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Wednesday, August 14, 2013

We are now in a Catch-22

Just two weeks ago I wrote (read here) that with the depreciation of rupee, we are having a bigger risk of retail inflation (and also core inflation) moving up again at an unabated speed. There were people who privately wrote to me and criticized me for negativity. I am sure that after reading below details they will understand that the negativity was justified.

Today, we have got the July inflation numbers. The inflation surges to 4-month high. July Primary Articles inflation at 8.99% vs 8.14% in June. July fuel & power inflation at 11.31% vs 7.12% in June. July manufactured products (will be a part of the core inflation) inflation at 2.8% vs 2.73% in June. July WPI Inflation at 5.79 % vs 4.86% in June.

In other words, we are in a stagflation economy now. In simple words, we have inflation without growth. This is extremely difficult situation for any central bank (RBI) to control. Remember that the primary job of the central bank is to control the inflation. The central bank does this by giving away growth (RBI did this by increasing interest rates during last almost two years). But now we have already compromised the growth without any impact on inflation. RBI can not reduce the interest rates as inflation is still there and growth will not return unless the easy money is provided. We are now in a classic Catch-22.

God bless us!!!

Look forward to receiving your response/feedback/criticism/praise.

Niteen S Dharmawat

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