Does this mean the inflation will come down?

Oct 17, 2011

In this issue:
» India Inc's external commercial borrowings coming down?
» FM optimist on India's economic growth potential
» India's power sector headed for trouble?
» Will Asia get stuck in a 'middle income' trap?
» ...and more!
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Higher inflation rates have been smouldering a hole in most of our household budgets. The prices of nearly everything have been trending upwards. Food, fuel, commodities, everything has seen prices go up. As a result, the Reserve Bank of India (RBI) has adopted a hawkish stance on monetary policy. However, despite the fact that the central bank has raised interest rates several times, inflation has not really cooled off. In fact in September 2011, inflation rates (WPI) actually went up to 9.72% as compared to 8.98% during the same period last year.

But the government is still optimistic that the stance adopted by the RBI is the correct one. The Economic Affairs Secretary actually expects inflation rates to trend downwards in the coming months. He has given a forecast that the inflation rates would come down to 7% by March 2012. And as unbelievable as it sounds, experts actually agree with him.

However, the reason for this is not because the prices would come down. It is simply due to the base effectt. So what does this mean? It means that due to the high rate of inflation recorded during March 2011, the percentage change in prices for March 2012, would appear to be low. It is just a statistical phenomenon. Nothing more than that. And other than the fact that it will make the government look in a better position, it would not really be of any help for the 'common man'.

The supply side constraints still continue to haunt India. Unless those are removed, it is unlikely that the prices of core commodities would ease up too much. This in turn would add pressure to the margins of the manufacturing firms. As a result, the latter would find it difficult to reduce prices anytime soon. So even though the inflation rates may start to signal the end of tough times, the reality will actually be far from it. Higher prices would continue to trouble us. At least till such time as the Government steps up on the reforms.

Do you think that lower inflation rates would actually mean lower prices? Share your views with us or you can also comment on our Facebook page.

 Chart of the day
Higher interest rates in India had forced India Inc to look outwards to meet their borrowing needs. Little wonder that most companies turned to ECBs (External Commercial Borrowings) for their funding requirements. However, as shown in today's chart of the day, India Inc's ECBs have started to trend downwards. One reason for this is that with the financial crisis gripping the world, most banks outside of India are cutting down their lending. At the same time, with increasing interest rates, most companies have postponed or cut down their capex plans. As a result, most of them have been able to meet their investment needs with their own cash balances.

Source: Reserve Bank of India (RBI)

Against the current backdrop of high interest rates as well as inflation, there have been doubts galore on whether India would be able to maintain its high growth momentum in the medium to long term. However, not so for a gentleman who is in charge of the country's finances, the finance minister. Addressing a public gathering, the finance minister, Mr Mukherjee exuded confidence that the country will maintain a high growth trajectory of 8.5% to 9% in the medium to long term. He however opined that increase in agriculture production on a sustainable basis and increasing infrastructure development are the key issues that need to be looked into if the desired growth is to be achieved. We couldn't have agreed more. Another important issue that needs attention is that of equitable growth. Only when the current difference between the haves and have-nots comes down, will the growth have real meaning. Otherwise, it could lead to the disillusionment of the common man and also result into large scale protests like the ones happening in the west currently. And at this stage of development, instability is something that the country can hardly afford.

Diwali, the festival of light may not be that bright this year as long blackouts may soon remind the country of its energy insecurity. As per a report of a leading brokerage, the power sector could face dark times ahead as coal, the key raw material for the sector is in acute shortage. To give you a feel of the crisis, 34% of the coal based power projects are operating with less than 4 days of inventory while 51% have less than a week's stock left. The main reasons cited are strikes in key producing companies, transportation issues and heavy rains in Orissa. However, these are immediate causes. While the power minister has assured of an improved power supply situation in next 4-5 days, it will be a folly to let it ease concerns. What we are facing today is a potential long term problem of stagnation in domestic coal production. Hence, the Government too needs to work towards policies that offer long term solutions. This will include letting Private companies participate in mining and selling coal so that the power companies are not left at the mercy of just Coal India. The next step should be to move towards reasonable pricing for coal as subsidy scheme cannot continue forever without its potential 'dark' implications. But this will need a strong political will that has not been summoned in all these years. Had these steps been taken earlier, the story of India emerging as a growing economy would have seemed far more convincing, as for any growing economy in the current times, energy will be the key driving factor.

There are several challenges confronting emerging economies like India and China in recent times. Income inequalities, inflation, slowing growth are just few of these. Nevertheless a 9 to 10% growth rate in the long term can ensure that these economies put together account for nearly half of global GDP. Also the per capita income levels are expected to eventually touch that in the Europe currently. However, the same cannot be achieved without some significant policy actions. The chief of Asian Development Bank (ADB) opines that India and China could well get into the 'middle income trap'. Technically it means that where national productivity and income growth stall after per capita income hits US$ 3,000 to US$ 6,000. Growth spurred by exports and investments cannot sustain unless domestic consumption demand remains strong. In India consumption has been one of the key drivers of growth so far. However, the ADB believes that volatility in food prices and inability to control inflation could wreck havoc to India's consumption potential. Thus all things said and done, India's long term economic prosperity hinges on the country's ability to keep necessities affordable to the middle and lower income population.

Despite Reserve Bank of India (RBI) resorting to a series of rate hikes in recent times, there was not much movement in bond yields. But the latter received a jolt when the government announced a massive borrowing plan for the second half of this fiscal. The government aims to increase its borrowings by around 32% during this period and this led bond yields on the 10 year bond to reach a new three year high of 8.79%. This has then demonstrated that the fiscal authority appears to have a larger influence on interest rates in India than the monetary authority (read RBI). One of the reasons for this could be that the central bank has taken the rather predictable path of raising rates by 0.2% every quarter. These small steps do not seem to have had much of an impact on bond yields. Whereas the surge in the government's borrowing plan could be said to have come out of the blue and hence the impact on bond yields as well. While the government aims to reduce its fiscal deficit, borrowings may still not come down as it has to contend with lower cash balances and likely drop in small savings. Whether banks will want to buy more bonds is the question. Most of them have enough in bonds already and do not want to be in a situation whether they do not have liquidity if there is demand from the private sector. What is clear though is that the RBI cannot fight a lonely battle on the monetary policy front and the government will have to tidy up its finances to take care of the fiscal side.

In the meanwhile, after opening on a positive note, the Indian stock market lost their initial gains and closed the day in the red. The Sensex closed 57 points below the dotted line. Energy and consumer durable stocks were the biggest losers. However, most other Asian indices closed on a positive note with Hong Kong leading the gains. Europe has opened the day on a mixed note.

 Today's investing mantra
"Risk is a part of God's game, alike for men and nations." - Warren Buffett

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9 Responses to "Does this mean the inflation will come down?"


Oct 18, 2011

to my thinking costly [what costly]food has two factors which are playing a part in making it costlier [once it has been harvested] 1 the insufficint and adverce storage 2 the commodity SATTA MARKET [by different names regards hs


Jack Wilson

Oct 18, 2011

High interest rates have never brought down onion prices... only more supply or reduced demand can do that. So, even if statistically speaking WPI and CPI numbers start trending down because of the high base effect, RBI and the finance ministry will pat itself on the back and congratulate themselves on curbing inflation by raising interest rates. They are not only fooling the gullible public but perhaps fooling themselves as well. God save India from its politicians and bureaucrats.



Oct 18, 2011

At the outset let me remind that the the inflation every body is talking about is whole sale price index,whereas the consumer prices i.e the retail prices at which the roadside vendors sell fruits and vegetables are higher by 40 to 50% than these and at the same time they do not reduce the prices when there is correction in the whole sale markets.I think policy makers are intellectually bankrupt and do not know what to do.They continue to follow the western financial models blindly.Central Banks in the developed western economies
apply the methodology of interest rates tightening or loosening because their consumptions are based on credits and loans,where as more than 90% of the Indian population do not depend upon credits and loans for their consumptions.70 to 90 % of the budget of the countryside families is spent upon the food articles on which they do not take loans on which they have to pay
interests .Would our policy makers blinded by the western phenomenons realize this basic fact.


nanda gopal

Oct 17, 2011

as brought out inflation cannot be reduced and absolute cost will not come down in the present context as a lot of illegal money is chasing few items available. The only way we can improve India is by demonetizing the 100/500/1000 Rupee notes and limiting the cash held by individuals and companies to a smaller level which will also reduce black marketing, corruption/ havala goondaism. This will also reduce the interest rates as banks will have a lot of money and industries can grow with lower interest rates. There will be some sectors which will be affected but a large sector which is honest will be benefited. I can elaborate and discuss more my email id is This will have a more significant result much more than Annas movement can ever think of achieving.



Oct 17, 2011

This only means that the rate of increase in inflation is going to decline and not the inflation in absolute terms...dun know who the govt is trying to fool.


Venkat Reddy Durgempudi

Oct 17, 2011

As I understand rate of infaltion is being calculated based on the previous years prices, if so, inflation rate coming down next year, from 9.7% to 7.0%, means prices would have gone up by 7% over the previous fiscal year instead of 9.7% currently it is at. Nevertheless, prices would go up but at a reduced rate. People with limited incomes, incomes that do not grow atleast at the rate of inflation would become poorer by the day. This way poor get poorer. This seems to be reality in rural India.

In a dveloping country inflation will never be zero for obvious reasons.



Oct 17, 2011

Our FM is trying to fool the public, as is always the case with politicians. Not only will we have continued inflation, it will occur with acute shortages of all goods and services come March 2012. As the US Economy grinds to a halt due to the debt overhang, Indian middle class is in for an even ruder shock in 2012 (as compared to 2008), where high prices of everything would be coupled with job losses and severe inability to payback loans. We might even see an exodus of people from urban centers to semi-urban/rural areas as the cost of living becomes unbearable in cities if you don't have a decent paying job.


Amit Sengupta

Oct 17, 2011

No- it won't. The market won't care for the data- all it will look for is the flowing cash, demand & supply. Cost of funds is no issue so long as business is done primarily with public money and supply-demand mismatch allows costs to be passed on to the end consumer. High inflation indeed helps generate a cash pile by the few and so, if the market doesn't care, the politicians don't care either.


hs goel

Oct 17, 2011

agriculture DO play an important part in bringing down inflation BUT high labour fertiliser cost and farmers selling of their land due land prices are the factors you cannot overlook

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