Via IlaPat's Notes [May-2021]
The US economy has been perhaps over-heating, recovering rapidly. They have given huge fisical stimulus, likely to give further stimulus. And kept monetory policy loose, the combination of both leading to inflation.
US is considering targetting rates above 2%, to compensate for the below 2% that existed for a long time. This proves the demand in US could remain high, while that is affecting commodity pricing. If federal banks don't step in, to dampen the growth, commodity pricing will be always continue to be volatile, due to lack of haptic. MP meeting 5.2% inflation in 1st half of the year, If we continue to have higher global inflation, and the rupee continues to depreceate, due to the fisical policy, the interest rate differential has gone down by 1.5%, and regularly new instruments are introduced to keep the interest rates low, which might be frowned upon as currency manipulation, but in the best interests for the economy, its really not what it seems. If you have a high global inflation, and a weak rupee, imported inflation will increase. That combined with locally, supply side shocks will lead to breach.
What impacts the rupee?
- Debt - Interest rate differential -- If IRD gets narrowed, money flow, more COVID deaths could ensue. Mostly money going out of the system, that weakens the rupee.
- "Growth expectations could go down" due to repeated lockdowns. Most foreign investors, FIIs end up pulling money from the system. India doesn't have too much of foreign debts, but major banks like Citi end up leaving India, due to difficulties in recovery. And, there is a marked reluctance by many Indian corporates to buy their assets as well, which throws the nation in a poor light, and risks sovereign ratings downgrade.
Currencies move based on people's expectations. RBI interference to strengthen the rupee? RBI is continuing to buy dollars, and that's helping US Economy in a big way. Raising of rates depends on the outlook for inflation. #2, If the cause for the inflation is temporary or permanent. CPI eased to 4.06 per cent in the month of January 2021. NID vs CPI - NID is GDP deflator, also called implicit price deflator, is a measure of inflation.
Past 5 years, NC has increased by 127% as similar to 456% growth during the dot-com bubble on a heyday. The "bubble behavior" characterized by modestly exuberant market behavior. If Mr.HNI buys a luxury villa in UK, the markets gamble on his company's related stocks, and most often create a demand, and impact P/E.
Q: Does reservation policy help in social mobility? Cost-Price Inflation 4+/-2 Q; How long does it have to be above 6 that RBI needs to be feeling that we have to raise rates? RBI, or any other central bank raises the rates based on the outlook for the inflation, #2 if the inflation is temporary or permanent. If there are factors that would have to stay, and worry this would be persistent, then RBI might start raising rates.
Q: Are we creating acid bubbles? Yes, there is concern, but its not the actual problem. Stock markets, depends on various factors.