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Showing posts with the label inflation

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Reviewing Inflation Targeting

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  In 2016, India officially adopted inflation targeting as the objective of the monetary policy. With five years elapsed since the Urijit Patel committee submitted its report and later adopted, the Reserve Bank of India (RBI) is all set to review the policy. The committee headed by Urijit Patel had suggested 4% as the targeted inflation with of course a permitted band of plus or minus two percent. In other words, the RBI policy would have to ensure the inflation remains within the range of 2-6%. The repo rate was made the benchmark interest rate around which the RBI stance would revolve. Based on the data and evidence, it was believed that 1.25% would be the ideal real repo rate. In other words, at this real repo rate, the economy grow at a level it would have grown if there was full employment. This was something akin to what Philips Curve would have projected around. The four percent inflation mark was perhaps viewed in the Philips Curve terminology as non-accelerating   inflation ra
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Consumption-Investment Dynamics and the Budget

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  The Union Budget for the financial year 2021-22 is to be presented to Parliament in less than a month from now. The focus would be on the stimulus the government would give to different sectors as they seek to recover from the lockdown induced by the Chinese pandemic. The focus of the government in 2020 would have to be ensure the firms and households remain solvent during the pandemic lockdown but as the vaccinations are underway, there would be direction necessitated for revival of the economy. The economy must shed the past and look towards the future. An important indicator would be however the boost to the consumption. The economic revival in India has to pick either through a growth in consumption or growth in investment. The government expenditure has ensured the economy remains stable in turbulent times and has saved further blushes for the economy. it is time to revive the other components of aggregate demand.   Investment is sought to be increased through Atmanirbhar pr
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Notes on Inflation

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  Inflation is a continuous increase in the general price level. It measures the changes in the price level in the economy. If the firms desire a stability in price, the price levels must remain stable. Therefore, an eye on inflation figures is no doubt important for any manager or an entrepreneur. For the inflation to be measured, there must be a construction of general price level. Generally, there are two measures that are constructed for general price level. Going back to the circular flow model, there are two actors, the firms and the households in the economy. Firms produce goods and services which the households consume. The firms sell goods at certain prices and the households consume the goods at certain other prices. There is a difference between the prices at which the firms sell and the prices at which the households consume. Therefore it becomes important to know which prices have to be taken for constructing a general price level. In all cases, price levels are constructe
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Macroeconomic Scenario in India: A Note

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  The year 2020 is about to end and perhaps looking back it would be a year that would be best forgotten for all the things. The Chinese virus induced pandemic does not seem to subside with new mutations being reported and countries going into lockdowns ahead of Christmas. This is despite the vaccines are getting administered albeit the baby steps in combating this disease. While experts do believe the end game for the pandemic has begun, one has to await for some more time before any concrete results are likely to be visible. As one looks forward to 2021, at this stage it seems the economic recovery is still some way off across the world. There would be a new President in the United States and it must remain to be seen how President Joseph Biden would deal with China, the country primarily responsible for the current global crisis, social, economic and health.   The macroeconomic projections for India have been less worse than anticipated. The second quarter of the financial year
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Will the Indian Lockdown Create Inflationary Tendencies?

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Some studies indicate a possibility of high inflation even in the excess of 10% within the next year. The expected inflation as per the surveys seem to point towards a jump of 3-4%. Interestingly, there is a divide among the economists over the after-effects of the Wuhan pandemic. The world having locked down for more than a month has without doubt created economic disruption both through Aggregate Demand (AD) and Aggregate Supply (AS) There has been an induced halt to aggregate demand with a similar restriction on aggregate supply. Furthermore, even with the lifting of lockdown, the propensity to self-protect might make prospective consumers wary of shopping thus lower AD. At the same time, the reluctance of the workers given the risks associated with the job tasks might make them skip from work thus adding to constraints in AS. Therefore an analysis would be worth pursuing over the likely inflationary impact or otherwise of the economic shutdown caused by the Wuhan flu. There
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RBI, Onions and Monetary Policy

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The outcome of RBI’s sixth and final bimonthly monetary policy statement for the FY 2019-20 is unsurprising. Repo has been retained at 5.15% and therefore the other rates like MSF, reverse repo, bank rate etc. too remain unchanged. RBI projects a growth of 6% something in alignment with what the budget has projected. They anticipate higher uncertainty in inflation. The question however, is given the macroeconomic dynamics at the current instant, could RBI stance been bolder or was it cautious reiteration of its mandate. As one delves in to the RBI monetary policy statement (available here ) some interesting pointers emerge. Global headwinds continue to impact the Indian economy too. There is no respite for European economies like France and Italy on the continued downward growth trend. Britain will have to confront with post Brexit uncertainties. US Iran tensions may have eased down momentarily but the impact might take a time to ease out, US-China trade wars demonstrate ebbs an
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Caselets in Macroeconomics

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Caselet I- Rupee depreciation and textile industry The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports.   Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets.   With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal ( 5% as compared to China’s 30%). Many analysts advocate leveraging the current scenario to capture the global market at the expense of China.   As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters. (Note: Use financial statements sh
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