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!