Unlike water, money always flows to the higher
grounds.
It may sound bizarre, but when it comes to global
movement of capital, money tends to behave like water in a Tsunami, in which it
defies gravity and ends up flowing to higher grounds.
This may also explain why, despite very
concerted and calculated efforts by top economists and bankers of India, like Finance Minister Pranab Mukherjee,
Chairman of the Planning Commission Montek Singh Ahluvalia and various reserve
bank governors meticulously applying every tactic in the text books, India’s
inflation defies taming. The interest rates have been hiked eleven times in the
past year and have reached 8% compared to almost zero in the developed world.
The vagaries of the Indian monsoon and the oil prices and the imperfections of
the Indian distribution system apart, the huge Inflows and outflows of foreign
funds definitely rewrite the rules.
There is enough evidence of this happening if the
trends of the past decade are examined. Extracts from the Annual Report of the Reserve Bank of India shows that there is a co relation between
the interest rates in the US (and the
developed world) and huge capital flows to the emerging markets. When the rates
are lower, clearly the higher rates elsewhere are attractive to investors and
vice versa. This trend, not seen prior to the past decade or so, abetted by the
modern technology and sophisticated financial instruments including ETF as well
as the modernization in the fiscal policies and systems in the developing world
more open to external investment, is in fact creating tsunami like effects
around the world.
One of the worst effects of this uncontrolled
flow of money around the world is similar to the devastation caused and left behind by a
tsunami when it recedes, in nearly the same fast pace as it advanced. It is
evident that the stock market and the share prices move in a bizarre fashion,
not coherent with and totally disregarding market fundamentals and baffling
corporate managements and investors alike.
compared to almost zero in the developed world.
The vagaries of the Indian monsoon and the oil prices and the imperfections of
the Indian distribution system apart, the huge Inflows and outflows of foreign
funds definitely rewrite the rules.
.
.
The trouble is, if the funds were to be entirely
deployed for wealth creating and productive purposes and investment as they are
intended for, perhaps the effect on inflation could be limited or controllable.
But there are huge sieves in the system through which a lot of it ends up in
the spending hands of the upward moving Indian middle class.
To start with the wage increments in India in the IT
sector are typically two or three times the inflation. The over and unreal
capitalization of the stock market in the periods of bull runs abetted by the
flow of Inward investment generates bubbles all over the industry, like in the
realities sector for example. Helped by the inherent weakness in the supply and
demand system, prompting parallel markets and cartelisation make sure that
prices and inflation remain high and uncontrollable.
The way forward for India and other emerging nations
will be to device systems to lock in such incoming funds or at least for
temporisation of their movements.
Ref-http://technorati.com/business/finance/article/why-do-you-think-india-cant/page-2/
