Recently in many newspaper/ channels we would have come across the term Currency War. What (exactly) is a Currency War? It is a writers term (Currency war), for economist it is well known as competitive devaluation. It is a condition in international market's where countries compete against each other in order to achieve a relatively low exchange rate for their home currency, which will help their domestic industry to perish.
Normally at a certain period or given time, any given currency exists in a global markets is determined by supply (how much of a currency exists) and demand (how much investors want to buy goods and assets denominated in that currency). A country can make its goods and services more "cheaper" (some may say more competitive, because its cheaper) in the global market by devaluing its currency.
The devaluation of a currency can be made in number of ways, say, from Quantitative Easing (QE) (printing more money - by doing so there will be greater the supply of its own currency, which, would result in the less value it tends to be) to Buying of another Country's Debt (more the demand for another country's currency, the more valuable it tends to be).
QE is a practice, when a central bank tries to mitigate a potential or actual recession by creating money and injecting it into the domestic economy (so that they can avoid inflation once the economy improves).
QE to devalue a country's currency indirectly in two ways. First, it will encourage the speculators to bet that the currency will decline in value. Secondly, the large increase in the domestic money supply will lower the domestic interest rates, which will become much lower than the prevailing interest rates compared to the countries which are not practicing quantitative easing.
When a country's currency falls in value, its exports usually grow, because its goods and services becomes much cheaper on the global market. Which will benefit the export of the country and boost the domestic as well as the global market and thus achieving economic stability.
(For More info: click here and for History of Currency War)
(Refernces: Wikipedia and Investopedia)
Wednesday, October 27, 2010
Monday, October 11, 2010
Quantitative Easing and Developed Countries
I have read 2 interesting articles today (11th October 2010) in Economist regarding the Quantitative Easing, they are - 1. The magic bullet - How the bulls believe quantitative easing will boost asset prices (Oct 7th 2010) and 2. The Japanese economy - Easy does it - Symbolic moves by the Bank of Japan (Oct 7th 2010)
Before going further on these 2 articles let me give definition for quantitative easing. What is quantitative easing? Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates cannot be lowered no longer then central bank's only option is to pump money into the economy directly. This is called Quantitative easing (QE).
The way the central bank does this through buying assets - usually financial assets, say government and corporate bonds. The institutions which sells the assets (either commercial banks or other financial businesses such as insurance companies) will have "new" money in their accounts, which will then boosts the money supply in the economy. Sometimes, the Quantitative Easing literally means printing money, but, nowadays the Bank don't have to literally print the money, because, it is all done electronically. However, few economists would still argue that QE is the same principle as printing money as it is a deliberate expansion of the central bank's in the monetary base.
Now coming back to those 2 articles, the First article says that the quantitative easing will boost asset prices. It states that "............ quantitative easing (QE), or creating more money to purchase assets. This is largely presented as a tactic to stimulate the domestic economy by lowering the cost of finance and putting more money into the banking system."
The article provides further information that "Over the past two years much of the developed world has attempted some form of QE. (The European Central Bank has done less than its rivals, which may help explain the euro’s relative strength.) Some see this as competitive QE, a game of “I can print more money than you can”. Many investors believe the Federal Reserve will be forced into another round of QE, perhaps as soon as November." It stresses that ".... QE is a kind of magic bullet, helping all asset prices to rise." It concludes that "Although asset prices may be buoyant at the moment, there are other risks ahead. Competitive devaluation is an inherently unstable system. Someone must lose their share of world trade. And a policy of boosting exports can all too easily turn into a policy of blocking imports."
The Second article talks about Quantitative easing and Japan. It provides the information about how japan is currently facing problem with their monetary policy and how they are trying to adopt quantitative easing in order to get out from the Economic Crunch. The article states that "The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2001 and 2006. The initial amount under consideration is about ¥5 trillion ($60 billion), ¥3.5 trillion of which is for public-sector debt. That is on top of a sum of ¥30 trillion already budgeted for BoJ loans to banks."
After I have read these 2 articles few thoughts arises in my mind, 1. Is QE is really a solution for the Economic Crisis and failure of Monetary Policy? 2. Whether QE will really boosts the asset's price? 3. If QE is used by an economy, then whether it's impact in the Exchange rate will be higher or lower? I am still looking for the answers for these questions.
Before going further on these 2 articles let me give definition for quantitative easing. What is quantitative easing? Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates cannot be lowered no longer then central bank's only option is to pump money into the economy directly. This is called Quantitative easing (QE).
The way the central bank does this through buying assets - usually financial assets, say government and corporate bonds. The institutions which sells the assets (either commercial banks or other financial businesses such as insurance companies) will have "new" money in their accounts, which will then boosts the money supply in the economy. Sometimes, the Quantitative Easing literally means printing money, but, nowadays the Bank don't have to literally print the money, because, it is all done electronically. However, few economists would still argue that QE is the same principle as printing money as it is a deliberate expansion of the central bank's in the monetary base.
Now coming back to those 2 articles, the First article says that the quantitative easing will boost asset prices. It states that "............ quantitative easing (QE), or creating more money to purchase assets. This is largely presented as a tactic to stimulate the domestic economy by lowering the cost of finance and putting more money into the banking system."
The article provides further information that "Over the past two years much of the developed world has attempted some form of QE. (The European Central Bank has done less than its rivals, which may help explain the euro’s relative strength.) Some see this as competitive QE, a game of “I can print more money than you can”. Many investors believe the Federal Reserve will be forced into another round of QE, perhaps as soon as November." It stresses that ".... QE is a kind of magic bullet, helping all asset prices to rise." It concludes that "Although asset prices may be buoyant at the moment, there are other risks ahead. Competitive devaluation is an inherently unstable system. Someone must lose their share of world trade. And a policy of boosting exports can all too easily turn into a policy of blocking imports."
The Second article talks about Quantitative easing and Japan. It provides the information about how japan is currently facing problem with their monetary policy and how they are trying to adopt quantitative easing in order to get out from the Economic Crunch. The article states that "The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2001 and 2006. The initial amount under consideration is about ¥5 trillion ($60 billion), ¥3.5 trillion of which is for public-sector debt. That is on top of a sum of ¥30 trillion already budgeted for BoJ loans to banks."
After I have read these 2 articles few thoughts arises in my mind, 1. Is QE is really a solution for the Economic Crisis and failure of Monetary Policy? 2. Whether QE will really boosts the asset's price? 3. If QE is used by an economy, then whether it's impact in the Exchange rate will be higher or lower? I am still looking for the answers for these questions.
Tuesday, September 21, 2010
BASEL III - An angel or an Evil?
On 12th September, 2010, the World’s Financial (Authority – so called) watchdogs hammered out the new rules during last week in order to stop banks from causing another financial catastrophe. But few economists, analysts and even some bankers are feeling that the agreement (Basel III) won’t prevent any financial calamity.
Before going further let me give a brief on BASEL Committee. It is a committee which is formed on Banking Supervision - forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding.
The Committee is best known for its international standards on Capital Adequacy, the core principles for effective Banking Supervision and the Agreement on cross-border Banking Supervision. (History of Basel)
Now coming back to BASEL-III (yes, already BASEL – I and Basel - II are implemented), on 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010.
Before going further, let me say one thing that the Bank of International Settlements claimed that they had succeeded in the implementation of Basel II norms. But, under the Basel II agreements/ arrangement, all banks were required to maintain particular capital adequacy ratios (CARs). This is to ensure that the banks have sufficient capital and allow them to meet all demands from depositors and also to cover the losses, if a borrower defaulted on their payments. But Basel II, had a misconception, that it would ensure the banking system from collapse or from any financial catastrophe.
The Basel III Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. As per Basel III norms, now banks will be required to hold a capital conservation buffer of 2.5% in order to withstand stress/ calamity in future periods which brings the total common equity requirements to 7%. The higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.
The interesting thing is many people started debating about Basel III from now itself, which is too early to say because the rules won’t come into effect until 2019 (9 years from now). And many think that it will be too late and it would provide very little by the time when it gets implemented.
Bernard Baumohl,chief global economist (The Economic Outlook Group) said to newsweek that "We could very well have one or two more crises before these rules even come into play". Its too early to say whether BASEL III is an angel or evil? we can (ofcourse need to) see how it functions only when it comes in operation.
Tuesday, August 17, 2010
Has China Overtook Japan???
Today (17.08.2010) when I was browsing the Economist website found 2 contradict statements. One states that "China's economy overtakes Japan's in real terms" and other States that "Japan overtakes China as the world's third largest economy". The beauty is both the Articles are published on 16th August 2010.
Later I went on to do some research regarding this and found that Japan’s nominal Gross Domestic Product for the second quarter was $1.288 trillion which is less than China’s $1.337 trillion. During the first quarter(first half of 2010) Japan remained bigger than China. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion as per official data.
It is believed that by some estimates China’s quarterly output actually overtook Japan’s in nominal (US dollar) terms in the fourth quarter of last year. Since the last quarter China has continued to grow rapidly while Japan’s recovery has stalled (due to weak policy framework and outlook?).
In terms of purchasing power parity, China replaced Japan as the world’s second largest economy nearly 10 years back. As per the world bank data 2009, China GDP - PPP is $ 8,887,863 million and Japan's $ 4,138,481. China’s economy also moderated from 11.9 per cent year-on-year growth in the first quarter to 10.3 per cent in the second.
As per Monday’s (16.08.2010) data the deflation remains entrenched in the Japan economy, which prevents people from spending as they expect prices could fall further. The Nominal growth dropped by 3.7 per cent annualised in the second quarter after two quarters of positive growth. In Japan, weak growth in the second quarter has raised questions about the strength of its economic recovery.
Japan’s slow growth is due to the stalling on consumer spending, falling public investment and slower exports. Net export growth slowed but remained solid and was the main contributor to growth.
But still Japan is relatively richer than China in terms of Per Capita Income. According to world bank ranking Japan is ranked at 39 ($ 33, 280) and China (main China land - excludes Hong Kong SAR, China & Macao SAR, China) is ranked at 120 ($ 6,710)
This arises few questions
1. How much one can rely on China's Data? It is believed that the current Data are not strictly comparable because the Japan's data have been seasonally adjusted while China's data have not.
2. If China has really overtook Japan's economy in real terms, then how much their overall GDP growth (real GDP) will be this year?
3. How Japan is going to handle crisis (or) crunch in their economy after having positive growth rates in 2 consecutive quarters?
Tuesday, August 3, 2010
Can Emerging Countries handle Inflationary Pressure?
Recently I have read an Article titled “Inflation: The Great New Divide - Capital from the low-growth West fuels price increases in Asia” by Peter Coy. In this article he clearly expresses his views on how Emerging countries are facing Inflationary pressure along with pressure of the role of locomotive to the Global Economy. He also clearly states that how India and China is playing a major role of locomotive to pull the Global Economy out of recession.
In this article he states that “For most of the post-World War II era, the U.S. was the locomotive that pulled the global economy out of recessionary valleys. This time it has been emerging-market nations, mostly Brazil, China, and India that have surged, carrying the U.S. along like a big, fat caboose. Exports accounted for a little more than half of the growth the U.S. economy managed to generate in late 2009 and early 2010, according to data compiled by the Commerce Dept. About 40 percent of U.S. exports went to emerging markets”
He fears that the “…. inflation in emerging markets—and near-deflation in developed economies—could slow the growth train”. In context of India and China he states that “Chinese and Indian policymakers are trying to cool things by curbing government spending, raising interest rates, or both. If they accidentally crack down too much, they won't be able to play the role of locomotive. That would be a blow to a U.S. economy that is already threatened with a pause or, at the extreme, a double-dip recession.”
Regarding Japan and Europe economy he expresses that “…. at risk are Japan and Western Europe, which, like the U.S., are wealthy but slow-growing and facing deflationary pressures”. According to Economist Dr. Edward Yardeni (in an interview with Bloomberg Businessweek) "The inflation problem is in exactly the countries you don't want an inflation problem"
Peter coy further states that “The accompanying graphic tells the story of a divided world. On the right are large, light-colored bubbles representing India, China, Turkey, and Brazil. These are countries with relatively low incomes, rapid economic growth, high inflation rates, and increases in inflation over the past year. The other prominent cluster is the wealthy nations in North America and Western Europe, plus Japan and Australia. They have higher incomes, slower growth, lower inflation rates, and smaller increases in inflation. Japan (diamond-shaped) is the only country suffering outright deflation. Russia's big drop in inflation makes it an outlier, befitting its halfway position between the rich and poor nations”. At the end of this article he gives a punch with a statement “The Bottom Line: The world economy is evolving into inflationary and near-deflationary zones. Emerging markets must slow down without crashing”. (For Full Article: http://www.businessweek.com/print/magazine/content/10_32/b4190010426918.htm)
It is true to that Emerging Economies are facing Inflationary Pressure and Developed nations are facing Deflationary problems. Dr. Edward Yardeni Rightly said in his interview to Bloomberg Businessweek that "The inflation problem is in exactly the countries you don't want an inflation problem".
Now, the Major worry is that if these Emerging Economies fail to handle the Inflationary Pressure (in an appropriate manner) then the entire global economy may fall into another Depression (yes, not mere Recession). One can be sure to certain extent that it may not happen in such manner because these Emerging Economies are well known for their policymaking ability. But, we need to watch how they tackle the current problem of Inflation without affecting their growth rates and their role of locomotive for other countries across the globe.
In this article he states that “For most of the post-World War II era, the U.S. was the locomotive that pulled the global economy out of recessionary valleys. This time it has been emerging-market nations, mostly Brazil, China, and India that have surged, carrying the U.S. along like a big, fat caboose. Exports accounted for a little more than half of the growth the U.S. economy managed to generate in late 2009 and early 2010, according to data compiled by the Commerce Dept. About 40 percent of U.S. exports went to emerging markets”
He fears that the “…. inflation in emerging markets—and near-deflation in developed economies—could slow the growth train”. In context of India and China he states that “Chinese and Indian policymakers are trying to cool things by curbing government spending, raising interest rates, or both. If they accidentally crack down too much, they won't be able to play the role of locomotive. That would be a blow to a U.S. economy that is already threatened with a pause or, at the extreme, a double-dip recession.”
Regarding Japan and Europe economy he expresses that “…. at risk are Japan and Western Europe, which, like the U.S., are wealthy but slow-growing and facing deflationary pressures”. According to Economist Dr. Edward Yardeni (in an interview with Bloomberg Businessweek) "The inflation problem is in exactly the countries you don't want an inflation problem"
Peter coy further states that “The accompanying graphic tells the story of a divided world. On the right are large, light-colored bubbles representing India, China, Turkey, and Brazil. These are countries with relatively low incomes, rapid economic growth, high inflation rates, and increases in inflation over the past year. The other prominent cluster is the wealthy nations in North America and Western Europe, plus Japan and Australia. They have higher incomes, slower growth, lower inflation rates, and smaller increases in inflation. Japan (diamond-shaped) is the only country suffering outright deflation. Russia's big drop in inflation makes it an outlier, befitting its halfway position between the rich and poor nations”. At the end of this article he gives a punch with a statement “The Bottom Line: The world economy is evolving into inflationary and near-deflationary zones. Emerging markets must slow down without crashing”. (For Full Article: http://www.businessweek.com/print/magazine/content/10_32/b4190010426918.htm)
It is true to that Emerging Economies are facing Inflationary Pressure and Developed nations are facing Deflationary problems. Dr. Edward Yardeni Rightly said in his interview to Bloomberg Businessweek that "The inflation problem is in exactly the countries you don't want an inflation problem".
Now, the Major worry is that if these Emerging Economies fail to handle the Inflationary Pressure (in an appropriate manner) then the entire global economy may fall into another Depression (yes, not mere Recession). One can be sure to certain extent that it may not happen in such manner because these Emerging Economies are well known for their policymaking ability. But, we need to watch how they tackle the current problem of Inflation without affecting their growth rates and their role of locomotive for other countries across the globe.
Saturday, July 10, 2010
Will RBI be Autonomy Body?
During Budget Speech our Finance Minister announced that there will be autonomous body called Financial Stability and Development Council (FSDC). He also further stated that - This body will be responsible for financial stability and also will deal issues and disputes pertaining between financial regulators. It is believed that this will be headed by the Finance Minister (FM) himself, which is expected to be an advisory body. He did clarify that FSDC will not act in any manner prejudicial to the autonomy of the current set of regulators.
Regarding this recently many articles where published about questioning on this FSDC. The article which is published in the website of gfilesindia written by GS Sood gives a clear structure of the FSDC. It stated that “It will be multi-layered. The council’s members will include the heads of financial regulatory organizations such as RBI, SEBI, IRDA, and PFRDA. In addition, the Finance Secretary and chief economic adviser of the Ministry of Finance will also be members of this council.”
It further stated that “The council will have two committees working under it, namely the Financial Sector Regulatory Co-ordination Committee (FSRCC) and Financial Sector Reforms and Stability Committee (FSRSC). The composition of FSRCC, proposed to be headed by the RBI governor, will be similar to that of the High-Level Committee on Capital Markets. That, in effect, means that all the regulators will be its members. The second committee, FSRSC, will be headed by the Finance Secretary and all the regulators will be its members other than the RBI Governor. The Deputy Governor of the RBI will be a member. The Finance Minister has been advised to establish a permanent secretariat for FSDC.”
He further added that “FSDC seems to have become a power game between the bureaucrats in the Ministry and those in the regulatory agencies. The bureaucrats in the ministry would love to shift the Centre of gravity of power away from the regulators to the Ministry. Despite all FM’s good intentions, FSDC would end up becoming a draconian super boss, given the games bureaucrats play especially when the Minister is as busy and burdened as is the FM.” (For full article: http://gfilesindia.com/title.aspx?title_id=111).
On Thursday (08-07-2010) many would have read in news paper that “RBI moves Finmin to secure autonomy”. The news states (excerpt) that “The Reserve Bank of India (RBI) has urged Finance Minister Pranab Mukherjee to allow the Securities and Insurance Laws (Amendment and Validation) Ordinance 2010 to lapse, since it could affect the autonomy of all regulators, including the central bank. The ordinance, promulgated last month, will automatically lapse if the government does not bring a bill to this effect in the monsoon session of parliament. In such a case, the existing High Level Coordination Committee (HLCC) on Financial Markets, headed by the RBI governor, will remain the nodal authority for coordination among regulators.”
There are few questions which arises on the formation of FSDC, they are 1) Can FSDC will be able to avert scams like Harshad Mehta’s & Satyam? 2. Who will head FSDC, the Minister or a bureaucrat or Governor of RBI? 3) If FSDC becomes the super boss of financial markets, what will be the role of Financial Regulatory Bodies (esp. RBI)? & the most important question is 4) Do India really needs FSDC?
There are different views among Economist and Financial Analyst regarding the formation of FSDC. An important thing, we should remember is, our Central Bank (RBI) have a world reputation for its Monetary Policy and Financial Stability. Now the question is whether the RBI will remain the Apex and Autonomous Body for the Financial Markets?
Regarding this recently many articles where published about questioning on this FSDC. The article which is published in the website of gfilesindia written by GS Sood gives a clear structure of the FSDC. It stated that “It will be multi-layered. The council’s members will include the heads of financial regulatory organizations such as RBI, SEBI, IRDA, and PFRDA. In addition, the Finance Secretary and chief economic adviser of the Ministry of Finance will also be members of this council.”
It further stated that “The council will have two committees working under it, namely the Financial Sector Regulatory Co-ordination Committee (FSRCC) and Financial Sector Reforms and Stability Committee (FSRSC). The composition of FSRCC, proposed to be headed by the RBI governor, will be similar to that of the High-Level Committee on Capital Markets. That, in effect, means that all the regulators will be its members. The second committee, FSRSC, will be headed by the Finance Secretary and all the regulators will be its members other than the RBI Governor. The Deputy Governor of the RBI will be a member. The Finance Minister has been advised to establish a permanent secretariat for FSDC.”
He further added that “FSDC seems to have become a power game between the bureaucrats in the Ministry and those in the regulatory agencies. The bureaucrats in the ministry would love to shift the Centre of gravity of power away from the regulators to the Ministry. Despite all FM’s good intentions, FSDC would end up becoming a draconian super boss, given the games bureaucrats play especially when the Minister is as busy and burdened as is the FM.” (For full article: http://gfilesindia.com/title.aspx?title_id=111).
On Thursday (08-07-2010) many would have read in news paper that “RBI moves Finmin to secure autonomy”. The news states (excerpt) that “The Reserve Bank of India (RBI) has urged Finance Minister Pranab Mukherjee to allow the Securities and Insurance Laws (Amendment and Validation) Ordinance 2010 to lapse, since it could affect the autonomy of all regulators, including the central bank. The ordinance, promulgated last month, will automatically lapse if the government does not bring a bill to this effect in the monsoon session of parliament. In such a case, the existing High Level Coordination Committee (HLCC) on Financial Markets, headed by the RBI governor, will remain the nodal authority for coordination among regulators.”
There are few questions which arises on the formation of FSDC, they are 1) Can FSDC will be able to avert scams like Harshad Mehta’s & Satyam? 2. Who will head FSDC, the Minister or a bureaucrat or Governor of RBI? 3) If FSDC becomes the super boss of financial markets, what will be the role of Financial Regulatory Bodies (esp. RBI)? & the most important question is 4) Do India really needs FSDC?
There are different views among Economist and Financial Analyst regarding the formation of FSDC. An important thing, we should remember is, our Central Bank (RBI) have a world reputation for its Monetary Policy and Financial Stability. Now the question is whether the RBI will remain the Apex and Autonomous Body for the Financial Markets?
Tuesday, June 15, 2010
IIP, INFLATION and BASE YEAR
Last week many would have read or listen in news that IIP index had bettered than expectations to increase at 17.6% in April. Creating a 20- Year high achieved due to increase in consumer demand, revival in exports and higher infrastructure spending. This 17.6% (General IIP) higher is as compared to the level in the month of April 2009. Another important thing is this growth (Year on Year) is much higher compared to 2009-10 (1.1%) and 2008-09 (6.2%). When it comes to manufacturing sector alone then it had a tremendous growth in April 2010 of 19.4% over the 0.4 % in April 2009-10 and 6.7% in April 2008-09.
Another Important thing appeared in the news is Food Inflation again raised marginally to 16.74% in the week ended May 29 marking second consecutive week rise. The annual rate of inflation (calculated on point to point basis) of Primary Articles stood at 17.21 percent (Provisional) for the week ended 29/05/2010 over 30/05/2009. The annual rate of inflation (calculated on point to point basis) of Fuel, Power, Light and Lubricants stood at 14.23 percent (Provisional) for the week ended 29/05/2010 (over 30/05/2009) (Source: Economic Affairs).
In March, CSO announced that they will follow the 2004-05 as the base year for price index and they also said they will have 250 new items in WPI to provide more realistic picture of price rise and its impact on people. They also said that a new wholesale price-based index for measuring inflation would be rolled out from May 14. But the fact and reality is till date we don’t find new WPI with the base year 2004-05, we are still following 1993-94 as a base year.
There are 2 questions which arise in my mind. 1. Since we are calculating the WPI with the base year 1993-94, it is really a big question whether this inflation rate shows the real picture of the Prices and its impact on People. 2. Why CSO is unable to adopt the new price index as they said from May 14? The base year 1993-94, is not only for Inflation index but the same is used for IIP also, until the new base year comes into existence it is difficult to say whether these data’s gives us the real picture of the economy.
Another Important thing appeared in the news is Food Inflation again raised marginally to 16.74% in the week ended May 29 marking second consecutive week rise. The annual rate of inflation (calculated on point to point basis) of Primary Articles stood at 17.21 percent (Provisional) for the week ended 29/05/2010 over 30/05/2009. The annual rate of inflation (calculated on point to point basis) of Fuel, Power, Light and Lubricants stood at 14.23 percent (Provisional) for the week ended 29/05/2010 (over 30/05/2009) (Source: Economic Affairs).
In March, CSO announced that they will follow the 2004-05 as the base year for price index and they also said they will have 250 new items in WPI to provide more realistic picture of price rise and its impact on people. They also said that a new wholesale price-based index for measuring inflation would be rolled out from May 14. But the fact and reality is till date we don’t find new WPI with the base year 2004-05, we are still following 1993-94 as a base year.
There are 2 questions which arise in my mind. 1. Since we are calculating the WPI with the base year 1993-94, it is really a big question whether this inflation rate shows the real picture of the Prices and its impact on People. 2. Why CSO is unable to adopt the new price index as they said from May 14? The base year 1993-94, is not only for Inflation index but the same is used for IIP also, until the new base year comes into existence it is difficult to say whether these data’s gives us the real picture of the economy.
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