Is Inflation Under Control?

Jan 19, 2013


- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The most recent inflation figures have come in this week, and it is good news. Prices are now rising at a rate of 7.18%, which is the lowest level in the last three years. The lower inflation rate is due to three factors. First, the Reserve Bank of India (RBI) has kept interest rates high. Second, the rupee has recovered some of its losses. And third, the oil price has remained relatively constant.

The RBI governor Subbarao indicated that this decline was certainly positive, even though inflation remains quite high. Many analysts now believe that the RBI will cut interest rates fairly soon, in a bid to stimulate the economy. And this is because inflation is falling and is no longer the same threat it was a year ago.

An interesting development has taken place in India's government bond markets. The yield curve is flattening. For the first time in three years, the yield on a 10-year government bond is the same as the yield on a 1-year government bond. What this means is that the annual return we earn from holding 1-year bond is the same as the annual return from holding a 10-year bond.

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The yield curve is a strong indication that the market believes inflation is under control. If the market believed that inflation was going to rise significantly, then the 10-year yield would be much higher than it is now. The flattening yield curve also indicates that the market expects the RBI to cut short-term interest rates in the near future.

While we should be pleased at these developments regarding inflation, it is important to recognize that inflation is still quite high. In addition, certain inflationary pressures are outside our control. Oil prices are determined on international markets, and a spike in the price will certainly lead to higher inflation. In addition, pressures on the rupee due to global risk aversion would also lead to higher inflation.

Nonetheless, inflation is no longer the biggest threat facing our economy. Right now, we need to focus on increasing growth rates back to what we've been accustomed to in recent years. The RBI recognizes this, and so we should expect an interest rate cut in the near future.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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2 Responses to "Is Inflation Under Control?"

devendra

Jan 22, 2013

Inflation will not be controlled by any organization except will power of Indian themshevles.

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Pramod S Phadke

Jan 20, 2013

Is inflation under control? This is the question asked by Mr Dossani. I would like to ask a counter-question:
Can inflation be truly controlled by action of one organization such as RBI?

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