For the 14th time, since Mar 2010, Reserve Bank of India (RBI) is likely to raise interest rates again on Tuesday.
That could be a record on rate hikes!!
The purpose of all these rate hikes is to curtail inflation, especially food inflation. However, the recent inflation figures show that the overall inflation, especially the food inflation remains high at 10% or slightly higher.
Evidently, the rate hikes are not working. But it seems that RBI is bent upon doing the same thing again and again to reduce inflation (Someone told sometime back that one of the symptoms of lunacy is doing the same thing again and again and expect a different outcome!)
Financial Thoughts view India's inflationary scenario differently as follows:
1) Interest rate hikes + Petroleum product (diesel, etc.) prices will ultimately drive up the cost of production at farm level.
2) The food prices in India are lowest among the world. That means the farm profitability in India ought to be among the worst in the world. No wonder many farmers in Andhra Pradesh decided recently to leave their farm uncultivated. If you travel through the picturesque Kuttanad region of Kerala state you can see hectares after hectares of agriculture land uncultivated, just because it is no longer profitable.
3) A recent article on rice exports has shown that the rice from India is the cheapest in the world. (http://gulfnews.com/business/economy/indian-rice-exports-will-rise-as-floods-cut-thai-supplies-1.903088). This implies two issues (i) there is potential to charge more (ii) if the profitability of the uncultivated farm lands are ensured, the supply would increase, partly contributing to the Supply in the Indian economy which would ease inflationary pressures
4) Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008
5) The solution for the inflation in India is increase the Supply side. A booming India has insatiable demand for more vehicles, better food, better & new road networks, travel facilities, more air ports, better ports, more metro railways, and other infrastructure facilities. But the mind boggling corruption at the high places is stifling the Supply side. Billions worth of infrastructure projects are not yet approved or actioned by several government (both central / state) levels either fearful of intrusive media/investigation agencies by honest officials or just because the dishonest ones negotiate better bribes as there seems to a rapid inflation in bribe rates as well.
As Infosys Chairman Mr Moorthy mentioned, after all it may be better to legalise corruption in one way or other - as some of the western countries legalised prostitution!
6) Let the food prices increase and let it stabilise at a higher level (than current levels) so that the farming becomes a highly profitable venture so that the teeming millions of India can turn to farming, instead of turning away from it and migrate to cities, which in turn chokes them and create infrastructure nightmares.
Based on the news and information, it appears that the rate hike is highly likely. That could trigger a stock market correction. Hence, I am going to take protection for my portfolio through some cheap puts and preparing to buy selectively as the market crash could possibly offer some good stocks at deep discounts.
Happy investing!
That could be a record on rate hikes!!
The purpose of all these rate hikes is to curtail inflation, especially food inflation. However, the recent inflation figures show that the overall inflation, especially the food inflation remains high at 10% or slightly higher.
Evidently, the rate hikes are not working. But it seems that RBI is bent upon doing the same thing again and again to reduce inflation (Someone told sometime back that one of the symptoms of lunacy is doing the same thing again and again and expect a different outcome!)
Financial Thoughts view India's inflationary scenario differently as follows:
1) Interest rate hikes + Petroleum product (diesel, etc.) prices will ultimately drive up the cost of production at farm level.
2) The food prices in India are lowest among the world. That means the farm profitability in India ought to be among the worst in the world. No wonder many farmers in Andhra Pradesh decided recently to leave their farm uncultivated. If you travel through the picturesque Kuttanad region of Kerala state you can see hectares after hectares of agriculture land uncultivated, just because it is no longer profitable.
3) A recent article on rice exports has shown that the rice from India is the cheapest in the world. (http://gulfnews.com/business/economy/indian-rice-exports-will-rise-as-floods-cut-thai-supplies-1.903088). This implies two issues (i) there is potential to charge more (ii) if the profitability of the uncultivated farm lands are ensured, the supply would increase, partly contributing to the Supply in the Indian economy which would ease inflationary pressures
4) Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008
5) The solution for the inflation in India is increase the Supply side. A booming India has insatiable demand for more vehicles, better food, better & new road networks, travel facilities, more air ports, better ports, more metro railways, and other infrastructure facilities. But the mind boggling corruption at the high places is stifling the Supply side. Billions worth of infrastructure projects are not yet approved or actioned by several government (both central / state) levels either fearful of intrusive media/investigation agencies by honest officials or just because the dishonest ones negotiate better bribes as there seems to a rapid inflation in bribe rates as well.
As Infosys Chairman Mr Moorthy mentioned, after all it may be better to legalise corruption in one way or other - as some of the western countries legalised prostitution!
6) Let the food prices increase and let it stabilise at a higher level (than current levels) so that the farming becomes a highly profitable venture so that the teeming millions of India can turn to farming, instead of turning away from it and migrate to cities, which in turn chokes them and create infrastructure nightmares.
Based on the news and information, it appears that the rate hike is highly likely. That could trigger a stock market correction. Hence, I am going to take protection for my portfolio through some cheap puts and preparing to buy selectively as the market crash could possibly offer some good stocks at deep discounts.
Happy investing!
