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Inflation, inflation, inflation


Inflation..inflation..inflation when do we respite from thee? No not now, not too soon has been the refrain since March 2010. Thus in its continued pursuit to tame inflation, RBI has raised the benchmark rates for the 11th time today by 50 basis points to 8 per cent. The more-than-expected rise spooked the markets as the Sensex fell by 353.07 points (1.87%) to close at 18,518.22 and Nifty fell by 105.45 points (1.86%) to close at 5574.85.

Eleven rate hikes in less than one and half years speaks of a far greater malaise in our economic system than generally understood.

 Inflationary concerns have continued to dog the policymakers for quite some time now:

  • Average inflation for 2010-11 has been 9.43% – the highest in 16 years.
  • Headline inflation has consistently and stubbornly remained above the 8 per cent mark since March 2010.
  • It stood at 9.44 per cent for June 2011, much above the Central Bank’s comfort level of 5-6 per cent. Thus necessitating the 11th rate hike since March 2010.

While RBI has been trying to manage the demand side of the price factor, the constraints on the supply side and the volatility in global oil prices has been a major risk… exposing the weak chink in the armor. Eleven rate hikes in less than one and half years speaks of a far greater malaise in our economic system than generally understood.

Structural problems in the areas of storage, procurement & supply system, and a broken food distribution system along with volatile oil prices continue to be a major constraint in fighting inflation.The government effort to control inflation (on the demand side… while supply side problems continue) seem to be self-defeating.

  • While the GDP growth rate is slowing down, there seem to be no respite from headline inflation.
  • Amidst slowing industrial output (5.6 per cent in May, the slowest in nine months) the government has scaled down the GDP growth projections for 2011-12 to 8 per cent and revised the outlook for wholesale-price inflation for FY12 to 7% from 6% earlier.

Will it be achieved; most experts do not believe it so. Neither the scaled down growth projections nor the full year inflation projections are expected to be met. Growth rates of 7.6% along with average inflation figures of 8% seem more the norm.

Under these circumstances, along with Eurozone and US economy concerns we can expect highly volatile markets with sharp movements in either direction. Uncertain times to continue with no clear market direction established. With scaled down growth projections and high cost of money, investors too need to scale down return expectations and wait patiently till the economy turns the corner for good times ahead.

Till then growth concerns have definitely taken a back seat in India’s quest for double digit growth path.

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