Clutching at straws.

The stock market jumped 1.81%, that is over 375 points, yesterday when the Consumer Price Index for December came in at 9.87% as compared to 11.16% in November. Vegetable prices have been falling in recent weeks, some vegetables which cost Rs 80 per kg are now available at Rs 20 a kg. The Congress has been pushing for lower interest rates, saying that retail inflation was due to the high cost of food which is driven by seasonal supplies and not controlled by monetary policies. Vegetable prices have dropped by around 30% but retail inflation has dropped by just 10%. That is because food grain prices cannot drop as they are set by the government, which pays higher than market rates to farmers, and then hoards the grains to be distributed at very low rates under the Food Security Act to buy votes. Since grains are also used as fodder for animals prices of meat and milk continue to rise. By March when the effect of the abundant monsoon starts to fade vegetable prices will rise again. So what explains this exuberance of the stock market? The markets are rejoicing because they feel that this will reduce pressure on the Reserve Bank to increase interest rates, never mind that at almost 10% retail inflation is still higher than interest paid by banks on term deposits, which means that savers are still losing out. The reason is the growth that the Congress keeps banging on about was mainly due to extraordinary borrowing by companies. As of September, 2013 3700 companies had a combined debt of Rs 24 trillion, which is one quarter of our GDP, and of this Rs 8 trillion was with companies whose interest payments exceeded their operating profits for that quarter. Scary stuff. " We are learning the lessons of growth," said Arundhati Bhattacharya, Chairperson of SBI, India's largest lender. What she means is that the growth was a mirage fueled by debt. If inflation stays high, pushing interest rates higher, companies may default on their loans leaving banks struggling with massive bad debts. Another reason for cheer is that if interest rates were to remain high property prices may crash as people will refrain from taking mortgages to invest in properties. Since most of the black money is invested in properties any fall in interest rates causes euphoria. People tend to clutch at straws when they are drowning.