Before moving on let's discuss what I meant with 'Inflation Arbitrage'. It can be of 2 forms, one in which the prices of a commodity are different after accounting for all the transportation, transaction and duty costs. This gives rise to Inflation Arbitrage.
The other form of Inflation Arbitrage which in my opinion is of a more serious nature is when price of 2 commodities giving equal utility are different. Now money is a measure of value and if the money for the same level of utility is cheaper than the given commodity I would borrow money and start buying the commodity increasing what is called the 'Speculative Demand' which doesn't really translate to growth but definitely pushing the inflation further. In this is precisely what could happen here if the interest rate don't harden sooner, yes it would slowdown growth but would prevent the economy from the so called 'Hard Landing'.
Next we address the issue of 'Structural Change' by taking upon the Agricultural sector.
Monday, February 12, 2007
Sunday, February 11, 2007
India Shines...Or really So - Part 1
These days newspapers are filled with articles of how India is now an emerging giant and would soon overtake China. How everyting is rosy and oh yes the same cliche just improve upon the infrastructure and both physical and social and then you would see how we can achieve achieve double digit growth rate. Though I have my issues with the growth in China but we take it some other day today let's concetrate on India.
Let's put things into perspective it's not just the Indian economy but the world economy that is booming and this includes the Latin American countries like Argentina who are still in fiscal mess, many laggard countries of Africa and why go very far even our dear neighbour Pakistan is doing great. Yes clocking a GDP growth of more than 9% for a 700 billion dollar economy does make an impact globally.
The growth that has happened during these few years is mainly due to the booming asset prices and the boom in the commodity markets. In India the growth has really been demand driven and this kind of growth is always shortlived. Soon the prices start soaring, the interest rates start rising and we see the growth rate coming down. The strucutre of the Indian economy still remains the same and with this structure to achieve a sustained double digit growth rate we require a savings rate of around 40%, yes we can get around this figure but that requires the so called 'Structural Change' which we haven't seen.
However to make matters worse what we are seeing today is that the interest rates are not going up as they should have been. RBI has increased the repo rate but left the reverse repo unchanged, that would have sucked liquidity from the market and what's more we hear that our dear FM making plea to banks not to hike housing loan rates. All this has meant that today with inflation at a 2 year high the real interest rates have actually fallen!!! creating conditions for what I call the 'Inflation Arbitrage' (more on it later). So it's not all that rosy here. Next we further discuss this topic and later dwell down to various sectors.
Let's put things into perspective it's not just the Indian economy but the world economy that is booming and this includes the Latin American countries like Argentina who are still in fiscal mess, many laggard countries of Africa and why go very far even our dear neighbour Pakistan is doing great. Yes clocking a GDP growth of more than 9% for a 700 billion dollar economy does make an impact globally.
The growth that has happened during these few years is mainly due to the booming asset prices and the boom in the commodity markets. In India the growth has really been demand driven and this kind of growth is always shortlived. Soon the prices start soaring, the interest rates start rising and we see the growth rate coming down. The strucutre of the Indian economy still remains the same and with this structure to achieve a sustained double digit growth rate we require a savings rate of around 40%, yes we can get around this figure but that requires the so called 'Structural Change' which we haven't seen.
However to make matters worse what we are seeing today is that the interest rates are not going up as they should have been. RBI has increased the repo rate but left the reverse repo unchanged, that would have sucked liquidity from the market and what's more we hear that our dear FM making plea to banks not to hike housing loan rates. All this has meant that today with inflation at a 2 year high the real interest rates have actually fallen!!! creating conditions for what I call the 'Inflation Arbitrage' (more on it later). So it's not all that rosy here. Next we further discuss this topic and later dwell down to various sectors.
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