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Indian Economy Situation Similar To 1991 – No Easy Solutions For Incoming Govt

Very relevant in today’ time…

Economics And India

Indian economy grew strongly till 2007-08 and then sputtered

Since the initial set of reforms in 1991, Indian economy has increasingly dependent on the global economic scenario in past 2 decades. From 2003-08, Indian economy grew at a strong pace primarily assisted by growth in global economy and liquidity flows. Low inflation levels during the period and focus on lower fiscal deficit in early part of the decade ensured that the country had fiscal stimulus measures in place when the economic crisis of 2008 struck.


The crisis resulted in global economy slumping which had a similar effect on India. Thereafter, in order to boost growth, Indian government embarked on a fiscal stimulus package which resulted in economic growth going back to ~ 8-9% by 2011. This also resulted in significant increase in fiscal deficit from ~ 3.5% in Fy2008 to ~ 6.5% in Fy2009.


However, not removing the extra stimulus…

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More articles now out in open stating dismal state of Indian economy

I always wondered whether I was the few ones who was being pessimist about Indian economy. I guess I am not alone. Slowly and surely, many blogs, articles and editorials are appearing in both offline and online world that suggest that all is not well. I am posting links below from various websites that support my earlier post. I will be adding articles and links as and when I get more of them.

1. Bleak future for BRICS, China only exception: Ruchir Sharma

2. India’s darkest hour – By Akash Prakash

3. Importer Nation – How a Billion Lives are being Destroyed

4. India’s economic decline

5. While we were silent

I have always felt that the current government’s policies and method of governance have a lot to do with the current situation.

I also agree with Mr. ‘s view on RBI and the present governor. I think RBI is the sole guardian of the currency at this point through its policies.


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Follow up to my earlier post on Yield Curves in India

Previously I had written how India’s sovereign yield curve is at best flat or humped at present and there are possibilities of it being inverted at some durations. . Also, in my earlier post, I had explained how INR cannot be stopped from massive depreciation despite the talks of FDI and other so-called reforms. For things to really change in a positive direction, it is domestic manufacturing and investment in infrastructure that needs to improve. The interest rates need to rise and be above the inflation levels for real rates to be positive.

RBI, India’s central bank, in recent days, has taken a series of steps to protect the rupee from further downslide.

Details can be found here

1. RBI announces Measures to address Exchange Rate Volatility

2. RBI announces Additional measures to address Exchange Market Volatility

Various articles explain the reasons for actions taken by RBI in recent weeks. Such as this, and this. No wonder, I feel that Mr. V. Anantha Nageswaran has been sympathetic to our RBI governor.

RBI actions are similar to those taken by other economies with huge CAD and slowing GDP growth rates such as Turkey and Indonesia. While the latter economies explicitly raised benchmark interest rates, RBI has thus far only indirectly raised the short end of the curve through the actions. 

In the backdrop of RBI’s liquidity tightening measure, yield curve shifted upwards with the 10 year G-sec yield rising sharply by ~100 bps from 7.4% to ~8.4%. The interesting aspect is that RBI also accepted 11% yield in 91-day and 10.47% yield in 364-day T-Bill auctions. This is clearly an indication of RBI’s intent to see an inverted yield curve. This also means that RBI is no longer bothered about growth but ensuring that INR doesnt fall from these levels. Another aspect is that because of the tight liquidity, banks may be forced to hike deposit rates. This would be actually good since it may bring back investors to bank deposits and increase the savings rate of the economy. In any case, I have always suggested that rates need to rise rather than fall for real rates to turn positive.

The actions also have a marginal positive impact on INR. Since RBI cannot control USD, it decided to squeeze the supply of INR in the system. Thus, INR has appreciated from 60-61 to ~ 59-60 in last few days. The interesting aspect is that INR hasnt appreciated significantly as expected by some market participants. As this post is being written, INR is now below 59. Whether the effect is temporary or INR comes back to 60 remains to be seen.

I continue to believe that it would take a change in government and its policies for the turnaround of the economy. The present government continues to go on its path of wasteful social and consumption expenditure rather than capital expenditure.

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14 Charts FedEx CEO Fred Smith Watches When He Thinks About The US Economy

Read more here

The original link and the ppt available here…

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Basic Relations between Equity, Debt and Currency markets

The bond, equity and currency markets of an economy move based on fiscal (GDP growth, fiscal deficit, CAD, etc.) and monetary policies (inflation, interest rates, etc.) in addition to global liquidity scenario and prevailing policies in other major economies. At a broad level, the following table holds true.


GDP Growth rate

Inflation rate

Yield rate Moves

Equity Indices Move


























A slump in economic growth can be tackled through 3 major avenues –

1. Fiscal policy – through a fiscal expansion (government spending)

2. Monetary policy – cutting benchmark interest rates, improving domestic liquidity in banking system

3. Currency – increasing exports and cutting back on imports

A big currency movement happens when transition occurs from one quadrant to another. Currency movement depends on the fiscal and monetary policies of the country. In case of contractionary fiscal policy and accommodative monetary policy, exchange rate will tend to be weak.

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