In our newsletter last month we forecast for the rupee "expect
further depreciation into 44 if crude moves towards $150, an appreciation into
the 42 range if the oil price scenario improves." The former of course happened
and the rupee has been diving towards 44 as oil springs higher and higher. For
interest rates we made a similar prediction and the breakout of the range we
had set was due to the same factors of inflation, crude oil and the RBI rate
hike, triggered by the two. Where we did go way wrong was on the inflation
forecast, we put it at 9%, while it has already crossed 11%, with huge
unprecedented revisions in past provisional numbers.
We are being forced to suspend all forecasts for the time being;
the highly unstable numbers due to crude oil prices and domestic inflation
(including large revision of past numbers) make it impossible for any
forecasting model to work properly. Rather than resort to pure guesswork, we
shall spare you frequent downward revisions in growth and upward revisions in
inflation, suffice to say, the trend is clear.
For almost three years we have been warning about inflationary
tendencies due to government actions, but even we did not expect the figures
would be 11.4% and rising. And we did not expect oil prices to cross USD 140.
At this point therefore, even if monsoons are good, inflationary forces will
remain at the forefront for the next few quarters. Had the government shown
fiscal responsibility in the past, quickly passed on oil price increases, and
allowed exchange rate to appreciate when the going was good, we would all have
been better prepared to deal with this situation. Inflation would also have
been a few points lower (though high nevertheless) giving greater room for
manoeuvre to the government. The government knows this ? efficient markets rest
upon signals given by freely moving prices, we mess with those signals and we
make our own life difficult.
The next quarter shall see many developments - a hardening of the
slowdown story; further spread of price rises across all commodities; the
government at some point will need to respond by tightening liquidity/reducing
its expenditures; interest rates will rise; and we will start to see fall in
investment intentions. And the government will be able to do little. In short,
good times are over and now the bad times begin.
But fundamentally of course there is nothing wrong with our economy
and sooner or later we shall spring back on the high growth path, but the road
in the short term is rocky. Actually at the present, if you are looking for a
feel good factor, do check the India Brand Equity Fund website (www.ibef.org) -
the sole cheerful voice in the gloom!