inflation, economy, interest rates

skk

Well it is...If I was looking at buying ( or not ) in India, I'll use stuff like price/rent ratios ( you can invert that into a yield and compare that to a risk free bond yield), price to income ratios, stuff mortgage companies used to use once upon a time, BEFORE making a loan( how long ago that seems ) like average mortgage debt to income(DTI), find papers from the Indian equivalent of Finance Prof Schiller of Yale University, see if the RBI has the equivalent mortgage loans buildout and buildup quarterly and yearly reports that the Federal Reserve has and study those and so on and see if it confirms my intuitive conclusion that - yes it is, its a dumb idea to buy property right now.

So, what are you going to do ?

-skk

skk

As a cautionary note and so that people pay attention to what the Indian Finance Ministry and the RBI does, here's a check written in Zimbabwe that's doing the rounds of the net in many places ( which is why I won't credit a particular site), and its for:

one quadrillion, seventy-two trillion, four hundred and eighteen billion and three million dollars only

O, I forgot and 00 cents. Some notes:

1. On the day the check was written, the parallel( black market) exchange rate was 750 Billion Zimbabwe dollars for 1 US$. So, that check was worth around US$1500. It was written to a car dealer.
2. On Aug 1st. they knocked 10 zeros off the currency. So that check, if written then and absent inflation for the 8 days would have been for $107,241.80.
3. But, at the current Zimbabwe inflation rate of 14% a day, the zeros will be RIGHT BACK. Come the end of the year, the check will again have to be for a quadrillion.
4. The check may be a spoof, but I haven't seen any debunking yet, but the inflation rate in Zimbabwe most assuredly is not a spoof.

It looks like this particular government in India, mindful of upcoming elections, is paying serious attention to inflation. The recent decision to appoint Dr. Subbarao as governor of the RBI, instead of extending Mr. Reddy's term, was seen in the financial press I read as increasing the effort to bring inflation down. Which is good. The RBI matters, since inflation is always a monetary phenomenon.

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Nick-H

If any government was actually capable of controlling inflation, they wouldn't have let it happen in the first place!

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Just one member of the IndiaMike Mod Team

trustindia

I think oil was the biggest contributor to this round of inflation. The middle class have had their petrol subsidised for years. Now they don't or at least they don't have the subsidy they used to.
That's bound to impact on the economy.

Nick-H

Fuel is still subsidised, and inflation is not just measured for the middle classes.

There have been big increases in the prices of basic food items; this makes life much more expensive for all.

KABAARY

Not true. Petrol was not subsidised (at least not fully). Rather it bore ths cost of subsidy on diesel, cooking gas etc.

capt_mahajan

Yep. They called it cross subsidy, like cross fertilization.

Nick-H

Now I'm confused.

I'm a driver, in India, I guess I ought to know, eh?

I thought that the government-owned fuel companies were supplying fuel, both petrol and diesel, at a loss.

Kabaary, I know you will be able to put chapter and verse into something understandable; can you explain, please?

Do you mean that petrol prices have been more expensive to support lower diesel costs?

trustindia

Okay I'll put it this way, prices at petrol pumps were kept artificially low for many many years at the behest of the government.
By means of administered pricing mechanism. (now I'm only guessing here but did the India Oil and the like just sell at a loss??? or were they reimbursed)
The first major hike in prices was in May/June this year as it was costing someone a fortune to keep the petrol pump prices at the levels they were at.
As far as I'm aware the pricing is still not realistic.


As pretty much eveything is dependant on fuel it would seem logical that this has a big impact on inflation, as well as the food commodities of course.

capt_mahajan

-crossposted-

Nick,

yep, resulting in skewed pricing and adulteration

err, 2002 article

http://www.outlookmoney.com/scripts/...articleid=3103


and 2007

http://www.livemint.com/2007/10/0512...-and-nons.html

trustindia

I think the idea was based on an old notion of variable oil prices, the prices were kept steady, with companies expecting to recoup losses when the price per barrel fell. Obviously thats not realistic these days.

capt_mahajan

The oil marketing companies are in poor shape and are bailed out periodically by the government with bonds and creative ways of accounting.

There have been many fuel hikes over the years. The recent ones seem worse in rupee terms; as a percentage, I doubt they were unique. Ten percent of 50 is larger than 15 percent of 20

Nick-H

Yes, I'd agree that fuel prices are very core to economic changes; a lesson I learnt way back in school was that everything has to be transported, so nothing is immune to fuel price.

I think that the govt fuel companies just loose money --- how is that possible? I don't know. But The Capt or Kabaary will

<cross-posted with Capt>

capt_mahajan

A really seemingly comprehensive article

(afraid I couldnt understand it after reading that it was from 'advancedge MBA online'



http://www.advancedge.com/articles/a...inginindia.htm

skk

Its a damn shame that after all these years, the phrase "inflation is always and everywhere a monetary phenomenon" still has no sticking power. I suppose this stuff is too dry.. can we get Katrina Kaif or Priyanka Chopra to do a Bollywood song and dance round this, I wonder ?

Its not oil that's pushing those prices in Zimbabwe, in Zimbabwean dollars, to those catastrophic levels, its the monetary authority, the Central Bank, creating new money ( out of nothing of course ) that does it, on the orders of the government.

Where the government controls the (fiat) money creation authority, which is the Central Bank, as in the days pre and post Margaret Thatcher, there the government can both create inflation and but also reduce it ( as Margaret Thatcher did ), simply by controlling the money supply. The Central Bank in the UK is of course quasi-independent now but it wasn't during the above period.

Where the Central Bank is quasi-independent, as in the USA, then the Federal Reserve governors can create or, if it wishes, eliminate inflation - as Paul Volcker did in the early '80s, simply by controlling the money creation by raising the price of money. Setting short term interest rates at 18%, as he did, soon dries up the appetite for money.

So, for India, I'm cautiously optimistic that they understand this and the Central Bank, which isn't independent, so it does things with the permission of the government, is indeed raising the price of money, i.e short term interest rates, and also reducing the amount of fractional lending, by increasing the amount of deposits required all towards reducing the amount of money creation and thus reducing inflation.

They get it it seems and I'm glad that they do and I hope that they continue to do so.

-skk