- Wealth PMS (50L+)
Inflation at 11.4% today and the folks on CNBC are jumping around in excitement. I usually don’t watch business news, but today I have this viral fever and couldn’t help but watch the gyrations of the anchors as they squirmed to explain the inflation. All of them blamed oil price increases, and one of them said non oil stuff is also going like crazy, and they even predicted that at this rate inflation would be 16% by the end of the year. (If it grew 0.4% every week)
This is a stupid extrapolation. This 0.4% was this week. Last week the jump was 2% (at that rate inflation will be 100% in a year) and before that we had spells of rising inflation and slowing rates – so there can be no conclusion of this dramatic sort.
11.4% itself is meaningless. It is so high it is ridiculous. To even make a statement that it is higher or lower is of no consequence – at an absolute level inflation about 8% or even 6% is too high. After that it doesn’t matter how high, you have to do whatever it takes to bring it back down.
What is important is the policy reaction. The first reaction is to raise rates – not very effective because the bond market in India is not very liquid. (Issued bonds go down when rates rise, and that affects both short and long term portfolios and issuing companies – but we have very little liquidity in our bond markets)
The other reaction, and I really hope this happens, is the destruction of the dollar rupee equation. Take the dollar to Rs. 35 by selling, if necessary, even half the 300 billion USD we store for no real reason. That will destroy exporters, but inflation is a bigger problem – choose the better evil.
As crude goes up in value – today’s rates were 142 – we will have even more inflation. But that will go away – this is starting to look like a panic rise, almost. Iran has 20 VLCCs sitting in the persian gulf looking for delivery – and given that it is heavy sour crude, not much takers. It’s only when RPL comes online that more of this crude can be refined, but even that is only 0.66 million barrels per day (versus 85 million barrels per day consumed worldwide). Still the increase in refining capacity will bring down price somewhat, but for that RPL has to be operational.
Lastly, there is the entire issue of the next wave of the credit crisis – and if Lehman and Citi are affected there are bound to be more outflows.
So what do I make of the picture. Bad. Very bad. While there may be pullbacks, unless something dramatically good happens, we are going down further.
Disclosure: Am short the Nifty.