Tags: india | inflation | us | fed

US Should Follow India's Attack Plan on Inflation

By Ashish Advani   |   Wednesday, 27 Jul 2011 09:01 AM

This is the last piece of my trilogy on India before I focus on investing in other parts of the world.

I returned back to the United States late last week but have India on my mind. The incredible success story I witnessed in India is hard to ignore and even harder to avoid as far as investments are concerned.

Last week, I wrote to you about the three things that need to happen to help India avoid an overheated economy, which could lead to a hard landing. I discussed India having a good monsoon, the Reserve Bank of India (RBI) raising rates by 25 basis points and oil prices staying in the $110 range.

The RBI raised the rates as expected. What wasn't expected was the RBI raising the internal borrowing rates by 50 basis points rather than 25 basis points. The rationale behind this large increase was that inflation was still much higher than expected. It is heartening to know that there are a handful of central banks around the globe that still stay true to their mandate of inflation control rather than pandering to the vagrancies of the stock markets.

With this 50 basis points increase, I would put the RBI ahead of the curve rather than playing catch up in its task to crush inflation. I don't expect any significant increase in petrol prices and other factors which would contribute to secondary inflation in India. In my expectation, headline as well as core inflation should peak by August or September and then begin a gradual decline.

The RBI, in its post-hike news conference, sounded fairly hawkish. I wasn't surprised to hear that since hiking a large amount and then sounding dovish would reduce the impact of large rate hike. I don't  see any further rate hike from RBI in the near future, During the September meeting, I expect them to take a neutral stance.

India's stock market lamented this move and dropped by nearly 2 percent.

In my opinion, the traders have a very short memory and they will get over this soon. The RBI has shown the intestinal fortitude to fight inflation and dampen the growth trajectory. Borrowing costs for corporations have now reached a painful threshold which will force them to slow down.

The citizens of India must be thanking the RBI for its steadfast assault on inflation. In the near-term as well as long-term, India's citizens and businesses will thrive.

It is about time the Federal Reserve learn a lesson from the RBI and turn off the liquidity spigots in the United States.

While that would be prudent, I won't hold my breath waiting for that to happen. Corporate America is addicted to cheap money and will lobby against any serious move to reduce the free money initiative.

Going back to India, the monsoons are still on target and RBI is
functioning as expected. The only kink so far is that oil prices don't seem to be on a decline yet. As soon as this occurs, we will see a surging Dalal Street (the equivalent of Wall Street in India).

Next week, I will introduce you to a new exciting investment locale in Asia where businesses are booming and money is waiting to be made.

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