hint of such action will lead to irrational exuberance, but that is the way things pan out in the equity markets. Nothing can be done about an over-reaction, after a rather long period of depressed market. The Sensex is still around 15,000 points, and it is the worst performing index in the world probably. And, hopefully, the Indian Rupee will start its move back towards where it was – at INR 45 to the USD (now it is around INR 53).

Finally, a ray of hope. May be the vegetables and fruits we consume would be available at a cheaper price soon. That should please the poor and middle-class families.

Cheers,

Vijay Srinivasan
7th January 2012
Mumbai

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One comment

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