Two red rags to the bulls.

Politicians and business fellows are seeing red. The Wholesale Price Index was - 4.05% in July. Wholesale prices have been falling since January because of weak commodity prices globally. This time the Consumer Price Index has come down to 3.78% in July after a tiny uptick in June when it was 5.4%. RBI Governor, Raghuram Rajan wants to maintain a real interest rate of 150 to 200 basis which means he can cut repo rate a hefty 1.25%, from 7.25% at present down to 6%. In theory, that will bring down the cost of borrowing and allow industries to set up new projects, adding new jobs, increasing tax collection and boosting growth. The high interest rate has not subdued car sales which grew by a robust 17% in July. Total number of Indians holding credit cards is a minuscule 20 million who spent a total of Rs 171 billion last year. This means that people buy only cars and real estate with bank loans. If car sales are buoyant despite high rates why are our movers and shakers squealing for rate cuts. Because real estate is in the doldrums and massive amounts of black money is stashed in properties. If property prices crash, as they should, to reflect market reality, they will lose heavily. It takes a lot of effort to make black money, involving enormous risks of feeling the heavy hand of the law on your collar, so it will hurt to see it vanish. The government has enacted a stringent black money law which must be scaring the bejesus out of these fellows, hence the enormous rage against the government and the Prime Minister. That maybe why no bill was allowed to pass in the monsoon session of the parliament. It may not be a question of interest rate and price indices. The rupee has been under pressure ever since China devalued its own currency, the yuan. If the rupee is overvalued our exports will fall further. Our exports have fallen for 8 months in a row and cheaper Chinese exports may hurt our exports even more. There is concern that other countries may weaken their currencies to stay competitive. Many African countries use the yuan for business or hold yuan as foreign currency reserve. So, the RBI may have to cut repo rate to bring down the value of the rupee. But how will it control the fall? Once the Chinese devalued the yuan the markets took that as a sign that the currency would fall further and started selling out. The government has been supporting the yuan to control the fall. China cut its interest rate to a historic low of 4.85% to support its stock market. It can do that because its inflation rate is just 1.5%. Our retail inflation at 3.78% is higher and may rise if a weaker rupee increases cost of imports, especially oil. The strength of the dollar and the Chinese moves have made it unnecessary to increase interest rate in the US but the Federal Reserve may be forced to increase rate by 25 basis points under sustained Republican attacks. The WPI and the CPI are red rags to the bulls of interest rate. How will the RBI manage them?