India - Inflation At Two Year High

Alchemist

Administrator
Staff member
#1
High prices of manufactured goods and pulses have taken inflation levels to a two year high - 6.12% for last week.

Items that have seen sharp price rise compared to last year, include fruits, vegetables, maize, arhar, wheat, groundnut seed, cotton seed, rapeseed, mustard seed, aviation turbine fuel, naphtha and furnace oil.

Metals prices have also moved up considerably and this is pushing up prices of manufactured goods.

With RBI's quarterly review of monetary policy coming up, there is speculation that a rate hike is around the corner.

Crude oil prices have seen a sharp fall in the past month and this may allow the government to cut retail prices to ease inflation a bit.
 
#6
Do you think RBI or Govt of India is willing to limit growth to contain inflation?
Inflation has to be contained when it goes past a certain level or else it can spiral out of control since higher inflation can lead to lower productivity.

There is no doubt that consumption has risen but not to the extent that prices are being driven up.

The current problem is because of a Supply shock where prices are artificially driven up,so both the farmer and consumer end up suffering while the middle men make merry.

The farmers should get a higher price which will encourage them to increase production and middle men have to appropriately dealt with by the government.

The RBI can only handle the money supply part of inflation by raising rates, reduce demand to an extent.

The benefit of growth will not percolate if inflation is not controlled, ultimately this will increase disparity between different strata of society where the lower income group will even struggle to foot their food bill.

As long as inflation is high,the Real Growth is lower (Real Growth = Nominal GDP - Inflation).
 

Alchemist

Administrator
Staff member
#7
Inflation has to be contained when it goes past a certain level or else it can spiral out of control since higher inflation can lead to lower productivity.
Inflation has already gone out of control.

That's why the markets are worried.

In fact, everything seems to be out of control now.

The government can't control inflation.

The government can't control its fiscal deficit. After one good year (thanks to 3G revenues), it seems India's fiscal deficit is again going to rise to an alarming level.

If inflation remains high, the government won't be able to pass on high oil prices to the consumers. As a result, the fiscal deficit will widen.

The current account deficit is growing and rising crude prices are only going to make things worse.

Last but not the least, the there seems to be the limited desire at the centre to control corruption and scams in the country.
 
#8
Inflation has already gone out of control.

That's why the markets are worried.

In fact, everything seems to be out of control now.

The government can't control inflation.

The government can't control its fiscal deficit. After one good year (thanks to 3G revenues), it seems India's fiscal deficit is again going to rise to an alarming level.

If inflation remains high, the government won't be able to pass on high oil prices to the consumers. As a result, the fiscal deficit will widen.

The current account deficit is growing and rising crude prices are only going to make things worse.

Last but not the least, the there seems to be the limited desire at the centre to control corruption and scams in the country.
Except for the inflation all other things are the same as the end of December 2010. Even inflation figures, they were already high, but gone higher now. So what's the reason, the market was wildly optimistic end of December, but looks totally down in the last one week?
 

Alchemist

Administrator
Staff member
#9
So what's the reason, the market was wildly optimistic end of December, but looks totally down in the last one week?
In the hindsight, the market was surely over-optimistic.

However, that's the nature of the market. It keeps oscillating between the two sentimental extremes - over-optimism and over-pessimism.

Only time will tell if over-optimism of late-2010 was medium-term or long-term over-optimism.

In other words, only time will tell if it was a medium-term top or long-term top. :D.
 

San Yad

Active member
#10
I think the clear message is to stay away for investing as of now and wait Nifty levels of 4800.

Not only inflation from our side, more fuel will be added in fire when European countries will come in lime light about the fiscal deficit.

Happy Investing!
 

Alchemist

Administrator
Staff member
#13
The worrying factor is that in a period where demand for oil and other commodities was relatively subdued and India had a good monsoon, the government was not able to control inflation.

Analysts forecast that western economies may bounce back in 2011. That may mean higher demand for oil and other commodities.

If non-food inflation also goes out of control, RBI will be left with no choice but to push up interest rates and slowdown the economy.
 

Alchemist

Administrator
Staff member
#16
I believe it is Diesel prices which push up inflation more rather than Petrol prices which hurt the retail monthly budget more.
Whether it's an increase in the price of diesel or that of petrol, the end-effect is the same - it reduces the purchasing power of money.

Now we need more money to buy the same quantity of petrol. That's inflation. :banghead:.
 
#17
Whether it's an increase in the price of diesel or that of petrol, the end-effect is the same - it reduces the purchasing power of money.

Now we need more money to buy the same quantity of petrol. That's inflation. :banghead:.
What I meant was that diesel prices has a direct bearing on the cost of transportation of food and other commodities, hence it effects CPI more directly.

Petrol prices on the other hand tend to effect personal cost of conveyance and hence it's effects are more micro than macro.
 

Alchemist

Administrator
Staff member
#19
The article is so very right.

The problem is not with the monetary policy, but the fiscal policy and the governance of the country as the whole.

If the government keeps throwing money into the economy and refuses to do anything about the supply side issues, there is nothing that RBI can do about inflation.

You have pumped in more money into the system and you are expecting the RBI to control it. I think the problem lies with the government.
I think what is important is that inflation is a government failure. It is a failure of supply side policies and it has been persistent for all the two years that UPA II has been in power. The budget completely failed to address a question of inflation.
 
Top