Wednesday, February 11, 2009
Tuesday, February 10, 2009
YoY Inflation Vs MoM Inflation & Deflation
Guys, many times I wrote in blog about Inflation, Drawbacks of YoY Inflation, Threat of Deflation, Monetary Policies targeting inflation & etc.
In Yesterday's Financial Express, Ila Patnaik has clearly explained...
-->Advantages of MoM Inflation Vs YoY Inflation
-->What should be the Monetary Policies with respect to that &
-->Banks reluctance in reducing the PLR as compared to reduction in repo!!!
In Yesterday's Financial Express, Ila Patnaik has clearly explained...
-->Advantages of MoM Inflation Vs YoY Inflation
-->What should be the Monetary Policies with respect to that &
-->Banks reluctance in reducing the PLR as compared to reduction in repo!!!
Monday, February 9, 2009
GDP forecasted to grow at 7.1% for 2008-09
Today CSO released the forecast for the Indian GDP growth for the year 08-09 as 7.1%.
I think its quite good growth compared to present conditions and there is little hope & space for repo & reverse repo cuts from RBI after the Vote of account.
Break of the GDP is as follows:
Farm growth seen at 2.6% vs 4.9% (YoY)
Manufacturing growth seen at 4.1% vs 8.2% (YoY)
Construction growth seen at 6.5% vs 10.1% (YoY)
Financial services growth seen at 8.6% vs 11.7% (YoY)
Mining growth seen at 4.7% vs 3.3% (YoY)
Services growth seen at 9.6% vs 10.9% (YoY)
Industrial growth seen at 4.8% vs 8.1% (YoY)
I think its quite good growth compared to present conditions and there is little hope & space for repo & reverse repo cuts from RBI after the Vote of account.
Break of the GDP is as follows:
Farm growth seen at 2.6% vs 4.9% (YoY)
Manufacturing growth seen at 4.1% vs 8.2% (YoY)
Construction growth seen at 6.5% vs 10.1% (YoY)
Financial services growth seen at 8.6% vs 11.7% (YoY)
Mining growth seen at 4.7% vs 3.3% (YoY)
Services growth seen at 9.6% vs 10.9% (YoY)
Industrial growth seen at 4.8% vs 8.1% (YoY)
Thursday, February 5, 2009
Inflation @ 5.07 Vs 5.64%
Inflation came down to 5.o7% as compared to 5.64% for the week ended January 24th, where in commodities & manufacturing goods came down.
As I posted previously, see the difference with which inflation numbers are decreasing.
I am worried for the next week & week next to that where in reduction of prices in petrol, diesel & LPG will come into consideration!
Since we can fight with little bit higher infaltionary conditions but its very hard to fight with the deflationary conditions, that too in this kind of conditions where in pink slips are dominating the job market, recessionary conditions for industry & etc...
As I posted previously, see the difference with which inflation numbers are decreasing.
I am worried for the next week & week next to that where in reduction of prices in petrol, diesel & LPG will come into consideration!
Since we can fight with little bit higher infaltionary conditions but its very hard to fight with the deflationary conditions, that too in this kind of conditions where in pink slips are dominating the job market, recessionary conditions for industry & etc...
Wednesday, February 4, 2009
Warren Buffett's Views on Derivatives
Guys you all know how financial innovations (in terms of securitization, CDOs[Collateralize Debt Obligation], MBS [Mortgage Backed Securities] & etc) have led to present crisis. And derivatives are such instruments. The great Warren Buffet expressed his views about derivatives in 2002 only. Following are the some of his views about the derivatives:
1. We view the Derivatives as time bombs, both for the parties that deal in them and the economic system.
2. Closing down a derivatives business is easier said than done. Like Hell, it is easy to enter and almost impossible to exit.
3. In recent years, some huge-scale frauds and near-frauds have been facilitated by Derivative trades.
4. I can assure that the marking errors in the derivatives business have not been symmetrical. They have favoured either trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive earnings or both. The bonuses were paid and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
5. Derivatives can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties.
6. Company’s derivatives instantly kick in with their requirement, imposing an unexpected and an enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis which may trigger for more downgrades. It finally can lead to a corporate meltdown.
7. A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from companies B through Z. History teaches us that a certain problems to correlate in a manner undreamed of in more tranquil times.
8. In banking and insurance industries, firms that are fundamentally solid can become trouble simply because of the travails of other firms further down the chain. When a “Chain reaction” threat exits within an industry, it pays to minimise links of any kind. That’s how we conduct reinsurance business, and it’s one reason we are exiting derivatives.
9. Macro picture sometime carry large amount of risk. Derivatives will be concentrated in the hands of few derivative dealers. Troubles of one could quickly infect the others. These derivative instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and Governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
10. We are apprehensive about the burgeoning quantities of long term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. So, Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
1. We view the Derivatives as time bombs, both for the parties that deal in them and the economic system.
2. Closing down a derivatives business is easier said than done. Like Hell, it is easy to enter and almost impossible to exit.
3. In recent years, some huge-scale frauds and near-frauds have been facilitated by Derivative trades.
4. I can assure that the marking errors in the derivatives business have not been symmetrical. They have favoured either trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive earnings or both. The bonuses were paid and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
5. Derivatives can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties.
6. Company’s derivatives instantly kick in with their requirement, imposing an unexpected and an enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis which may trigger for more downgrades. It finally can lead to a corporate meltdown.
7. A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from companies B through Z. History teaches us that a certain problems to correlate in a manner undreamed of in more tranquil times.
8. In banking and insurance industries, firms that are fundamentally solid can become trouble simply because of the travails of other firms further down the chain. When a “Chain reaction” threat exits within an industry, it pays to minimise links of any kind. That’s how we conduct reinsurance business, and it’s one reason we are exiting derivatives.
9. Macro picture sometime carry large amount of risk. Derivatives will be concentrated in the hands of few derivative dealers. Troubles of one could quickly infect the others. These derivative instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and Governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
10. We are apprehensive about the burgeoning quantities of long term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. So, Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Tuesday, February 3, 2009
Say's law-->Keynesianism & Its Implementation
Today I an article in Business line from Mr. Harish Damodaran. In which he has beautifully explained the concept of Say's law, Savings & Investments, Keynesian concept with respect to Say's (which I posted twice from the Keynes book) & implementation of the packages which th government is announcing now...
Monday, February 2, 2009
Threat of Deflation
Guys, I am back with my favorite topic deflation/inflation (microeconomics) after two days of net problem in the college. Many times I posted about the possibility of deflation due to reasons like current situations like financial turmoil, monetary policies, followed by bank's reluctance to lend, job losses which makes people save their consumptions for future purpose & etc. Today I read an article from business standard where Mr.Tushar Poddar(Chief India Economist, Goldman Sachs) expressed his thoughts. So I thought you guys also can have a look at it...
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
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