Is inflation set to rise in the months ahead? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is inflation set to rise in the months ahead? 

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In this issue:
» Volatility in the bond market has increased
» What the US jobs data really shows...
» Tweak in policy to revive the road sector?
» Greece has been given another lifeline
» ...and more!


00:00
 
Those hoping for an interest rate cut because of the slowdown in the Indian economy, may just have to wait. As the GDP growth in India slowed down to the lowest in a decade, there has been increasing pressure on the RBI to cut rates. But the central bank has been in no mood to relent. And this may be the case in the coming months as well.

The culprit this time is the persistent slide of the rupee against the dollar. The Indian currency touched a low of Rs 61.21 against the US dollar yesterday. And this is bound to have an adverse impact on food as well as fuel prices. India still has a long way to go before it achieves security on the energy front. In the meanwhile, the country has no option but to import around 70% of the oil that it consumes. A weaker rupee piles on the pressure making oil imports more expensive. This has a negative bearing on prices as they will rise making fuel expensive. Rise in fuel prices indirectly translates into higher food prices because costs of transportation increase. All of this only means that inflation will not come down too much anytime soon. In fact, as per an article in the Economic Times, wholesale price inflation may very well go up to 6-7% in the coming months. One must note that this had eased to 4.7% in May 2013. Thus, even when global commodity prices have been softening, India has not been able to capitalise on this because of a weaker rupee.

The RBI so far has been reluctant to go in for drastic reduction in rates because it has been keeping a watchful eye on inflation. But if inflation stubbornly stays firm, one can hardly expect the central bank to loosen its monetary policy even if economic growth remains poor. In effect, the RBI's hands are tied with not much room to cut rates.

The slide in the rupee could not have come at a worse time for the government. As the trade deficit widens the fiscal deficit problem will also remain stubborn. It is therefore almost certain that the government will not do much in terms of easing the burden of the central bank. Hence steep food and fuel prices, combined with high interest rates could make the inflation situation worse in the months ahead. The current scenario only highlights the need for food and energy security from a long term perspective if India has to avoid problems related to inflation in the future. The sooner the current government or the future ones show some initiative on this front, the better off we will be.

Do you think that wholesale price inflation is likely to rise in the coming months? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
 
There has been considerable volatility in the global stock markets in the first 6 months of 2013. Interestingly, when emerging markets still grew faster than their developed peers, the stock markets in these countries displayed a reverse picture. So the US and Japanese stock indices have done quite well in the year so far, while the Indian and Chinese indices have been rather subdued. One of the reasons for the buoyancy in the developed world is the huge deluge of money from the central banks. This money found its way into various asset classes including stocks and helped fuel the indices. The ground reality though has been different because neither the US nor Japan have displayed any signs of a remarkable recovery. Stock markets in China and India have been at the receiving end largely on account of both the economies slowing down. The fact that the US will taper off QE has only made these markets jittery. Whether this slowdown reverses in the coming months though remains to be seen.

*Change between 31 Dec 2012 and 3 Jul 2013
Data Source: The Economist


02:01
 
What do you think is the key difference between a bond and a stock apart from the fixed returns offered by the former? Well, bonds are lot less volatile, aren't they? An article in FT has highlighted how this myth is going to be severely tested in the near future. Apparently, volatility in bond market has been moving towards uncomfortable levels in the recent times. And it has perhaps to do with the US Fed's decision to wind down its quantitative easing program. Thus, with the biggest buyer of US Treasuries slowing down on its purchase, mood is indeed jittery across the bond market.

Speculations are underway about how high the yields would really go and this has given rise to the tremendous volatility. In fact, even a seasoned investor like Bill Gross has registered a loss of around 3% so far this year. Mind you, this is a big number in the context of bond markets.

Of course, if things go way out of hand, the Fed can always resume its quantitative easing and take the yields again to lower levels. But this can't go on forever. Eventually there will come a time when even the Fed will be able to do little to stop the yields from going higher. And this will be the time when that gold you'd invested in could come in quite handy we believe.

02:46
 
The US stock markets may be celebrating. The latest jobs reports not only show a growth in job creation. The growth numbers are even higher that those reported in early 2013. Going by common sense, it would mean that both industrial growth and economic recovery in the US are on an uptick. Needless to say that one would assume US companies to be back in the hiring mode. But the situation on the ground is far from this. The employment numbers for who are in part-time jobs for economic reasons jumped multifold in the past month. This means those who failed to fetch full time jobs settled for less. However, while doing so they got themselves officially classified as 'employed'. The well qualified workers in the US have had a tough time finding jobs than less qualified ones. Does the situation seem very different from India? The government's NREGA scheme too has been accused of supporting only low skilled workers. Not just the US, but even countries like China and India need to ensure suitable employment for the educated mass. Else the problem of youth unemployment will be a bigger problem for the Asian giants than the US in days to come.

03:21
 
Drying liquidity has hurt the road sector. With clearances taking longer than usual banks are unwilling to lend. This has meant that most road projects are stuck in a limbo. However, recently government made a change in the policy to revive the fortunes of road sector.

As per the new policy, the promoters of existing road projects can now offload their stake to interested buyers anytime. As noted earlier, most promoters of these projects are cash starved. Allowing them to exit the project would speed up execution. Let us see how. Until now the promoter who was facing liquidity issues in a particular project had an option of partial exit. In other words, he needed to hold at least 26% stake and dilute the rest if desired. However, allowing him to exit the project completely would mean that a new promoter can now take over the project. The financial condition of this new promoter can be different than the existing promoter. He could arrange for finances at better terms or he may have sufficient liquidity to kick start the stalled project. Thus, the new rule would ensure that the project moves into those hands where execution and liquidity risks are comparatively lower. We believe that this new rule will add a fresh life to the road sector.

03:50
 
The Chinese are known for their appetite for scooping up global assets. It is therefore no surprise that they have been among the biggest foreign buyers in the US housing market. As per an article in Money News, the Chinese were the second largest group of foreign buyers of US homes in 2012. During FY13, Chinese home buyers accounted for 18% of US$ 68.2 bn invested by foreigners in the US housing market.

The Chinese fondness for American homes is not new. But the increasing wealth in China coupled with the post-crisis weakness in the US housing market has given a boost to Chinese demand. China boasts of a little less than a million millionaires. It is said that about 50% of them were considering the option of shifting abroad. Apparently, the US ranks amongst the most favoured destinations.

04:16
 
Greece has just been extended another lifeline. To prevent the country from defaulting on its debt in August, the Eurozone and IMF have given it another loan of 6.8 bn Euros. However this time round, the lenders have imposed strict terms. Greece has to cut down its public jobs and ensure that it sells government assets to raise cash. The question is whether Greece would pay heed to these terms or not. After all it has been on life support since 2010 and has not really done much on the reform front till now.

The country has been one of the sore points for the Eurozone in the period of crisis. It has been on the verge of debt default more than once. But each time the zone has played the knight in shining armor and has rescued Greece with bailout funds. The question now is how long can this continue. Unless Greece seriously restructures its finances, this situation is going to keep coming up again and again. Eventually the coffers of bailout will run dry. When that happens the Eurozone will be faced with tough choices. So isn't it better to just take these tough decisions now rather than postponing them to a later date? Unfortunately the Eurozone leaders appear to think otherwise. They would rather postpone the eventual crisis than take a tough step to fix things now.

04:46
 
In the meanwhile, the Indian equity markets continued to remain buoyant on the back of sustained buying activity across index heavyweights. At the time of writing, the Sensex was up by 86 points (0.4%). Barring the Indonesian markets, all the other global indices were trading in the green.

04:56  Today's investing mantra
"Projections should be handled with care - particularly when they're being provided by someone who has an interest in misleading you." - Charlie Munger

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    4 Responses to "Is inflation set to rise in the months ahead?"

    sudhir adhikari

    Jul 14, 2013

    Keeping in view the coming elections and the attitude and policies of the govt. inflation is bound to rise in the months ahead.

    Like 

    Sthithapragnja

    Jul 10, 2013

    Equity Master Team ,
    With great humility fortified with ignorance in abundance,
    I observe as under; on the (""Is inflation set to rise in the months ahead ??)
    The write-up brilliantly brings out the current scenario obtaining in both the fields
    (The Fiscal sector and the Monetary sector )both of which have both direct and indirect impact (visible & invisible) on the lives of ordinary citizens(Aam Aadmis ) of India !!
    Coincidentally both the Food and Energy security measures being contemplated and in active process(Work In Process/Progress) prompts me to quote from a Great late Statesman thus ;
    "" I have a long way to go before I sleep and have loads of work to complete/accomplish ?? ""
    We have been talking of Kal,Aaaj aur Kal ?? (I mean the hindi word in English script)
    Either ,it can mean the past(yesterday??) or it can hopefully mean the (bright) future(tomorrow??)
    This reminds me of another great signboard in an adda; the ubiquitous humble village
    tea shop): in bold letters at its very entrance (no door frame to name but a humble bamboo pole) !! (A HAND-WRITTEN CARDBOARD NOTICE pinned on the bamboo pole
    In the middle which serves as the entrance !!)

    ""CASH TODAY ; CREDIT TOMORROW !!"" {**}
    This incidentally prompts another quote which is familair now-a-days as well as long time ago ??
    "" You have abundant freedom to certainly FAST TDOAY for an Uncertain / Unlikely FEAST TOMORROW ??""{{*+}""YESTERDAY IS HISTORY,TOMORROW IS A MYSTERY, and TODAY is a GIFT !! That's why we call it The ""PRESENT ""
    The Great Emperor (an excerpt from a famous fable) once wanted to show his immense power and had his throne placed near the shoreline and ordered the Ocean ( whose
    Minions/essential constituents:: the incessant waves were beating/breaking and splitting themselves up on the shoreline) to stop the waves forthwith ??

    The analogy is uncannily apt for the great Powers that be The FISCAL and MONETARY Behemoths :: The Emepror and his ADC (The Aide De Camp) !!
    We have COAL aplenty under the deep depths of the Bowels of Mother Earth but some scanty supply over ground to generate power(the electric one) ??!!
    We are forced to import costly BLACK GOLD (Both SOLID & LIQUID ??) to have some semblance of Energy security ??

    Herein comes the profound wisdom of the Cautionary Board in BLOCK LETTERS at the entrance of the ubiquitous Tea Shop ??{**}

    I hasten to conclude with the quote of another leader of another country who coined the elqoeuently worded Term ""SOVEREIGN DEMOCRACY "" whose VAGUENESS(alluringly) revealed its FLEXIBILITY ??

    I hasten to conclude !!

    Like 

    sanjay prabhughate

    Jul 10, 2013

    wholesale price inflation is likely to rise in the coming months. Yes it will rise. i think this is having link with election fund.

    Like 

    Abhay Dixit

    Jul 9, 2013

    In India, government talks of unemployment and industry talks of lack of skilled-semi skilled employees. The problem is politicians give an impression to youth that they can get jobs without developing skills and putting in efforts.

    How do we inculcate hard working and skill development habits in youth?

    Like (1)
      
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