Inflation depends on two major factors – Fiscal policy and Monetary policy, the latter is government driven – In India there was no major drought in any state, we have ample of resources, Uttar Pradesh had huge Sugar production, wheat production is excellent this year, Industry growth has been steady (slower in March- April), but even then Central government was unable to optimize the resources, it had. I expect no great change if any new political party comes to power, we should thank our stars that no Political party gets clear majority in center, atleast the ruling party has a fear that it might fall, for the blunders they have been doing.
On the contrary, in China’s Fiscal policy by the Central bank is strongly related to their monetary policy, Crude consumption in China is huge when compared to India – or for that matter South Asian nations, even then China has a better growth story, the Inflation in China dosent hurt people there, they have several sanctions from West nations, but still they have survived and have become a major power after the US. US might invade Iran, given they have elections coming up soon, and it will provide Bush’s Republican party more votes in coming elections. Although when it seems democrates have an edge over them. However, the demand of crude has increased exponentially and so is global inflation in last 6 months. If US invades Iran, demand in Crude will rise further in middle east and in the US as well.
It is foolish on the part of Indian government to distribute subsidy everytime they see given Industry in trouble. For example – when dollar weakend last year and rupee was around 39-38.50, Textile owners / exporters in delhi started crying for their business, and now when dollar is again strong against rupee at 43-43.5, why Government is still giving subsidy to them? The reason being election in 6 states, and general elections coming up, the UPA grovernment has to woo the voters.
The turmoil started when on Friday – Morgan Stanley published an official report that Crude will trade at $150 levels by July 4th (I dont know how they published date ! ), anyways as soon as the report got out Capital markets in the US slipped downside, with Crude heated at $140 levels.
Atleast for this week, it is very dificult for the markets to recover, for Nifty 4450 is crucial level, from which it re-bounded in Jan this year, if it closes below that level, markets will set to make new lows in coming days!
CRR hike is also on cards for RBI – 8.24% Inflation is not a comfort zone for UPA government and they will create pressure for RBI to hike CRR, which will suck remaining liquidity from markets.
