Wednesday, March 30, 2022

It's impossible because it is not possible.

"The RBI on Tuesday announced a $5 billion sell-buy swap auction on April 26, the second such auction is as many months. The first one, also of $5 billion, was done on March 8," TOI. "Under a sell-buy auction, the RBI sells dollar and takes in rupee from the buyers of the US currency. Through such auction, the central bank would be able to suck out liquidity from the banking system." This is aimed at increasing the exchange rate of the rupee against foreign currencies which will bring down the cost of imports and thus control inflation, while tightening liquidity will force banks to increase lending rates. "India's central bank may have to pay a bigger price for ignoring inflation by tightening interest rates much more aggressively later, like the Federal Reserve is doing now, according to the nation's largest asset manager," Mint. In the US, The consumer price index (CPI) rose by 7.9% year-on-year in February, CNBC. Yet, inflation in the US has been low historically, just 1.23% in 2020, macrotrends, and the Fed has been trying to bump it up, wrote Ajit Ranade. "Where was inflation hiding?" "The Dow Jones Industrial Average was 8,000 in January 2009 and is now over 34,000. That's up fourfold." "Housing prices have risen faster than US gross domestic product (GDP) in this decade." Thus, inflation was hiding in asset prices in plain sight. Savings of Indians have reached a record 4.8% in stocks, while it is 49% in real estate, TOI. "The Reserve Bank of India has confounded market expectations with its accommodative policy even as inflation breached its 6% limit for two months." However, "Amidst the ongoing invasion of Ukraine by Russia that has impacted global oil and commodity prices, bankers and analysts expect the RBI to continue holding rates in the next monetary policy review in April," Hindu. The RBI expects retail inflation to come down to 4.5% later this year, which would be within its target mandate of 2-6%, BS. The problem in India is that our CPI basket of goods and services contains items no longer used, so our monetary policy is based on wrong readings of inflation, FE. True, but outdated items constitute a very small part of the CPI basket, wrote Pramit Bhattacharya. "The 2017-18 National Sample Survey (NSS) consumer expenditure survey showed that the share of food in overall consumption went up 1.6 percentage points to 47.5% between 2011-12 and 2017-18. The survey results were junked by the government because they showed a dip in rural consumption." The RBI projects inflation expectations from a survey of 6,000 urban respondents, ignoring rural households, so its monetary policy is wrong. "When expectations of future inflation are so high, people start factoring this in their wage demands, leading to higher wage inflation," wrote Vivek Kaul. The RBI is trying to push up the rupee by selling dollars but foreign investors have sold equities worth Rs 1.14856 trillion this year. They will repatriate the proceeds in their domestic currencies. "The real problem will start if and when they start selling out of bonds as well." The RBI may think that it can make the trinity possible. Others have failed.      

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