Archive for April 29th, 2008

Does appreciation of the currency lead to lower inflation?

April 29, 2008

I came across this interesting table in RBI’s Macroeconomic and Monetary Developments 2007-08. The table (Table 35) is in Chapter 4 – Price Situation.

The Table summarises the Macroeconomic Indicators in a few emerging markets:

Country Consumer Price Inflation Real Efective Exchange Rate
Mar-07 Mar-08 Mar-07 Mar-08
Brazil 3 4.7 -0.3 13.6
China 3.3 8.3 2.1 5.3
Indonesia 6.5 8.2 0.5 -6
Israel -0.9 3.7 2.8 8.8
Korea 2.2 3.9 0 -13.5
Philippines 2.2 6.4 2.9 9.6
Russia 7.4 13.3 5.1 5.3
South Africa 6.1 10.6 -16.8 -12.1
Thailand 2 5.3 7.6 2.6
India 6.7 5.5 0 1

The table shows that despite appreciation of the currency in some countries, inflation has increased. Why do I point this? Well, oft late there has been a lot of debate over this topic. Some economists have suggested that RBI should let the currency appreciate and this will take care of inflation. Some have said this is the only tool RBI has.

But as the  table shows it has not really worked in other countries. For instance see Brazil, China, Israel, Phillipines, Russia, Thailand- in all currency has appreciated between 2007-08 but the inflation has actually increased. The inflation numbers are based on consumer prices and that is why we see lower inflation. I have raised this issue over measuring inflation over wholesale prices and consumer prices here.

Infact, inflation has increased whether the currency has appreciated or depreciated. This is a global phenomenon with rising food prices (see my research here).  

Capital flows in India: Are they really good?

April 29, 2008

I have written a paper applying the Rodrik-Subramaniam framework on India. I had mentioned in a post earlier on the new framework proposed by the duo. I expanded on the thoughts and put it together on a paper.

Let me know of your comments.

RBI’s Annual Monetary Policy Review 2008-09

April 29, 2008

RBI announced its monetary policy for the financial year 2008-09. The highlights are here and the detailed policy is here.

The much awaited decision on interest rates is:

  • Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
  • Scheduled banks required to maintain CRR of 8.25 per cent with effect from the fortnight beginning May 24, 2008.
  • RBI didn’t change the policy rates but just increased CRR. This implies RBI is more concerned over excessive liquidity and believes that interest rates have peaked. Higher policy rates could further slow the growth.

    Prior to the policy, I had pointed thatRBI was into a dilemma. The markets expected that inflation is going to be around 7%-7.5% over 2008-09 and this would warrant a hike in interest rates. RBI’s preferred inflation is around 4.5% to 5% and the expected numbers are much higher. But growth rates have moderated across sectors (it is still high relative to the world) and a further hike could slower growth further.

    So, any change in rates could harm either inflation or growth. Still, the Bloomberg/Reuters Polls showed RBI would take a hawkish stance over rising inflation and hike rates. By not increasing rates RBI is trying to balance growth and inflation.

    What however worries me is that RBI expects inflation to be around 5.5% in 2008-09 which looks really difficult looking at the present numbers

  • Inflation to be brought down to around 5.5 per cent in 2008-09 with a preference for bringing it close to 5.0 per cent as soon as possible. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes a medium-term objective.

    RBI has also announced prudential measures to address banks exposure to commodity markets and look at special purpose vehicles/off balance sheet activities of banks.

  • I will keep adding to this post as I am still reading the report.

    The viewers should also take a look at Macroeconomic and Monetary developments released yesterday.


    Another important point to note is that RBI’s targetted growth in Money Supply (M3) is 16.5% -17%. Chapter 3 of Macroeconomic and Monetary developments shows the M3 growth. It is about 21% in 2007-08. Hence, RBI might be taking some more measures to suck excess liquidity from the system.  

    Assorted Links

    April 29, 2008

    1. WSJ Blog points SWFs are being welcomed in Washington. Meanwhile, one of the former Fed official says bailout of Bear Stearns was the worst policy mistake in a generation.

    2. The debate between Rodrik and Cowen hots up a bit with Cowen clarifying his piece

    3. PSD Blog points Bill Gates foundation moves into agriculture.

    4. DB Blog on reforms in property registration system in Honduras

    5. CB Blog has some good posts. Pointsto Esther Duflo article on food price crisis, IRRI note on rice prices, and top 100 intellectuals

    6. Ajay Shah onwhat RBi should be doing in today’s monetary policy. He compares India’s financial system to China’s and criticises India’s policymakers. Another one on crony socialism.

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