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2012: Gold….Hold On!

Gold is down in dumps and the year end is closing on. What’s in store for the metal in 2012? When gold surged to all time highs above $1900 per ounce in September, apart from the evidence that the world economy is sputtering to downhill, there were ample enough hopes that the US Fed would launch another round of its quantitative easing soon. However, the momentum generated during the middle of the year is holding on quite steadily in the US economy with the nonfarm payrolls hitting and initial jobless claims plummeting to three year lows. The dollar has been rallying ever since and though it looks that the gains have been triggered due to a shoddy outlook for Eurozone economy, a meaningful part of the strength could also be linked to the positive vibes witnessed in US economy itself. This seems to be one of the biggest negative influences for the latest plunge in gold. The yellow metal had rallied sharply on previous rounds of QEs.

While it is not a very easy task to give the outlook for any asset for the upcoming year, the downward lurch in gold seems to have pulled the metal at attractive level particularly in the global markets. While a further drop from hereon could take the metal near $1500, it might not sustain there for long and rise towards something like $1700-1800 in the first quarter of the year. Gold prices tend to mostly rise in the first quarter of the calendar year and there is no reason why 2012 could be different. Where the metal would hold onto these gains and rise towards $2000 in the first half of the year would depend upon the turn of events in the currency markets as well as the risk appetitive. The recent episodes of downswings in gold have been followed by long periods when the metal has tended to behave like a risky assets though its gains have normally beat equities and bulk of the commodities. With the prices down nearly $300 from its all time highs in last three months, the gold prices are looking well poised for a sustained move up from thereon irrespective of the forces in risky assets.

From the Indian demand perspective, the year gone by has witnessed the prices complete a giant cycle from 20000 to 30000 in a span of less than one year. Almost the upside was boosted to a certain extent from the INR’s depreciation, the exorbitant gain of nearly 10000 rupees could linger around for a while from the psychological aspect for the Indian buyers in investment and retail demand side. This very factor could limit the losses for the local prices given that a fall towards Rs 26000-25000 levels would bring in frenzied demand. Gold’s latest drop has ensured that it acts exactly like a risky asset. Now this is similar to 2008 when the metal collapsed in the aftermath of the Lehman debacle, tracking the strength in the dollar and defying all the positive logic even as the world seemed to be headed for a catastrophe.

The conditions are similar except to the fact that the world is headed for an even bigger shock this time around with the possibility of a break up of Eurozone very much on cards. This could be a cataclysmic event and could see the metal explore fresh highs at a gravity defying pace.  2012 is widely prophesied as the year of doom…the end of the world. Well the financial markets could certainly witness such an end with Euro cracking up and US debt deadlock rumbling on further- even as the debt to gdp ratio nears 100%.  In case if both the events happen together and there is a very good possibility of that happening, Gold could be the last man standing up.


Dont think this is the end!

The US dollar closed at its seven week high against the Euro on 25th November, witnessing a continued bout of strength that has seen the dollar gain by 6.50% over the last four weeks as the EMU struggled with surging sovereign debt costs, a series of downgrades which includes, apart from the usual PIIGS suspects, newbie’s like Hugary and Belgium. Further adding salt to the Euro’s wounds was a failed debt Auction for German debt- which effectively means that the investors are refusing to acknowledge the German bunds as the preferred measure of safe haven. However, with much of the negatives already being factored in and the stock markets entering into December, could we see a change in the scene?.

A latest WSJ post says that December is historically the second-best month of the year for stocks after July. The post further states that  the US markets so far only have suffered limited damage from the market's other bogey--Washington's deficit-cutting impasse ( the first bogey being the Eurozone debt gridlock). The main risk which the US markets could rather run into is the much larger debt issue at home rather than across the Atlantic. US Treasury Bonds have rallied off late despite news that the so-called Debt Super Committee failed to agree upon fresh budget cuts ahead of its self-prescribed deadline. The lack of action from the group of legislators could certainly mean growing credit risk for the US Treasury and global credit rating agency could well throw a cat among the chickens by way of highlighting the US debt mania.

Data out earlier in the month from US Treasury showed the burden of federal borrowing on the shoulders of the American public reached $15,033,607,255,920.32.( stop counting it up-its 15 trillion). That was roughly equal to 99 percent of the size of the total US economy projected for 2011. That’s painstakingly high for an economy struggling to come out of a deep recession. Government debt has steadily climbed since August 2, when Congress broke a three-month deadlock and agreed to raise the country's official debt ceiling from the then-$14.3 trillion to $15.194 trillion. Debt covered by the ceiling - slightly less than total public debt - has grown to $14.989 trillion since then, with the government spending some $1.40 for every dollar it takes in revenues.
                                                         EURO/USD Monthly Chart

The implication of this for the Euro/USD pair could well mean that the USD might be nearing its short term top soon. The monthly chart for the pair indicates quite clearly that the EMA 100, currently placed at 1.3187 might be a critical supporting point for the pair. LAST MONTH AS WELL, A DROP UNDER EMA 100 WAS VERY SHORT LIVED AND THERE ARE NUMEROUS OCCASSIONS DURIING THE TORRID TIME AFTER LEHMAN BUST WHEN THIS THRESHOLD ACTED AS A VERY GOOD FLOOR FOR THE PAIR.

Game on then for the fx markets…the inherent weakness in the US economy has been masked to a larger extent by the worries over the Eurozone debt and the associated risk aversion in asset markets. Time is ripe for a turnaround it seems. The latest poster from the Economist magazine is also worth taking a note of. The lead story asks quite explicitly – Is this the end? This is indicative of the fact that sentiments for the Euro have been pushed down a deep hill. Good time to expect a turnaround when the popular opinion says the otherwise!


Markets @now...a great volatility puzzle!

This is a very interesting graphic. A snapshot of the marketwatch on 10th November 2011 at 10.00 pm. It’s been crazy stuff in the markets. The Eurozone troubles are thickening despite the flip flop pertaining to the debt heavy countries. Look at the circled headlines. The first says US foreclosures jump a whopping 7% in Oct. Second says Asian stocks tumble on Italy fears. Third says Europe stocks rise on hopes over Italy cure. Fourth one, a story by Peter Brimelow which talks about how current market movement is looking like 1973 and we could witness a heavy fall in the coming few months. The fifth and the last one says that the US markets have rebounded after a selloff. On top of it all, Gold is down $50 right now …reasons totally unknown and oil is at a four month high…..have not seen weird and esoteric moves than this. Indeed a great volatility puzzle. 


Euro’s Swim or Sink moment

If the EU fails to formulate a coherent response to the debt crisis, things are likely to turn very ugly for the Euro going into its second decade. The twin effects of a painfully slow recovery in major advanced economies like US and Japan and a persistent state of insecurity about the cohesiveness of the currency bloc and integrity of its member nations would drag on the economic fortunes of the distressed union. While the dawn of the decade gone by was marked with a thrilling sense of exuberance about the world’s first optimal currency area, the end of the decade has bought a painful reality check for the region and the test seems to be only getting tougher. Without a lot more political integration in Europe and a sense that all the EZ countries are "in this together", the ordinary folks in Germany, France, Netherlands would be extremely non-plussed at having to underwrite the fiscal ineptitude of other member states who didn’t even deserve to be a part of the EZ in the first place. There have been talks about the possibility of some countries, most notably Greece leaving the euro area and some see this as a clear signal that having a single currency among such a diverse group of countries was a bad idea. At the end of it, monetary union will only work with political and fiscal union over a longer term. Will the Euro survive this rough tide then?

The Euro came into being on January 1, 1999 with 11 countries abolishing their national currencies in favor of the Single currency-as it was popularly termed in the years to come. Euro was being looked at as a perfect currency to break the decade old dollar hegemony and the forecasting community around the world predicted that the currency would replace greenback a decade down the line. At its birth, single currency was called as "the most ambitious experiment since the launching of the Bretton Woods system at the end of World War II”. Euro did well over most part of the next decade, gradually appreciating against the US dollar- the world’s reserve currency. The Euro area GDP grew steadily and the global currency reserves were slowly getting diluted into Euro. In fact, the Euro reined supreme when the global crisis stuck, much to the extent that a collapse of the US housing market and a slide in global equities in 2008 hastened many observers to push the Euro as the next global reserve currency. However, this was not to be. What started in a localized part of the US mortgage market spread to virtually every corner of the global financial markets and the concomitant flight to safety bought back US dollar much like a phoenix.

The euro's great achievement has been to provide a stable means of exchange for the world's largest single market. The single economic space anchored by the euro has also forced European policy makers to compete for people, goods and capital with improved policies. However, now that the cracks have come wide open, a much relevant factor is the ability of the Euro to survive under testing global conditions.  This is where things began to look shaky for the Euro. The crisis is sharpening antagonisms within Europe and pushing the Eurozone to the breaking point. Despite the single currency, government bonds of different countries attain widely different values on the financial markets. Some countries—like Spain, Portugal and Greece—have to pay much higher interest rates because of growing doubts about their credit worthiness.

The economic position of the individual Eurozone countries is extremely diverse. At the beginning of the 1990s, the so-called “stability pact“ was adopted on the insistence of Germany. The introduction of the euro seven years ago was tied to firm conditions concerning financial policy. Each accession country had to commit itself to strict budgetary discipline. The annual deficit of a country was to be limited to a maximum of 3 percent and its total debt to 60 percent of the country’s gross domestic product (GDP). First and foremost, it was Germany that urged the adoption of these criteria as a means of maintaining the stability of the euro. The euro was to be strengthened not only to compete with the US dollar, but also to ensure the dominance in Europe of the German economy, which was certain to profit from a stable currency owing to its position as the leading exporter.

What started in Greece has given birth to a new crisis of the eurozone as a whole. While there is no denying that the major responsibility rests with the Greek authorities who mismanaged their economy and then deceived everyone about the true nature of their budgetary problems. Financial experts in Brussel’s European Union (EU) Commission assume that the deficits of the sixteen Eurozone states will increase to 4 percent of GDP this year and 4.4 percent the following year–although such figures have to be corrected upwards almost every day. The stability pact’s 3 percent cap on debt is being exceeded in all the Eurozone countries.
It should be stopped because failure to do so could set in motion an unstoppable process of contagion that would affect the entire banking sector of the EU.

For those thinking that a coordinated response to the Eurozone debt trouble would be a good sign for the European banks, its safe to regard it as hallucination. The STOXX® Europe 600 Banks index, which captures the performance of the top 600 banks in Europe, has never been in a recovery mode in last four and half years since topping out at 541.27 points in April 2007. Mind you, the index topped out much before the European credit markets froze and borrowing costs witnessed an unprecedented increase.  The index slumped to, would you believe it- 87 in March 2009 and quotes around 150 right now.  Haven’t the banks witnessed enough pain already? This is not going to alter even if Greece gets his share of the troika funding eventually as banks have already agreed to take a haircut to the tune of 50% on their outstanding Greece debt.

A country should not participate in either a common-currency regime or a common monetary standard if its own public finances were too weak. If its government needs to retain control over issuing its own currency in order to extract more monetary seigniorage from the financial system—possibly through inflation—than a common currency regime would permit, then no fixed exchange rate regime is feasible or advisable. More subtly, by owning its own central bank, the government becomes the preferred borrower in the national capital markets. Because the government alone owns the means settlement on interest-bearing debt denominated in the domestic currency, it can float public debt at the lowest interest rates in the domestic capital market. This preferred access to the domestic bond market also allows the national central bank to act as a “lender-of-last resort” for domestic commercial banks- something the ECB has expressedly stated it cant be. .

The laxity obersed regarding the budget deficit criteria when Greece was allowed to be a part of the currency block is playing itself out in the most vicious manner now. This is made worse by the lack of labor mobility in the Eurozone. Language and cultural barriers prevent labor migrating to where they are needed the most, creating more internal imbalances. The PIIGS enjoyed the upside of lower rates while keeping the higher rate of inflation for wages they had before the Euro. Now, they have to choose between a deflationary adjustment or devaluation. Most people cannot stomach the former

So, with monetary union, but not fiscal or political union, the PIIGS are free to create a socialist utopia with all of the trappings. Massive social pograms, state provided care from cradle to grave, complete security provided by the state etc even when the fiscal conditions of the goverrnment are not good enough to provide for them. Meanwhile, in order to prevent the PIIGS from crashing the system, the northern neighbors will be forced to buckle down and work harder, ever increasing the productivity gap between the PIIGS and the so called "core" of the Eurozone i.e. Germany and France. Bailout will follow bailout with no end in sight, until there is the political will among the member nations to make the most distressed nations in the region in the to abandon the Euro and swing the clock right back to where it all started.

This is essential because the inequities among the countries cannot be sustained in any sort of free market system, and the longer the attempt is maintained the worse the inequities will become. Again, when you are in water, you have to either swim or sink. You cannot stay afloat hanging at the back of others forever. Let us back up a little bit. Germany and France would very well rather have Greece leave the Euro, convert its debt in local currency, then devaluate, and finally work its way up the economic recovery slope- the way its normally done. Once Greece works its way back to economic normalcy, yet again it could be absorbed as a new member.

And there is a good reason why this needs to be done on an urgent basis. The soaring costs of borrowing for the other nations in the Euro zone, notably Italy have been ballooning up, hitting more than 7% and well on their to elevate even more as the uncertainty premium builds up and economic momentum slows down around the world. There is an acute sense of uncertainty as to how many German and French banks would be wounded if Greece goes belly up and does default on its debt. Informed guesses reflect that 73% of the Greece debt is owned by foreign investors, mostly German and French pension funds.

Will this be possible but? The interest of these bondholders could be large enough to pressurize the governments to initiate detested public measures. Again we are witnessing the 99-1 rule being played here. All along the last few months, German officials have played it very smoothly, never committing on anything concrete, never appearing not to. They have not dejected any plans to support Greece despite knowing fully that Greece is not working efficiently towards a recovery.

The bigger question to ask is, would the Euro have survived and triumphed had it not been for the global crisis? These past 9 years, with debt plaguing the performance of the dollar, have been quite interesting, watching the US debt exploding to the upside, and the dollar imploding to the downside. But now, the Eurozone has been trapped in its own debt problems, and the investors are looking for a safe haven. The Euro/US dollar exchange rate is a dance that is going to be a drag for a while and it will be interesting how Germany takes it. The prime economy in the region has turned in a very good performance in last couple of years though its export heavy model has done little to address to the intra regional imbalances in the Eurozone.

We can safely say now that Germany has been extremely dependent on the survival of the euro than any other country in the region. The export powerhouse—largest exporter in the world until China overtook it last year—thrived because Eurozone countries could borrow unlimited amounts of euros to buy German goods.  And Germany has never cared much about diversifying their export destinations. Since mid 1990’s, the share of Europe in has held mostly steady in 44-48% range with last two years witnessing a mild drop-mostly because of the severe credit crunch faced by households and corporates in Europe.

Its too late for the Eurozone to turn back now and a dissolution of the EMU could spell disaster not only for the region for the entire world as it would be coming at the worst possible time.  As for the public protests, it would be just a mater of time before the frenzy takes an ugly turn. The world has already seen how the public uprising in Arab spring evolved this year.  First of all, the EU leaders have to acknowledge the fact that with 93% probability of a default on Greece debt already priced in, even if the country fails to pay its creditors either in part of full, the impact of it might not be very severe in strictly financial terms. They have to let Greece leave the currency bloc, let the creditors take a haircut and focus on ensuring that the others debt laden economies do not witness a run on their debt. This would at least give the Euro a chance to survive. The stubbornness to keep Greece in the union is acting like a slow poison for the financials of other economies with Italy having dole out an unsustainable 7% for acquiring debt.

Meaningful change and effective reform are vital and should naturally emanate from the lessons learned. Euro is at its Rubicon and some dire measures are needed to show to the world that the optimal currency project was not just a failed attempt by Europe's socialist nanny states to piggyback on the strength of the Deutschmark


Understanding lopsided currency swings

Currency market swings have become extremely lopsided in the last few years. The advent of the global economic crisis along with the follow up recession era measures initiated by the governments and central banks around the world have made the age old logical flow of knowledge in economics and financial markets obsolete and the theory of reflexivity- a popular idea coined by the billionaire investor George Soros is making its presence felt more than ever. Will the currency swings return to their normal course anytime in the near future?

How else could one explain the radical upswing in the Japanese yen over the last three years? An embattled currency with nothing much to gather support from the local economy has risen nearly 40% since the global credit crisis first surfaced in late 2007. This has happened so even as the country continued to chug along its 15 year old deflationary cycle and was hit by one of the largest quake ever recorded in modern history.  The currency traded close to its postwar high at 75.87 yen versus the US dollar last week, despite the BOJ deciding in a unanimous vote to hold its key short-term interest rate at between zero and 0.1 percent, as a means to counteract the yen's rise by making it less appealing for speculators to bet on Japan's currency, as well as increasing the size of a key asset buying program. Japanese Prime Minister Yoshihiko Noda told parliament on 28th October that Japan stands ready to take all measures to tackle the yen's appreciation to record highs, suggesting further intervention by Tokyo into currency markets to cool the yen's rise. The Japanese premier was referring a recent trend of large manufacturers opting to set up shop overseas, due to cheaper parts, labor and other costs, as the rapid rise of the yen has made it hard for them to compete on a global scale while based in Japan. However, for Noda, who is  Japan's fifth prime minister in three years is likely to share the same fate as his predecessors who failed to cap the ferocious rise of the yen, breaking under key pressure points like 90 and 80 and has refused to turn the other way round despite the fact that the G7 nations announced a coordinated intervention to push down the strengthening yen in March this year.
Similarly, the US dollar has stayed broadly on course over the last three years even as the economic conditions turned from bad to worse and the debt to gdp ratio shot up to alarming levels, eventually leading to a historic cut in the debt ratings for the world’s largest economy. The greenback still continues to be the most preferred asset in world markets on liquidity counts, bucking even gold! The currency displays positive tendencies whenever risk aversion hits a high.  And though it may seem counterintuitive at first, strong US data have tended to have a negative effect on the currency, making it behave exactly the same manner as the Japanese Yen.

The other such asymmetries in the world of currencies include the Chinese Yuan, which was virtually unaltered during the 2008-2010 period, making Soros criticize China for deliberately keeping its currency low in order to keep exports cheap.  The hedge fund manager- best known as the man who broke the Bank of England” after he made a billion betting against the value of Sterling on Black Wednesday in 1992, made these remarks exactly an year ago and noted that China could also influence the value of other world currencies because they have a “chronic trade surplus”, which means the Chinese have a lot of foreign currencies. “They control not only their own currency but actually the entire global currency system,” he said.

What is causing these abnormal swings? Let’s begin with the basics of asset pricing and appreciate that markets search for prices that create a balance between supply and demand. In a free market economy, when all participants act rationally and all the available information is absorbed, the conditions are said to have reached equilibrium.  However, George Soros does not agree with this out rightly. His theory of reflexivity suggests that, sometimes, markets are inherently unstable and the underlying forces create negative feedback loops that cause prices to diverge wildly from equilibrium.

To quote Soros, “there is an active relationship between thinking and reality, as well as the passive one which is the only one recognized by natural science and, by way of false analogy, also by economic theory. I call the passive relationship the “cognitive function” and the active relationship the “participating function,” and the interaction between the two functions I call “reflexivity.” Reflexivity is, in effect, a two-way feedback mechanism in which reality helps shape the participants’ thinking and the participants’ thinking helps shape reality in an unending process.  In short, reflexivity states that people's beliefs affect their reality and people's reality, in turn, affects their beliefs.

Rational investors are supposed to allocate capital out of overvalued securities and into the most attractively priced ones, causing individual valuations to move closer to levels supported by fundamentals. This is more fitting in case of stocks than other securities though. Offcourse, exogenous factors like margin pressures on leveraged positions by individuals or an outright hike in the margins by the security exchanges could lead the investors cut back on their exposures purely on a circumstantial basis. Such reflexive forces have been in full swing over the last half a decade. The corroborative evidence has been present not only in asset markets but could be linked to real economy as well. Credit crunch has led to a rapid deterioration in business and consumer balance sheets, which in turn caused tighter lending standards and eventually made less credit available in the economy. This yet again causes business/consumer spending slowdown and further worsening of balance sheets. 

However, the ramifications have been felt the most in the world’s most liquid and most happening market. The rate of exchange of a given currency against the other currencies is a reflection of the state of the economy of this given country in comparison with the economies of the other countries. Effectively, when a particular currency is charting a course which is radically different than the one resonated by its fundamentals, the feedback loops associated with currencies tend to affect international trade, fund transfers, long term finances as well as monetary and fiscal policies of not only the home country but of the major trading partners as well. This is precisely what Soros meant when he stated that China effectively controls not only their own currency but the global currency system.

Another critical aspect of such riddle some moves is carry trade. Carry trade is a strategy that enables investors to sell a currency with a low interest rate to buy a different currency yielding higher interest rates. While such trades started with the Japanese Yen, since 2007, traders have snubbed the Asian currency to the all mighty greenback. With the benefit of the hindsight, it could be claimed that asset markets were indeed right in gauging the gravity of the crisis following the sub prime meltdown and were thus willing to use the dollar as a funding currency for all the risky trades. Fed has been providing loads of liquidity and has absolutely no control over where all of this liquidity will slosh. This excess liquidity is flows into new asset bubbles, something which could be understood by the fact that every other asset class rises as the greenback eases and vice versa.

Some automatic stabilizers to domestic and international imbalances would help a great dealing in eradicating these asymmetries and ensuring a level playing field for the currencies. It is important to note that currency markets have countered attacks from such reflexive forces on quite a few occasions in their history. In the mid 1980’s, the US dollar soared in value against the major currencies after the US Fed explicitly targeted the rate of money growth to curtail hyperinflationary scenario.   The US dollar soared sharply even as the country was experiencing a large and growing trade deficit. The greenback surged nearly 80% in value against the currencies of its major trading partners like Japan and Germany. The US persuaded the other global leaders to coordinate a multilateral currecny intervention, designed to allow for a controlled decline of the dollar and the appreciation of the main antidollar currencies. In the famous Plaza Accord, each country agreed to make changes in its economic policies and to intervene in currency markets as necessary to bring down the value of the dollar.

However, despite leading to a secular decline in the US dollar, the accord could hardly be termed as a grand success. Not every country fulfilled their agreements. The US did not follow through on it’s promise to cut the budget deficit, UK economy suffered due to rise in interest rates while Japan was hurt by the dramatic rise in the Yen. By the end of 1987, the dollar had fallen by 54% against both the D-mark and the yen from its peak in February 1985, leading to a widespread fear of an uncontrolled dollar plunge. The clock was turned right back in 1987 and the Louvre Accord was signed to stabilise the dollar. 

Why such coordination could not be possible this time around is anybody’s guess. The major industrial economies are too occupied in setting their own houses in order. They lack the clout needed at the international level now and beggar thy neighbor policies are unlikely to bring in the desired results given that the world economy is much more integrated and asset market dynamics have much more wide reaching consequences for real economy.

Will the currency swings return to their normal course anytime in the near future? Could we see the US dollar toppling like pack of cards once (and if) the miffed responses from the traders turn around and the advanced economies resume their downward spiral, paving way for the next economic superpowers to take the reigns of global economy in their hands? Currency wars are threatening to erupt anew as central bankers are striving hard to protect their economies from fiscal tightening and lopsided currency swings that threaten a new global recession. Protectionist pressures continue to build: not good news for the world economy as massive trade imbalances between the developed economies and emerging countries continue to threaten a full fledged recovery. Until the Fed decides to change its ultra easing bias and raise the cost of money, currency market lopsidedness is unlikely to fade away. 


Is the local inflation topping out?

Is the local inflation topping out? Well… looks very much likely given the recent moderation in world commodity prices and a slowdown in domestic economic activity would go a long way in ensuring that the horrors caused by the stubbornly high prices could be a thing of the past…at least on the official front.

A latest PIB release states that government is aware that inflation hurts the lower income group of society. Measures taken to contain prices of essential commodities include -- import prices reduced to zero on rice, wheat pulses, edible oils (crude) and onions...,”

In its annual report released on Thursday, the RBI said inflation is likely to stay elevated at least till the third quarter of the current fiscal, before falling to 7% by March 2012.

The minister of state for finance Namo Narain Meena said in a written reply to a question in the Lok Sabha that the impact of inflation is different in urban areas vis-a-vis rural areas. “The impact of inflation on rural and urban areas differs because of the diverse consumption pattern and income distribution,” the minister said further.

He said that inflation, as measured by the consumer price index (CPI) for both rural labourers and industrial workers, has fallen substantially during the last few months.

While the CPI-rural labourers slipped from 17.35% in January 2010, to 9.03% in July this year, the CPI-industrial workers came down from 16.22% in January 2010, to 8.62% in June 2011.

“In response to the anti-inflationary policies of the government, CPI-RL based inflation has eased to 9.03% in July 2011, from its peak of 17.35% in January 2010,” Meena said.

The headline inflation, as measured by wholesale price index (WPI), has been above the 9% mark since December 2010, and stood at 9.22% in July this year. However, Food inflation stood at 9.80% in mid-August, coming down drastically after hitting highs of around 20% in first half of 2010. The monsson has been good for a second year running and given the slowdown in the latest quarterly GDP numbers, the RBI has much more leeway in coming out of its tight money stance.

Data out yesterday indicated that India’s GDP rose 7.7% in the three months to June compared with 8.8% in the year-ago quarter – its slowest pace in 18 months.

Media reports noted that the government remained cautious about its economic assessment after the data came out. Finance Minister Pranab Mukherjee termed the GDP number "disappointing", his Chief Economic Advisor Kaushik Basu advised against reading too much in the positive entries of the data. "You should not set your hopes too high for the immediate next quarter," he said, adding, "But I do expect growth in third and fourth quarters to show quite a substantial pick-up."

The spate of interest rate hikes by the RBI over the past few months ate into consumption growth, which fell to 6.3% from 8% in the previous quarter and 9.5% in the year-ago quarter.

Have the latest official talks queered up the pitch for a change in RBI’s stance?  We will need to keep our figures crossed on that though the inflationary trends would be expected to offer solace for the central bank and local markets in the coming months.


Why the Yuan has been soaring post US debt downgrade?

Would like to share a fantastic post on MW which explains why the Yuan has been soaring right after the S&P's  US debt downgrade. In toto, there are three factors which are influencing the Chinese exchange rate policy.

Over the course of less than two weeks, the Chinese currency’s value rose a significant 0.63% against the dollar. The yuan-dollar exchange rate slipped below 6.4 yuan for the first time Aug. 17, closing at 6.3996.

Continued inflationay pressures- Since monetary authorities are keen about inflation concerns, as well as constraints on using interest-rate adjustment as a policy instrument, they found ample reason for letting the yuan appreciate. (Please note that the nation's CPI has struck 6.5% in July and the price pressures are expected to ebb somewhat in the coming months...but the overall scenario reamins worrisome)

Possible Quantitative Easing In the US...brace up for a QE Ben Bernanke cautioned the markets in his latest speech at Wyoming....China’s inflation problems could deepen if, in hopes of strengthening the U.S. economy, the Federal Reserve extends its accommodative monetary policy or even launches a QE3. Analysts say accelerating the yuan’s appreciation was considered a reasonable countermeasure to this kind of future inflationary threat. 

Chinese government seems to be keen in maintaining high gross domestic product growth rates through trade surpluses. China’s exports in July broke monthly records again, rising more than 20% from the same month last year to more than $175 billion. The trade surplus for the month topped $31.4 billion, the highest since February 2009.

Read the whole report here