My three cents!
For USA it all started with the Sub-Prime crisis. For india it all started with the rupee appreciation. Now are they two related? Partly yes.
Apart from US crisis, rupee appreciated because India suffered from Dutch disease. In 1960s when Netherlands discoverd huge oil reserves in its backyard, it kept exporting oil to the other countries. Hence there was lot of new demand for the Netherland's currency. When there is a huge demand for something, its value goes up.
Exactly same thing happened with India. Our exports have increased(currently $155b). There was demand for rupee in the international market. Hence the value of rupee appreciated.
Now another reason is Sub-prime crisis. How did it affect the rupee?
Due to credit crunch following the sub-prime crisis, the federal chief was forced to reduce the fed rate. When you reduce the interest rates, the value of that particular currency comes down for the simple reason that that particular currency becomes more accessible. Hence dollar depriciated against all the currencies in the world. This helps US export more goods helping it revitalize the sagging domestic industry. The entire world gets incetivized to import more from USA on account of cheaper dollar. The dollar is being made cheaper deliberately. Hence rupee appreciated against dollar though it didn't with other currencies such as Euro and Pound.
Now what are the implications of this credit crunch?
Very unfortunately, now the entire world is suffering from another problem which the current credit crunch has no relation with. That is soaring food prices. This on account of completely different reasons like diversion of food crops for bio fuel production, rising oil prices etc. If the inflation wasn't so high, the world economy would have been brought on main course with more ease. Now chiefs of central banks are completely helpless since their only tool of putting more money in the hands of people to avoid credit crunch would not be helpful. Since such a step would fuel inflation even trigger serious agitations over soaring prices from the poor sections especially Africa. Now we can already see nation-level protests in Hiati. They are the most dangerous forms of protests. Even weapons of mast destructions can't stop them! After all its about food.
But despite that the Fed has gone ahead with the interest rate cuts since it's more important for it to come out of crisis. Hence the inflation has gone up to 4.03%(latest) but growth has been around 0.6% rendering real growth to -3.4%. This means the purchasing power of dollar is coming down and poor would feel the crunch soon. But US has got the best mechanism to address their concerns since every one has got a Social Security Number and it knows how much their incomes are.
Now in india, the interest rates stand at 7.75%. If we reduce the interest rates, the money becomes cheaper since it would become more accessible and that sends the inflation northward reducing the purchasing power of the poor.
But increasing the interest rate has even worse problem. Then the money becomes even more difficult to get by thus making the industrial production go southward. You ask why? For example would you buy a car when the interest rate is 20% as against the usual 15%? No. Hence the industry cuts down its production after seeing the market interest rates. And one more interesting thing is even industry needs credit to produce goods. Even TATAs need credit to produce goods. They don't have any savings accounts! What ever profits they make will be distributed in the form of dividends, salaries and the rest to feedback investment. This fedback investment would hardly be used to produce goods. This is basically to upgrade machinery, set up a new plant etc but not to produce more goods. Here using credit from banks makes more sense for them. Hence either way, high interest rates have an adverse impact on the industry and thus the economy as a whole. Now since the production has come down, think of an assembly line worker. Most probably few of them should get sacked since there is not much production. Now the unemployment goes northward. This is not good either.
So almost all the central banks are caught between the devil and the deep blue sea. That is the very reason why RBI didn't change its stance from the current 7.75%. Its hoping a miracle would happen and show it the way!
One best option is to reduce the interest rates for quick stimulation and then immediately suck out that money from the system. But this may not be simple
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Re: Recession...how bad is it? -
21-03-2008, 03:16 PM
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PRAGMATIC Simian....
Re: Recession...how bad is it? -
23-03-2008, 10:04 AM
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what have u decided? 
Linear Mode
