Inflation is baaack so are all kinds of controls on capital flows..

One is not sure what is really going on Indian economy. The harder the govt tries to absolve its past sins the  more the past sins are interested in catching up.  All things around are just melting. You can fool some people some of the time. all the people some of the time but not all the people all the time. This is what the government has been trying to do. By crowding itself with all the star econs, it feels economics is taken care of.

The measures to control rupee depreciation have failed to inspire. Though one can always argue the counterfactual that without these measures rupee would be headed to 70 by now.  Infact, whenever the measures are taken rupee goes for a further toss. RBI recently took further measures today to prevent capital outflows. So, slowly the measures to open capital account are being rolled back.

Meanwhile, all bond players would be wondering what sins have they committed. After few years of high inflation and record borrowing, market outlook  looked better. But all has been reversed. The bottomlines must be looking a different color than red.

Tomorrow, it is going to be one month since interest rates were tightened to boost rupee. The bond markets have been so volatile ever since then. The 10 year closed today  at 8.50%   after closing at 8.12% on last Friday. The yields shot up tracking Govts measures to mop liquidity by issuing shirt term bills for Rs 22,000 Cr. Further rates tightened today (closed at 8.40% yesterday) tracking higher than expected WPI inflation. WPI Inflation came in at 5.79% much higher than expected 5.1% – 5.2%. Core which was subdued for a while also shot up from 2% to 2.4% registering MoM gains.

CPI inflation has been consistently around 9.5%-10%. Core CPI also rose this month from 8% to 8.4%. So it is not just about food and fuel. But other items rising as well. Despite good monsoons and surplus foodgrains we continue to have food inflation in double digits. When will the government ever understand that inflation is a serious issue? FM and his team promise worry about FIIs all the time over their stock market gains. When will similar concern be shown towards citizens over this high inflation issue?

Even media just reported about weak IIP nos but not elevated CPI trends.  So, no one really cares much about inflation. Though hopefully, headlines would be different tomorrow over recent WPI trends.

High time RBi also starts to focus on CPI inflation. We have had this new series  for 2 years now and deserves a much higher policy weight now. Even old CPI series shows similar trends. Whichever CPI one takes, the trends are similar – inflation is too high for comfort. The question of why inflation remains so high despite growth  falling every month is an issue which needs a much broader debate than just the falling growth.

All looking pretty scary now. It is much like US, Eurozone where markets kept ignoring  economic weakness and then suddenly everything melted. We are seeing similar things happening in India as well. India’s Minsky moment seems to be striking…

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