Inflation – What to do with it

Market was taken by surprise after 50 bps hike in both repo & reverse repo by RBI. Even interest rates on saving account have been increased by 50 bps from 3.5% to 4%. GDP growth forecasts also revised downwards which has dampened sentiments. This has led to a fall in markets. After almost 9 hikes in repo & reverse repo and number of hikes in CRR still inflation has been sticky & not coming down. This is due to imported inflation caused by international commodities. So the steps taken by RBI are a bit harsh & will impact demand to certain extend. The fact of the matter is that RBI's monetary policies are more effective in controlling asset bubbles rather than inflation. As an example take the tyre industry. Natural rubber that forms the majority of the cost of raw materials for the industry shot up by an average of 37% last year. Now if tyre manufacturers would not pass on the cost price increase they will make huge losses. As such tyre prices went up by an average of 18% last year and as a result of this the companies were able to cut down the losses; however tyre companies still made losses in the last quarter. However the reality is that the pass through of costs has happened only partially and a part of this cost absorption has happened because of increased volumes and better efficiencies. Now rubber, carbon black & nylon tyre cord that are the three major raw materials for tyre manufacturing are all global commodities. As such how is tight monetary policy of the RBI going to bring down the prices of these commodities? At best a very tight policy will cut down demand of tyres in India and make these companies make more losses.

Yesterday I was hearing video of Udayan & Mitali who were hosting the Investors camp at Jaipur. They were of the view that Retail participation is at the lowest & there is no interest among investors. Delivery volumes have fallen to 9% of the total volumes which is again an ALL TIME LOW. The argument investors make for not investing is that in last three years they have not made money. This makes me feel that this is the best time to buy. Every other person I meet is interested in buying Gold, Silver, Real-estate, Fixed deposit etc. My sense says that something unknown thing can only drift down market substantially from here as everybody knows what the problems are. A man fallen on the back can only rise. Government has also started taking actions against corrupt ministers, M.P.s, bureaucrats, high profile businessman etc which to my knowledge has never happened in India where a ruling government punishes his people. I am hopeful that from mid May after assembly election results we may see big steps taken by government.