|»5 Minute Wrap Up by Equitymaster|
On This Day - 3 AUGUST 2010
Is India staring at low growth plus high inflation?
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India, infact, recovered strongly and since then its GDP has been growing nicely. And the government is aiming for growth in double-digits. But the scenario may not be as hunky dory as it seems. This is because India has a much bigger problem to deal with i.e. inflation. Food prices in the past one year have stubbornly refused to cool down. Non food prices are also now seeing a rise in prices.
So, how has the RBI been dealing with this issue?
It raised the repo and reverse repo rates in its recent monetary policy. The CRR, however, was left unchanged. And more hardening of interest rates would ensue. But is this enough?
After all, the two most relevant rates, the repo and cash reserve ratio, are still considerably below where they were before the central bank started slashing interest rates in late 2008. Further, the government has raised the tolerable wholesale price inflation rate to 6%. This limit was 5.5% in April and around 4% a couple of years ago. Thus, rather than bring inflation down, the government is finding it easier to conveniently readjust its 'comfort' level. This hardly expresses efficiency on its part.
At the height of the crisis, the central bank relaxed rates and pumped in stimulus measures to fuel growth. But the problem is that when it came to withdrawing these measures, it has not been nimble and aggressive enough. Unless the RBI really goes on the frontfoot, India will have to deal with what is known as stagflation - low GDP growth coupled with double-digit inflation. Not a promising prospect indeed!
Take the case of wheat, whose prices are expected to surge led by a global shortage of the commodity. The Wall Street Journal reports that global wheat prices have staged the most drastic rise in more than 50 years. This is on the back of a drought in Russia that has fueled worries that it could lead to a global shortage of the grain.
India, world's second-largest wheat grower, can be part of the blame for rising wheat prices as well. And the blame lies on the poor storage facilities that have led to tonnes of wheat rotting under open skies. The rotting grains have contributed to India's rising food prices. Wheat prices in the country have risen by around 12% per 100 kilogram in the past three months alone!
There have already been a few instances in the Indian stock markets in the recent past. And this certainly has our market watchdog SEBI worried. The SEBI wants to bring in a mechanism that could check price rigging in cases where the stock is being listed after a long layoff.
As mentioned earlier, such stocks are fertile grounds for manipulation on account of absence of recent price history. And this could thus end up hurting the retail investor. Fixing price bands before hand was considered as an option. But it was being felt that this was coming too much in the way of honest price discovery mechanism. However recently, a call auction was proposed. Here, price gets discovered in the first few minutes of trade after matching all the buy and sell orders. Hmm, yet another retail investor friendly step by the SEBI we should say.
Faber believes that the Chinese markets are discounting the slowdown in economic growth too soon. Also that the Chinese property markets could lead the bubble to burst. "China could crash" is Mark Faber's latest predicament in an interview to Bloomberg. A crash in Chinese stock markets could send investors to other emerging markets like India in search of better returns. Having said that, a crash in commodity prices could bode very well for the future profitability of Indian manufacturers.
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