I am sure that the subject of my article would be very confusing for some of you or may be strange for a lot of you. What I am trying to convey with this one is again some graduation level economics which I studied during my Macroeconomics paper in 2005, which I believe the world central bank's heads are forgetting or trying to overlook over more complex understandings.
The core objective of any Central Bank is to do a through analysis of the forthcoming economic situation of an economy (growth and inflation) and accordingly adjust the liquidity flow into the system. It also involves taking into account any major local or global events that could shape up the economic situation in the country and hence being prepared for the same.
Thus, in nut shell I would say that the core objective of any monetary policy is to manage liquidity into the system so that the economy grows (with minimal inflation), but this decision should be based on ex-ante analysis and not ex-post analysis.
This precise mistake I believe ECB committed in July 2008. In July 2008, when the global credit crisis was almost about to reach its peak, the global growth outlook was bleak and most of the central bank's around the world were either growing through rate cuts or on the verge of doing so, ECB announced a rate hike of 25 bps, which as per experts is one of the many important reasons of the current EU turmoils. The move as said by Mr. Trichet was" mainly on account of "heightened concerns at the ECB about inflation in Europe".
The Indian markets as of now is quite insulated from the global turmoil, but like EU in 2008 this move by RBI on Friday could lay the foundation for a big Index correction.
The news flowing from US has been more of that of a magician's mixed bag. Positive and Negative news abound, it is indeed a difficult task to predict whether the aftermaths of PIGS ( Portugal, Italy, Greece and Spain) have actually spilled over to countries like Austria, or are nations like Germany showing enough resilience.
ReplyDeleteCome what may the liquidity had to drain from the Indian Markets , in light of closing of the infrastructure projects for Commonwealth somewhere around september, yet it would be really difficult for RBI to wait till then!
The prices of essential commodities on high, fuel price hike would bolster further inflation. The wait would then be not worth it. The moot issue before the central bank remains inflation, rather than preserving the stock indices of the nation, which have already beaten the global bourses on weekly,fortnightly and a monthly basis.
If there are flip sides of the BWA and 3G licensces, there are also big public issues lined up in this fiscal. Although theoretically correct, but it hardly is prudent that the money gets parked from the liquid markets to bourses. For eg: Gold and indices falling on the same day in last week , there are several examples of existence of "Other" avenues for parking funds. I beleive Fixed Incomes markets like debt need to be scrutinized for sure.
Whether RBI did a ECB, or not, one thing is for sure the market had, has and will have enough appetite for good money provided its fundamentals are right. Inflation is a very important concern for a very large section of society in India, far far bigger than the victorian mainlands. And trust me, I didn't read a Chavez before posting this comment :)
Thanks Bablish for your views... A real good insight on the subject..
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