Myth of free market
A fundamental principle of economics is that “in a ‘free market’ current price of anything having an economic value is a function of demand and supply of such things at that particular point in time.” Of course, there could be multiple factors that may impact the demand and supply of a thing; but usually nothing impacts the “price” directly other than the forces of demand and supply.
In a ‘controlled and/or manipulated market’ the prices of things are fixed by the controlling authorities (or forces); regardless of the demand and supply for such things. In such markets, usually demand and supply of things are controlled and/or manipulated; or demand and supply duly get adjusted to the fixed/manipulated prices.
In the modern world, money is arguably the largest factor of production in the world. The price of money (interest rate) should ideally be a function of demand and supply of money. In case of excess supply, the interest rates should be lower and vice versa.
If we apply this core principle of economics to the world around us, we may discover that a significantly large part of global markets is presently either controlled or manipulated. The free market may only be prevalent in textbooks now. It has been completely obliterated from the political speeches across the world; and is also being systematically removed from the policy documents.
The US Federal Reserve can simply manipulate the supply of the USD to influence the prices of bonds, goods & services denominated and settled in USD. An axis led by China and Russia is emerging to weaken the powers of the US to manipulate the global markets through controlling supply of USD. So far, it is more of an intention. There is no work-in-progress evident on the ground.
Removing all doubts
Notwithstanding all the grandstanding, global preaching, and progressive narratives, the US has mostly been a racist and sexist society. For many decades there was a pretense on part of the US politicians to present it as an inclusive, liberal and free society. In the ongoing elections the pretense has been shed. There is a conspicuous effort to make the contest between a Right wing, “white” supremacist “man” and a “woman who happens to be “black”.
Confidence of RBI
In its latest monetary policy report, the RBI has expressed strong confidence in the Indian economy. It projected the real GDP growth of 7.2% for FY25. It also sees the growth momentum sustaining in FY26 with 1QFY26 of 7.3%.
On the other hand, the brokerages are projecting material slowdown in profitability growth. The corporate tax collections for FY25, so far, are down 6% yoy. The core sector growth has collapsed to many months low in August. The capital expenditure of the states in FY25 is projected to be less than even FY23. The central government spending which has supported the growth since FY21 is also tapering. Private capex has picked up but is mostly related to asset (land and building) acquisition rather than enhancing productive capabilities.
I wonder where the confidence of the RBI is flowing from! Is RBI relying too much on the forward looking surveys indicating better business and consumer confidence for the future despite conspicuous deterioration in the current conditions? Or is there something not known to the markets; just like Haryana election results where CM Saini could clearly see what no one else saw.
INR, yields and rate cuts
RBI has apparently let go of the USDINR 84 level, which it was allegedly defending for almost a year. The FPI outflows are accelerating every week. The US0 India yield gap is narrowing, further raising the specter of accelerated outflows.
The benchmark US yields (now 4.10% rising 40bps after aggressive 50bps rate cut by the US Fed) and mortgage rate (now over 8%) have not behaved on the expected lines.
In India also there is almost a consensus over a repo rate cut in December. The MPC members might however be wondering whether it is desirable to waste one important arrow in their quiver at this point in time when there are ample indications of a crisis like situation emerging in 2025, requiring aggressive policy support. Given the market condition, a rate cut may not be passed on the borrowers as banks are already struggling with credit-deposit growth mismatch. The benchmark yields have already eased in anticipation of a cut and may not ease much post the cut. In any case, the RBI may not like the US-India yield spreads to narrow further, further pressurizing USDINR.