Double digit inflation going away?

Wed, 7 Jul Pre-Open

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Now, this should bring back smiles on the faces of policy makers. Clearly, the Indian Government seemed rattled at the response to the nationwide bandh day before yesterday. Now, they can only hope that the high inflation rates cool down substantially in the weeks to come. Fortunately for them, things seem to be heading their way. It looks like their prayers have been answered.

As per news coming in, monsoon rains have advanced into India's key grain producing states. This then marks a strong revival after the 16% below normal rains in the month of June. What more, it has also helped lessen fears of crop losses in one of the world's largest producers of agricultural commodities. "The situation has substantially improved, I am confident of crop area to higher than the last two years", India's agricultural minister is believed to have said.

It should be noted that last year, India witnessed its weakest rains since 1972. And this led to shortfall in crop production, which in turn led to record inflation rates. Infact, the impact was felt in the global markets as well. Some commodities like sugar saw their prices touch record levels in nearly three decades on account of higher imports from India. But not anymore. Revival in rains as mentioned earlier could lead to a sharp jump in production, thus helping cool down prices not only in India but globally as well. Moreover, it could also help overall inflation in India go back to more acceptable levels and thus, reduce the temptation for India's central bank to indulge in more monetary tightening.

Europe will not go into double dip: Trichet

The rumblings of a double dip recession in the developed world are getting louder by the day. However, Jean Claude Trichet, the head of the European Central Bank is willing to have none of it. He is pretty confident that Europe will not double dip. He does believe that governments have to juggle a delicate balancing act when setting spending and tax guidelines. But he is equally sanguine that budget cuts and structural reforms would help economic recovery while bank test would help restore confidence.

Notwithstanding these measures, we believe that the chances of a double dip are still on the higher side. The developed world has come to this point by living beyond its means for years together. And such excesses usually do not go away in a short time. What follows is a long period of adjustment where economic growth slows down a great deal. Agreed that the Government tries to postpone the inevitable by loosening its purse strings. But you cannot solve a problem of excess debt by throwing more debt at the system. Moreover, the confidence is still pretty fragile. A small spark anywhere could easily turn into a full blown fire. Thus, Trichet's optimism is misplaced according to us.