Economy Analysis

A challenge:Inflation-Growth trade off

2010-03-31T06:09:00.000-07:00

During global meltdown RBI had provided aggressive stimulus measures,But the time has come to exit those stimulus packages step by step..A doctor always advice you to take the medicine when you are ill and discontinue once you recover. The same is happening with our Indian economy.RBI has to exit from those stimulus packages which provided during worldwide slowdown. but now Indian economy is on recovery mode.
RBI has hiked both repo and reverse repo rate by 25 point each.
Repo rate is rate at which RBI lends money to banks for short term. The hike in repo rate means it will make cost of borrowing costlier for banks and Reverse repo rate is the rate at which banks parks their money with RBI. Hike in reverse repo rate means it will lucrative for commercial banks to park their money with RBI. Repo rate increased from 4.75% to 5% and reverse repo from 3.25 to 3.5%.this will check inflation by checking the cheap money availability which has begun by RBI as a part of stimulus packages.It has become crucial to counter inflationary pressure because it exceeded than what RBI had projected for march 2010. The annual inflation rate for march 2010 is 9.9% while projection was 8.65a approx and it is expected that it will cross double digits.

India is on recovery mode but inflation is becoming serious matter of concern day by day and govt with the help of RBI wants to ease it but hike in repo rate will ease inflation but impact our growth rate.RBI saying is that to counter inflation we have to compromise growth in near term but in medium term it will benefit. increases in repo rate will increase interest rate. Inflation from food items is also catching now non food items.So to check inflation we have to compromise with growth.At this point of time the biggest challenge ahead RBI is inflation growth trade off. So by tightening monetary policy we can see growth in middle term.

Fluctuations in dollar and its impact in the Indian economy

2010-03-06T00:22:00.000-08:00

During 1970-80, India which was consider isolated from the world economy , It had very less impact of dollar fluctuations because it was more relied on import but post 1980,India started to indulge more and more in exports,and now trade among India and US has begun.When we see US as an importer,it has huge demand for the products like ready made garments, textiles, tea, diamonds that are mainly produced by India, and when we see India as an importer then India has huge demand for the products that are produced in US, euro ope, Iraq etc. like oil,petroleum products,pharmaceuticals etc.

But how fluctuations in dollar has huge impact in the Indian economy?

Fluctuations in currency occurs due to demand and supply mismatches of the currency, if supply of currency exceeds the demand then it value depreciates, on the other hand if demand exceeds supply then its value appreciates. In the recent global meltdown we had seen that US was facing economic crunch, the demand in the US had fell down, drop in demand had badly hurt Indian export sectors, our supply exceeds the demand in US therefore Indian currency rupees in 2008-09 touched the $1=50Rs and in 2007 when our economy was booming, foreign investors had huge appetite in our country, export sector had huge demand, the rupees appreciated w.r.t dollar. and was around 1$=39 rupees.

We have seen that in 2007 the rupees was appreciating and demand for dollar was weakening, reason being that supply of dollar was increased in India because India was a favourite destination for the foreign investors, export sector was flourishing , we had huge supply of dollars that made Indian Rs strong. we were getting dollar from various corner like NRI, economic commercial borrowing (ECB), foreign inventors(FDI and FII) and export sectors.

When Rs appreciates, import sector has positive impact, the importer appreciates.The explanation is for instance $1 moves from 45 to 40 Rs then import becomes cheaper. for importing the goods worth 100 dollar India will pay 4500 Rs (if $1 =45Rs), and in second case(if $1=40Rs) for the same transaction India will pay 4000 Rs.
In contrast when Rs depreciates the exporter appreciates-The explanation is for instance $1 moves from 40 to 45 Rs for exporting the goods worth $100 ,exporter will will get 4000 Rs (if $1 =40Rs), and in second case(if $1=45Rs) for the same transaction exporter will get 4500 Rs.

so fluctuation in currency impacts
Export sector
Import sector
That results changes in Indian economy .

Did budget meet the expectations of common people?

2010-03-01T08:20:00.000-08:00

The budget that was announced by Finance Minister Pranab mukherjee on 26 feb,2010 was drafted by keeping in mind the common masses.The govt has taken the measurement steps for the fiscal deficit that is 6.8 % of GDP, which is a severe problem for country like India, FM promised it to bring down at 5.5 % till FY11. The Govt has also tried to lower the burden of tax on people. The increase in income tax slab is a welcome step.The income tax rate upto 1.6 lac is exempted.The taxable income above 3 to 5 lacs will fetch 10% tax, which was earlier 20 % in that way the people will save10% , similarly above 5 lacs now only 20% tax has to pay, and above 8 lacs it is 30%.
No change in corporate tax and education cess but surchage has decreased from 10 % to7.5%.
We have seen the positive GDP number 7.9% for the quarter 2 was really astonishing indicates that we were able to manage the good growth rate despite crisis but the entire credit goes to the contribution of stimulus pakages so rolling back the entire stimulus at one go wil not be a prudent decision so FM has tried to exiting the stimulus in partial manner ,step by step by raising the excise duty from 8 to 10% so now we are having unified service and cenvat tax at 10 %.
The rising excise duty will add pressure on middle income people, hiking the prices of crude oil, petroleum deisel will make the transport of food item costlier which will increase the inflationary pressure so it was very disappointing on the inflation front, which was against the expectation of public because they were expecting that prices of essential commodities will go down , nobody had thought even prices will hike.
The increase in MAT was also disappointing for corporates , lowering the surcharge was balanced by increase in MAT.

The income tax rate/slab:

assesment year 2011-12(FY2010-11)

Upto 1.6 lacs
upto 1.9 lacs(women)

upto 2.4 lacs for (senier citizen)

Nill

from 1.6lacs to 5 lacs
from 5 lacs to 8 lacs
above 8 lacs

10%

20%

30%

So surplus is going to left among salaried people which is good news for everybody.
Some bad always comes with good so if we ignore the short tem inflationary pressure then in long term this budget will benifit. so overall it was very balanced budget and pranab babu done a great job to satisfy maximum number of people.

Is rising Inflation a matter of concern?

2010-02-03T04:12:00.000-08:00

Offcourse, the rising inflation is matter of concern, we have seen that food inflation that is at 17.40 % on 16 jan,2010, which is very high. The prices of food items are increasing. the potatoes prices has been soared by 50% plus. Similarly the prices of most of the essential commodities , vegetables, pulses , sugar are soaring. The Reason for increasing the prices is lack of supply, In india the inflation is measured by WPI, the non food inflation has reached from 1.32 to 4% approx, and the prediction is that it will touch to 8%. To control this rising inflation , the RBI has hiked CRR.So the govt is taking steps to control this sharp rise in Inflation.This is one of the major problems besides infrastrutre, Fiscal deficit etc.

Extended Trading Hours

2010-02-01T08:08:00.000-08:00

On 5 jan, 2009 SEBI taken the decision of increasing trading hours by 55 minutes, from 9:55 am to 9:00 am, while closing time left unchanged at 3:30pm. Many brokers shown discontent on this move because this 55 minutes increment will increse burden on the broker's part and will lead to inefficiency because they have to open office at 8:00 am and in metro cities it usually takes couple of hours to reach the office. This move has been welcomed only because SEBI wanted to align the Indian equity market with International market, mainly because of Singapore , SGX nifty which is nothing but the nifty 50 which is traded in Singapore stock exchange, which opens three and half hours before Indian stock market opens. This SGX nifty helps to know the FII stand in indian market, In Singapore stock exchange no trading is allowed only in derivative market (F & O)nifty future trading is allowed.On the very first of this extended hours nifty fell down but the reason expressed was lack of FII participation rather than impact of changing hours. No major change has taken places ,no volume , no profitablity has increased as expected.

RBI hikes CRR by 75 bps

2010-01-30T23:18:00.000-08:00

RBI has hiked CRR by 75 bps, this move will implemented in two stages. In first step it will hike by 50 bpt and in next move it will hiked by 25 bps more. The step taken by RBI was unexpected by bankers because banks had expected it to hike by only 50 bps. This step has been taken to curb the inflationary pressure, because impact of inflation from food item is also touching to non food items and also fuel products too.
CRR hikes will also lead to rise in interest rate because banks have to keep 5.75% of their deposits with RBI in cash, so banks can't lend 5.75% of their deposit, so definitely less money to lend ,results in high interest rate. But still RBI has assured that this move will not give immediate rise to high interest rate. The other Rate repo, reverse repo all remain unchanged. To give boost to economy RBI has taken call on that , now future will answer how fruitful this step of RBI is?

Biggest Crisis in world

2010-01-29T05:47:00.000-08:00

Sub prime Crisis
Lehman Brother Crisis

Sub prime crisis, that shook the world on 27 Nov, 2007, this reason behind that crisis was skyrocketing property prices in US. The real estate market was booming in US. Banks were rushing to give the housing loan to borrowers without being much concerned about their past records. There are two kinds of borrower, Prime borrowers are those whose past record is good while subprime borrowers were those either they were not willing to pay back the loan or were not having stable income. Banks were charging high interest rate to the subprime borrowers.So many lenders got into that business and given mortgage loan to borrower they thought that even if borrower will not pay, banks will sell their property, and will manage to earn profit. But housing prices went down, banks had no buyer for that property and borrowers started to make the default and they declined to pay even low interest rate in this way so much debt accumulated.
This subprime Crisis led to lehman bankrupcy, Lehman Brother was US fourth largest investment bank, a 158 years old institution, was filed bankrupt on 15 sep, 2008 by US Fed Reserve, the reason being above sub prime Crisis and poor relations with US top banks. There were no buyer for Lehman brother. Bank of America ad Barclays had turned down the offer of buying it because in past Lehman failed to maintain good relation with these banks. So Fed Reserve left with no option except filing it Bankrupt. This is Biggest bankruptcy in the history of US. Because of these crisis entire global economy gripped by Recession.

Bubble always bursts

2010-01-29T04:16:00.000-08:00

All you remember that during march ,2008 our india had given first time ever the 9% GDP, sensex touched 21000 pts, inflation was no matter of concern it was 4% which is consider ok, job market had enough opportunity but
suddenly picture got changed, stock market started to crash down because of global slowdown (lehman brother bankruptcy, subprime crisis) stock market ended up at 8000 pts, everybody was feeling jittery, inflation reached highest ever 12%, GDP fell down to 4-5%, no job remained more.Unlike USA, in india we had no recession ,it was mere a slowdown.It was a correction. Always Bubble follow the burst.

Why RBI hikes and cuts CRR

2010-01-28T21:22:00.000-08:00

What CRR is
Cash Reserve Ratio: "It is certain fixed percentage of time and demand liablities of banks that RBI keeps with itself."
Currently it is 5%, when we were grappling with the recession it was hiked by 50 basis point and reached at 5.5% the reason behind was that if CRR is hiked that commercial banks will be having short of supply that can lend to general public bacause banks have to keep reserve more with RBI, generally during slowdown, flow of money tightens , so during recession RBI hikes the CRR but when the recession gets over the RBI again starts to take the reverse steps and cuts the CRR, and we have seen that RBI cut the CRR by 50 basis points and again it is 5%. the reason being that as recession impacts get slow , liquidity starts to flow, and again banks starts to lend the money.
(the monetory measures are taken by RBI, while fiscal measures are taken by government.)