Ignore the uncomfortable

"Three of the world's largest central banks took different approaches to interest rates last week," as "The Bank of Japan kicked off the action on 31 July by unexpectedly hiking before the Federal Reserve decided to stay on hold while signaling a potential cut in September. On 01 August, the Bank of England lowered borrowing costs for the first time since the start of the pandemic." "Euro area inflation unexpectedly quickened," "China's manufacturing unexpectedly shrank," and "Australia's core inflation unexpectedly decelerated." ET. "US job growth slowed more than expected in July, while the unemployment rate increased to 4.3%, which could heighten fears that the labor market is deteriorating and potentially making the economy vulnerable to recession." ET. The jobs report has activated the Sahm Rule, "an economic indicator created by Claudia Sahm in 2019," which "states that a recession is likely underway when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months." ET. "A recession is a significant decline in economic activity across the economy," and "is often defined as two consecutive quarters of negative economic growth." ET. India has no such problem. The debate is about the rate of growth of the economy and how the Reserve Bank of India (RBI) can turbocharge it to over 10% by cutting rates. In its June meeting, the Monetary Policy Committee (MPC) of the RBI projected India's GDP to grow at 7.2% in FY25 (April 2024 -March 2025) and consumer price index (CPI) inflation to average at 4.5%. It confirmed GDP growth at 8.2% in FY24. TOI. India's CPI inflation for June came in at 5.08% because food inflation rose by 9.36%. pib.gov.in. In news just out, the MPC in its meeting today left its policy rate unchanged at 6.5% and its inflation projection at 4.5%, even while expressing fears of high food prices because of excess rains due to La Nina phenomenon and higher oil prices because of geopolitical tensions. ET. The government's Economic Survey 2023-24 recommended that the MPC should target core inflation which would provide a more stable picture. ET. Core inflation is calculated by excluding food and fuel prices from the CPI inflation basket because their prices are volatile. Investopedia. "While the idea of such a target switch is tempting, it is also inadvisable. Price stability in general is what policy must aim for, after all, so that what the rupee is worth declines along a predictable path." Mint. Prices in India, rising at a faster rate than in the US, results in a weakening of the rupee against the dollar and could further fuel higher inflation by increasing the prices of imports. "Foreign investment in Indian government securities via the fully accessible route (FAR) crossed $9 billion in the first seven months of this calendar year," compared to $8.21 billion in the whole of 2023. ET. That should strengthen the rupee against the dollar. Instead, the rupee has fallen to 83.95 against one dollar today (xe.com), compared to 83.28 per dollar on 20 May 2024 (Forbes). The US Fed uses a variety of data to arrive at any decision. India is much simpler - reduce rates to stimulate economic growth. Ignore anything you don't like. That's the core belief.