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Is the inflation party over? - Views on News from Equitymaster
 
 
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  • Oct 5, 2009

    Is the inflation party over?

    The benign inflation party may be about to get over. And the reversal is most likely to be sharp and big in its scope. Infact, as per a leading daily, the WPI could touch as much as 7% by March end, driven primarily by rising food prices. Important to add that this is higher than the rate the RBI is comfortable with. Hence, it will be interesting to see what path the RBI will adopt going forward. Is it going to upset the status quo or will it start tightening its purse strings.

    Well, if the word that is coming out of some of the top personnel of the RBI is to be believed, it is going to be more a case of the former than the latter. In other words, a benign monetary policy may continue and rightly so. Since economic growth is still a concern, it will not make a lot of sense to suck the liquidity out of the system. However, if inflation is seen getting out of hand, then some tightening could indeed take place as the central bank is known to have done in the past. For the time being though, let the low interest rate party continue.

    'Gold could touch US$ 5000'
    While the low interest rate party continues unabated in the US as well, its real economy, unlike India, is showing little or no signs of revival and hence, fears are growing that the easy liquidity policy of the Fed is giving rise to creation of asset bubbles everywhere. Even safe haven metals like gold are seeing tremendous demand. Infact, even after reaching highs of US$ 1000 per ounce, there are talks that it may not be done yet. As per renowned investor Peter Schiff, the US benchmark index will fall another 90% from the current levels when measured against gold and gold will touch US$ 5000 per ounce.

    Schiff, who rightly predicted the US housing bubble and is a author of two books on finance, also opined that the US is never going to have a real recovery unless the markets lets it have a real recession. "Our phony consumer-based economy isn't viable; it only exists as long as the Chinese and Japanese lend us money to buy their stuff," is how Schiff managed to put it across. We hope the US policy makers are listening.

     

     

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