Monday, February 12, 2007

India Shines...Or really So - Part 2

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.

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