It is all about balancing growth and inflation. Like the Finance Minister said recently, "Inflation-control measures like drawing excess money out of the economy and the robust GDP growth cannot go hand-in-hand". The matter, as it stands today, is how much growth should we forego to control inflation? The Finance minister is of the opinion that the government would not mind sacrificing GDP growth to some extent for controlling inflation. Hence, the focus of domestic and global policy makers has shifted from GDP growth or recession to fighting inflation.
Global phenomenon
Actually, this situation was forecast many months ago. It was a problem waiting to happen when the US Fed kept cutting benchmark rates repeatedly in the last nine months. Inflation has now become one of the biggest global issues. Soaring inflation, particularly in food prices, has moved to the top of the agenda for policymakers.
The European inflation rate accelerated to 3.6 percent last month, the highest in almost 16 years, China's economy inflation stayed above eight percent despite efforts to ease food shortages. The expansion in liquidity due to rate cuts has led to a huge amount of money chasing commodities, pushing up their prices to irrational levels.
The diversion of food for the production of bio fuels, such as ethanol, is also being stated as one of the reasons for increase in food prices worldwide. Recently, there were protests in the Philippines, Haiti and Egypt over shortages in food and their soaring prices. Many rice-growing countries like India, Cambodia, and Vietnam have imposed restrictions on exporting food staples like rice to protect their populations from price hikes.
Policymakers are worried that such restrictions will further reduce supplies to non-producing countries and push the prices up further. This could worsen social unrest. The World Bank estimates that 33 nations are at risk of unrest. Analysts expect inflation to remain high at least in the first half of the year.
Domestic markets
On the domestic front, India's inflation has soared to its highest level since November 2004. The wholesale price index-based inflation rate, which soared to 7.41 percent year-on-year in the week ending March 29, has marginally declined to 7.14 percent this week against an expectation of 7.21 percent. Inflation is currently well above the central bank's comfort zone of around five percent. In its annual report released on August 30, the central bank forewarned of an increase in price pressures, due to shortfalls in farm production and infrastructure, which would spur inflation and curb growth.
In the Indian context, food prices play a big role in inflation because food items have a larger weight in the indices here. As many live on sustenance wages, even a marginal increase in price of food items becomes unbearable. These have large political ramifications. Inflationary pressures could increase, as oil prices are now at $105 a barrel. But on the flip side, the government has announced that the southwest monsoon, crucial for the nation's agricultural economy, would be normal this season. How factors influencing inflation will play out will have a crucial i m p a c t, going forward.
Moderation in growth
The domestic stock markets had factored in the worst in the prices of all stocks. The markets rallied most part of last week due to there being no bad news. From the results declared, it appears as though the economic growth will begin to moderate in the coming quarters. That moderation, given last year's robust growth rate of 9.4 percent, may be at 8.2 percent. But given the global context, this is indeed a very good figure.
Investors here have been resilient to the Reserve Bank of India's (RBI) rate hikes due to a dramatic growth in incomes. If the growth for the fiscal year does reach the central bank's forecast of 8.5 percent, it will be only marginally below the 8.6 percent average achieved over the past four years.
The RBI is due to announce the annual credit policy on April 29 and economists are expecting a hike in the cash reserve ratio (CRR). Some are of the opinion there could be a bank rate hike too. Overall, the growth momentum is still expected to remain notable, despite the anticipated slowdown.
Policymakers hold key
Inflation remains the biggest threat to this outlook, and supply-side factors, if not dealt with appropriately, could render these growth rates unsustainable. The key to the problem lies in how deftly the policymakers, both RBI on the monetary front and the Government on the fiscal front, control inflation without damaging growth too much. Hence, the future of the stock markets is in the delicate balance between growth and inflation.
Global phenomenon
Actually, this situation was forecast many months ago. It was a problem waiting to happen when the US Fed kept cutting benchmark rates repeatedly in the last nine months. Inflation has now become one of the biggest global issues. Soaring inflation, particularly in food prices, has moved to the top of the agenda for policymakers.
The European inflation rate accelerated to 3.6 percent last month, the highest in almost 16 years, China's economy inflation stayed above eight percent despite efforts to ease food shortages. The expansion in liquidity due to rate cuts has led to a huge amount of money chasing commodities, pushing up their prices to irrational levels.
The diversion of food for the production of bio fuels, such as ethanol, is also being stated as one of the reasons for increase in food prices worldwide. Recently, there were protests in the Philippines, Haiti and Egypt over shortages in food and their soaring prices. Many rice-growing countries like India, Cambodia, and Vietnam have imposed restrictions on exporting food staples like rice to protect their populations from price hikes.
Policymakers are worried that such restrictions will further reduce supplies to non-producing countries and push the prices up further. This could worsen social unrest. The World Bank estimates that 33 nations are at risk of unrest. Analysts expect inflation to remain high at least in the first half of the year.
Domestic markets
On the domestic front, India's inflation has soared to its highest level since November 2004. The wholesale price index-based inflation rate, which soared to 7.41 percent year-on-year in the week ending March 29, has marginally declined to 7.14 percent this week against an expectation of 7.21 percent. Inflation is currently well above the central bank's comfort zone of around five percent. In its annual report released on August 30, the central bank forewarned of an increase in price pressures, due to shortfalls in farm production and infrastructure, which would spur inflation and curb growth.
In the Indian context, food prices play a big role in inflation because food items have a larger weight in the indices here. As many live on sustenance wages, even a marginal increase in price of food items becomes unbearable. These have large political ramifications. Inflationary pressures could increase, as oil prices are now at $105 a barrel. But on the flip side, the government has announced that the southwest monsoon, crucial for the nation's agricultural economy, would be normal this season. How factors influencing inflation will play out will have a crucial i m p a c t, going forward.
Moderation in growth
The domestic stock markets had factored in the worst in the prices of all stocks. The markets rallied most part of last week due to there being no bad news. From the results declared, it appears as though the economic growth will begin to moderate in the coming quarters. That moderation, given last year's robust growth rate of 9.4 percent, may be at 8.2 percent. But given the global context, this is indeed a very good figure.
Investors here have been resilient to the Reserve Bank of India's (RBI) rate hikes due to a dramatic growth in incomes. If the growth for the fiscal year does reach the central bank's forecast of 8.5 percent, it will be only marginally below the 8.6 percent average achieved over the past four years.
The RBI is due to announce the annual credit policy on April 29 and economists are expecting a hike in the cash reserve ratio (CRR). Some are of the opinion there could be a bank rate hike too. Overall, the growth momentum is still expected to remain notable, despite the anticipated slowdown.
Policymakers hold key
Inflation remains the biggest threat to this outlook, and supply-side factors, if not dealt with appropriately, could render these growth rates unsustainable. The key to the problem lies in how deftly the policymakers, both RBI on the monetary front and the Government on the fiscal front, control inflation without damaging growth too much. Hence, the future of the stock markets is in the delicate balance between growth and inflation.
