India caught in a hyperinflationary spiral!

India's economic conditions are getting from bad to worse. If oil prices continue to stay this high, India is, without doubt, going to go bankrupt.

As oil prices go up, the govt will have to print more money to finance the oil bonds, which means more inflation. To keep inflation in check, RBI increases interest rates. Interest rates may be high, but in real terms, they are still negative. India's fiscal deficit is mostly funded by short term t-bills (70% or so). So basically, a rise in interest rates completely messes up Praknob Mukherjee's budget numbers. So there is more money printing and the spiral continues.

The end game is that India will become a Zimbabwe!

the situation does look grim at the moment. even the RBI expressed skepticism during the latest rate hike. but zimbabwe? is it really that bad?

zimbabwe (from wikipeda)

http://en.wikipedia.org/wiki/Zimbabwe#Hyperinflation_2003.E2.80.932009 wrote:

As of November 2008, unofficial figures put Zimbabwe's annual inflation
rate at 516 quintillion per cent, with prices doubling every 1.3 days.
.
.
.
On February 2, 2009, the RBZ announced that a further 12 zeros were to
be taken off the currency, with 1,000,000,000,000 (third) Zimbabwe
dollars being exchanged for 1 new (fourth) dollar. New banknotes are to
be introduced with a face value of Z$1, Z$5, Z$10, Z$20, Z$50, Z$100 and
Z$500.The banknotes of the fourth dollar were to circulate alongside
the third dollar, which remained legal tender until 30 June 2009

Huzefa Kapasi wrote:but zimbabwe? is it really that bad?

Chicken Little Chatterjee tends to get carried away by his simplistic XL-based models. Don't let all that drama-queenish hyperventilation scare you.

Just as the INR runs the risk of devaluation due to inflation, so do other currencies. How, for instance, do you think are all those QExes and the wars being funded?? This fiscally imprudent race to the bottom will ensure equilibrium in the relative valuations of currencies. If anything, secular investment inflows (FDI and FII) into India drawn by the large growing economy puts an upward bias on the relative value of the INR. That's why you're seeing the Rupee at Rs 44-45 instead of the Rs 46-47 last year despite oil prices hitting a high.

yes, what you say makes sense. *phew* but i really wonder how folks function in a hyperinflationary economy like zimbabwe. that old joke -- it's cheaper to travel by taxis than a bus in such a situation 'cos with taxis, you pay the fare only at the end of the journey -- does not sound like a joke anymore.

I think chatterji is absolute zero's alterego with a dash of uppilanicus thrown in, with that chickenlittlish personality and tendency to take credit for everything. he is probably heavily invested indirectly or directly in india and these predictions are his way of dealing with that tension.

Propagandhi711 wrote: he is probably heavily invested indirectly or directly in india and these predictions are his way of dealing with that tension.

i think so too!

[quote="Merlot Daruwala"]

Huzefa Kapasi wrote:but zimbabwe? is it really that bad?

Chicken Little Chatterjee tends to get carried away by his simplistic XL-based models. Don't let all that drama-queenish hyperventilation scare you.

There is a distinct difference between US and India. The US financial system, and the almost 90% investment people have in stock markets, make it more amenable to federal control. Infact they are toying with using money market funds to fund deficit, rather than sell bonds to China.

In India, with a big portion of the economy being black, policy options like interest rates have only limited effect. Infact Finance minister was on record, when he mentioned a couple of years back, that fighting inflation is not easy in India, as the RBI has limited leverage. Clearly real inflation (notwithstanding the skullduggery did by UPA, where they changed the basis year for inflation, to keep official figures low) is high, especially food inflation. In terms of how much the Rupee goes, clearly it buys only 1/2 to 1/3rd of what it bought in early part of this decade, if you consider common house hold purchases, food, groceries, eating out, transport and allied services. Salaries have not gone up by that much. We can always argue that a part of price increase is also driven by demand increase. But then it points to regulatory failure. This would mean that in real terms, the Rupee is devaluing by an alarming rate of at the least 100% over the past 5 years, even after discounting out demand increase, as far as the lay person is concerned. For somebody buying a Car or a cellphone, it is actually better, because they would not have got a Nano/cellphone at this price 5 years back. But not so for majority of the household repeat purchases.

But you have to agree, that keeping the interest rates high (the only policy option available to the government) is a not sustainable. To protect lay people & Senior citizens, they also increase the deposit rates on Savings bank and Fixed deposits and also on EPFO and other pension funds (thus increasing future liabilities), without a clear plan on how to fund them. This would mean that the Banks now have to charge much more for its corporate loans. This is how Bulk of the Banks make money. Now who does it ultimately hurt, the small & medium business sectors which make up more than 50% of the Indian economy and this ultimately throttles future GDP and per capita GDP growth, and wealth creation. Where ever possible, Big Business gets away by borrowing from abroad at cheaper rates, but they can do so only for some limited projects and it causes more overheads. Clearly they need to do something to control this trend. In addition, Inflation reduces the value of hard earned savings silently.

i am very worried about the current inflation scene (petrol hiked by rs 5 per litre and soon diesel to be). evidently indian economy is going to be in high inflation for the next 5 years at least (it is already the second most inflationary country in BRIC after russia).

as an investor, where should one invest (one's savings) to beat inflation (to just be at par and not try to profiteer)? gold, silver, dollar, real estate? stocks are not an option here.

Huzefa Kapasi wrote:
as an investor, where should one invest (one's savings) to beat inflation (to just be at par and not try to profiteer)? gold, silver, dollar, real estate? stocks are not an option here.

>>I have heard about TIPS. Treasury Inflation protected Securities. Supposedly it gives you a rate of return better than Inflation rate. The catch, government inflation rate figures (which is based on prices of a bunch commodities and common household items), may not equal the real inflation rate OR may not even be realisitc.

>> I am pretty sure Dollar will go down. Question is will you buy the Euro or Australian Dollar OR the INR ?

>> It would be interesting to know how Stocks would react to inflation. On the one hand they might boom, just to keep up with the inflation, on other hand, with the inflation going up, and denting future growth and reducing savings (effectively), stock markets might price in future GDP growth reductions and might go down. With inflation going high, interest rates would go high, so this would give a lesser incentive for people to invest in Stock Markets, and people might pull out money from Stocks to Bonds. in addition, housing loans would get dear, and it might slow the recovery in Housing. So contrarian factors are in play here. Hope some of the folks here who might be knowledgeable on this, can provide some links about the correlation between Stocks and Inflation.

higher inflation means higher interest rates. industries have to borrow money from banks at higher rates and this affects their profits. after RBI raised interest rates by 50 bps recently, companies which have taken debts went down (larsen) because they now have to pay more money to banks in interest eating their money. of course, that does not affect debt-fee companies.

regards
captain obvious

but large corporations can raise/swap-with overseas debt to bring down the cost of borrowing.

i don't know to what extent that is possible. i would imagine every organization would then want to do that.

ok, overseas debt would also be subject to fluctuations in dollar-rupee exchange rate, so it might not be such a good idea after all.

Ya! I'm the chicken little......and you guys are not Goldilocks sleeping in a bear cave.

There are several differences between the US economy and the Indian economy. First of all, if you haven't been paying attention, India is selling it's family silver in order to pay it's gas bills. Have you not seen the plethora of public sector companies moving to private hands? Why? Because Indian govt desperately needs cash.

RBI may raise rates, but in real terms, it is still NEGATIVE (Inflation rate is far higher than interest rate).

YES - the USD is collapsing, but that is by design. The US govt is desperately trying to wean China and India off the dollar peg. But China and India insist upon maintaining the peg, even at the cost of killing their domestic economy.

If India wants to grow, it has to tether the USD-peg and let the rupee rise. That will bring down commodity prices and inflation will come down somewhat. However, at this stage, nothing is going to help because IMHO it's too late.

The economy will continue to spiral out of of control because they cannot control the deficits and the deficits will be funded by more money printing. If RBI raises rates, it means more interest payments by the govt, which means more money printing.

The only way to get out of the problem is to default...which would be cataclysmic to all asset classes. All roads point to a dramatic shakedown in India and China which might bring down world markets.

In the past, problems in the US brought down world markets. This time around, China and India will be responsble for bringing down the markets.

The only safe investments today are USD (short term treasuries), gold..and maybe a few big cap safety plays like PG, MSFT, etc.

Buyer beware.

Sir, I've no idea what you're smoking. The INR is not pegged to the dollar or to any other currency. The RBI has not intervened in the currency markets for atleast the last 3 years.

A word of advice: it might help if you stop hyperventilating and start reading up on basics. Facts might be for morons, but they'll certaintly stop you from making preposterous statements like the ones above. HTH.

Merlot Daruwala wrote:Sir, I've no idea what you're smoking. The INR is not pegged to the dollar or to any other currency. The RBI has not intervened in the currency markets for atleast the last 3 years.

A word of advice: it might help if you stop hyperventilating and start reading up on basics. Facts might be for morons, but they'll certaintly stop you from making preposterous statements like the ones above. HTH.

Oh please!! Don't run to the bank after reading the headlines. Pay attention to the fine print, because the devil is in the details.

India doesn't have an overt peg to the USD..that's pretty obvious. But RBI intervenes extensively in the currency markets to keep the INR from rising too much. Let me pull up references.

harharmahadev wrote:India doesn't have an overt peg to the USD..that's pretty obvious.

Ok, then don't use words like "USD-peg" when you obviously know that there is none.

harharmahadev wrote:Let me pull up references.

Haha, ok. No offence, but I won't hold my breath.

First of all, let us get our facts straight:

Fact No 1: Indian govt fixes the price for fuel. Fuel is sold below cost. The losses are partly subsidized by the Indian govt. This creates fiscal deficits. The rest of the losses are absorbed by the oil companies (ONGC, GAIL, etc) and OMCs. This is an indirect loss, since most of the oil companies are govt run enterprises. Here's the link for reference:

http://news.in.msn.com/business/article.aspx?cp-documentid=5196233

In 1960s, it was mal nutrition and food
In Late 1960s , It was over population
In 1970s, It was unemployment
In 1980s, it was lack of growth
1n early 1990, it was bankrupt economy
In late 1990, it was sanctions due to N Bombs
In early 2000, It was RSS
In late 2000, It was faster growth leading to inflation
In 2011, it is hyper inflation again

And cover story for the past 3 decades was Terrorism.

But somehow Indian people survive, prosper and move forward. Not suggesting there are problems or dark clouds or hidden tsunamis. India is one sixth of world population. IT will continue to survive and move forward. Make sure you are not crushed under its gaint wheels.

Read as : "Not suggesting there are NO problems or dark clouds or hidden tsunamis. India is one sixth of world population.

Haha...sir, let me remind you that you were supposed to give references to back your claim that "the RBI intervenes extensively in the currency markets to keep the INR from rising too much."

While the FinMin's deficit financing of oil subsidy is undoubtedly an impressive sleight of hand, how, may I ask, is it any evidence of intervention by the RBI in the currency markets?

truthbetold wrote:In 1960s, it was mal nutrition and food
In Late 1960s , It was over population
In 1970s, It was unemployment
In 1980s, it was lack of growth
1n early 1990, it was bankrupt economy
In late 1990, it was sanctions due to N Bombs
In early 2000, It was RSS
In late 2000, It was faster growth leading to inflation
In 2011, it is hyper inflation again

And cover story for the past 3 decades was Terrorism.

But somehow Indian people survive, prosper and move forward. Not suggesting there are problems or dark clouds or hidden tsunamis. India is one sixth of world population. IT will continue to survive and move forward. Make sure you are not crushed under its gaint wheels.

Are you TBT3 from Sulekha CH? If so, very glad to see you, and welcome to the new CH!

Merlot Daruwala wrote:Haha...sir, let me remind you that you were supposed to give references to back your claim that "the RBI intervenes extensively in the currency markets to keep the INR from rising too much."

While the FinMin's deficit financing of oil subsidy is undoubtedly an impressive sleight of hand, how, may I ask, is it any evidence of intervention by the RBI in the currency markets?

I just got done chatting with Subbu. He told me that RBI intervenes in the currency market. Here's a snippet from the email he sent me:

"We intervene extensively in the currency market!"

We good now?

I'm trying to find you the article on the INR USD....time lagta hai, bhai!

http://www.sirchartsalot.com/article.php?id=87

The above is an old article but valid nevertheless, since the basic trend is still in place. Here's a reference of facts:





As you can see, INR has anchored itself to the titanic. INR is dropping against almost all major currencies except the USD. I'm trying to find the article where Subbu himself talks about RBI intervention....googleshwar isn't helping me this time.

truthbetold wrote:In 1960s, it was mal nutrition and food
In Late 1960s , It was over population
In 1970s, It was unemployment
In 1980s, it was lack of growth
1n early 1990, it was bankrupt economy
In late 1990, it was sanctions due to N Bombs
In early 2000, It was RSS
In late 2000, It was faster growth leading to inflation
In 2011, it is hyper inflation again

And cover story for the past 3 decades was Terrorism.

But somehow Indian people survive, prosper and move forward. Not suggesting there are problems or dark clouds or hidden tsunamis. India is one sixth of world population. IT will continue to survive and move forward. Make sure you are not crushed under its gaint wheels.

Malnutrition, overpopulation, chronic unemployment, inequitable growth, rampant debt problem, overregulation (self-sanctions), social problems (corruption, communism, etc), hyperinflation - all these problems still persist and thrive. Nothing has been solved. You have only added new problems to the mix.

Liberalization has opened up a few sectors and a handful of the population have done very well for themselves. However, as a whole, the country is still struggling to cope with the age old issues.

funny how you say basic long term trend and they show a 9 month chart from july '10 to mar '11.

harharmahadev wrote:
Malnutrition, overpopulation, chronic unemployment, inequitable growth, rampant debt problem, overregulation (self-sanctions), social problems (corruption, communism, etc), hyperinflation - all these problems still persist and thrive. Nothing has been solved. You have only added new problems to the mix.

Liberalization has opened up a few sectors and a handful of the population have done very well for themselves. However, as a whole, the country is still struggling to cope with the age old issues.

it is true that Indians are richer than they were two decades ago. it is true that lesser and lesser people are going to bed hungry (not because they frequent self-service restos and wait for their "self" to arrive). however, some of the problems you have mentioned cannot be ignored. population, inflation and sucky infrastructure are major concerns. indian cities are the worst in the world and i think they will implode soon (if they have not already). i live in pune and this city is an example of how not to build cities. mumbai is 10X worse than pune. i imagine most cities (except c'garh) are no different.

quality of life is highly subjective. however, indian cities do not have sufficient parks, maidans, art galleries, museums and libraries - not insignificant things for one's upbringing.

i disagree with your malnutrition argument. i am not denying it, but the situation has improved over the years.

If one is interested in understanding what the future of India looks like, one needs to carefully read the attached document on the Mexican Peso Crisis:

http://www.frbatlanta.org/filelegacydocs/J_whi811.pdf

There is a LOT of similarities between the two.

Merlot Daruwala wrote:

harharmahadev wrote:India doesn't have an overt peg to the USD..that's pretty obvious.

Ok, then don't use words like "USD-peg" when you obviously know that there is none.

harharmahadev wrote:Let me pull up references.

Haha, ok. No offence, but I won't hold my breath.

http://economictimes.indiatimes.com/news/economy/finance/rbi-taking-steps-to-deal-with-rupee-fall-finmin/articleshow/10957192.cms

We good now? Can I say I told you so? Need more proof? Do you want the finance minister or RBI governor to come to your house and whisper it in your ear?

harharmahadev wrote:

Merlot Daruwala wrote:

harharmahadev wrote:India doesn't have an overt peg to the USD..that's pretty obvious.

Ok, then don't use words like "USD-peg" when you obviously know that there is none.

harharmahadev wrote:Let me pull up references.

Haha, ok. No offence, but I won't hold my breath.

http://economictimes.indiatimes.com/news/economy/finance/rbi-taking-steps-to-deal-with-rupee-fall-finmin/articleshow/10957192.cms

We good now? Can I say I told you so? Need more proof? Do you want the finance minister or RBI governor to come to your house and whisper it in your ear?

Eh? Are you delusional? The Rupee is already down some 15% against the Dollar since September and you continue to cling on to your belief in a "dollar peg"?? Do you even understand what a peg means?

Just so you can be cured of this illusion for good, here's Subir Gokarn informing the whole world - not just whispering in my ear - how the RBI is not targeting any specific exchange rate but is only looking to smooth out sharp movements with its perfunctory interventions.

Can we restart this discussion?