Economy is fine says the Economic Advisor.. As usual I beg to disagree..

The Economic advisor to the prime minister says the economy is doing fine and we can expect a growth rate of 8.5% this year. Good News.

As always I am a naysayer and my only grouse is that we have inflation running at an average of 10% for the last four quarters and with nominal interest rates lower than the inflation rates we have already run into negative real interest rate territory for the last three quarters. This does not bode well for the foreign exchange rate front. As long as the real interest rate remains negative, Rupee will keep being under stress, new symbol not withstanding. May be, this is good for the software companies and other export led businesses, but since we are an oil importing economy with a trade deficit of close to a billion dollars and heavy reliance on "invisibles" to Balance our BOP, we need more to be done on the trade deficit side.

All through the blog you will find mention of this inflation in India being more due to non availability of supply than the over supply of money. Managing this inflation by using monetary policy is like managing hypertension by asking the heart to pump less blood rather than by exercising more. Ask any doctor for a remedy he will certainly say that your body needs exercise to counter high BP and not drugs to slow your heart down. But our regulators are not "doctors" they have their monetary policy blinkers on all the time.

what next? INR (sorry I still do not have the font to write the symbol of the Rupee) will weaken to offset for the negative real interest rate for another six months and then if we see some inflation management (monetary or otherwise) we may see a stop to the rupee losing value.

This, along with the money due to be pulled out from emerging markets, thanks to the new act signed by Obama will lead to depressed markets for the next six months. a recovery for the markets is seen only later.

A review of the economy is expected on the 26th evening. The shape of things to come will be decided later. But, since it is an RBI event and therefore a monetary event, it may not give any medicine for the disease of low investment and low supply kind of situation we are in.

Till then short a few August futures and make money.