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Economy

How far from Deflation?

How far from Deflation?
Deflation is just about there, on a wholesale price basis. It’s true though, that at a wholesale level, prices of food seem to be going up. Yet, that is seasonal – and soon, with crop harvests going through, we’re likely to see that ease off as well.

We’ve not had deflation for a VERY long time – since before Independence. Watching the RBI tackle it will be intereesting, with bond yields staying about 6.5% (they closed at 6.62% today, a 20 bps drop from Friday).

Deflation takes an enormous amount of time to even out. People raise prices immediately. But the other way around takes time. Can you imagine going to your boss and saying ok, we have deflation, so I’ll take a pay cut? The answer applies to everyone then, from vegetable vendors to car manufacturers.

  • Technovestor says:

    >India, and will enter into recession.. never (my thoughts a year back)…… Deflation, well it was out of my realm of remotest possibilities for India.

    this caused me to buy 3 Indian tech stocks with a vengeance last april to september, thinking they are already fairly priced and when global turnaround happens, these will bounce back.. couple of them are about 40-50% down, one is around 70% down (aaah!!!!)..

    i should have been patient, maybe was over ridden by the india story.. although i had entered with 3/5 year perspective, the timing seems to have been drastically wrong..

    deepak, hats off to your predictions on india as well.. i dont know what is it with us indians – while we were probably all agreeing that the world is going through crisis, blah blah last year,… very few of us actually (fund managers included) were short on india.. Is it we have some kind of bias, an extra emotional string attached towards the country which sometimes affects adversely ? Or is it just me

  • Anonymous says:

    >Hi..

    Is there a way to explain deflation that is understandable? I mean something like deflation for dummies.

    I have been through Wikipedia and the usual sources and I still cant understand why falling prices are such a bad thing..

  • Siddharth says:

    >Ok Deflation= prices falling.

    Does this means that the term insurance premium what is currently will also come down during ‘deflation’. As I see as per the tables my age is increasing whether deflation or not. (lol) So more I wait more premium I will have to shell out and even if the premium per 1000Rs comes down, by that time my age which may have increased by a year will adjust for the new rates. At the end possibility is that no gain in waiting.

    On the funny note I got to be horrendously optimistic to expect the insurance co’s to lower the insurance premium (pure risk term)in Deflation!!
    cheers

  • Anonymous says:

    >deflation is more mathematical than real. In a country like india where there is unmatched demand for everything ..real deflation is not something RBI would worry about. Instead RBI will do more of buying back long term securities so that long term interest rates come down and real interest rate remains below 2-3%. That probabily is more sensible
    for a country like india. cutting repo /reversrepo will not be passed easily untill unless bond rates come down. So instead of cutting interest rates RBI might be inclined to buyback bonds..

  • Deepak Shenoy says:

    >Unmatched demand? Uhem. Deflation takes a lot more time than inflation to hit the road – and that doesn’t just bring down prices – it takes away goods. Bunching inventory at the manufacturer, deflation ensures that either they go bust or refuse to supply – meaning, those cheap cars you see have no way to come to you, even if you have the money.