The Last Week - Economic Reforms, QE3

There was lot of activity in the North Block & PMO last week. Manmohan Singh Government finally decided to bite the bullet and unleash the economic reforms in order to revive the economy which was at its lowest point in the last 8 years - thanks to a slowdown in Eurozone, 2% GDP growth in US and the spate of corruption scandals which have hit the UPA Government in its second term.

The mood was extremely pessimistic in the last 2 quarters and was deteriorating by the day. Therefore, it was extremely important that the Government announce a flurry of big bang reforms to revive the economy. It did exactly the same. The following announcements were made starting Thursday i.e. Sept 13. On Thu, Government hiked diesel prices by Rs.5 a litre and limited the subsidy on domestic LPG to 6 cylinders (per family) in a year. Next, on Fri, Sept 14, Government announced opening up of retail sector by allowing 51% FDI limit in multi-brand retail, 49% FDI in Aviation sector & broadcast industry.

Effect of oil subsidy due to the increase in diesel prices & reduction of subsidy on LPG?.

The Government claims that oil subsidy will come down by approx. 20300 crores.

Announcement by US Fed

Another important global news of the week was announcement of Quantitative Easing 3 (QE3) by Ben Bernanke in US. He announced that US FED will buy $40 Billion of US Government bonds every month till the end of 2015. This is to keep the interest rates @ ZERO percent in order to boost the US economy. 

What will be the consequences of QE3 - I believe it will fuel inflation due to the rise in commodity prices. Gold prices have seen a new high, metal prices are rising & crude already rose 1.5% post the announcement of QE3 by US Fed.

What will be the impact of QE3 on India

This will fuel inflation and the claim by Government that the oil subsidy bill will come down by 20300 crores will not be possible. This will negate the effect of increase in diesel prices and will do no good to India. The action by US Fed is detrimental to the global & Indian economy and the commodity prices will rise by astronomical amounts. 

I believe that the best asset class for investment in this scenario is GOLD.

Will RBI initiate a rate cut on Mon, Sept 17 

It will be very interesting to see whether RBI Governor will announce a rate cut in its mid quarter monetary policy on Sept 17. It is expected that the RBI Governor will join the party but the increase in inflation by 68 bps will compel him not to initiate a rate cut. Also, the announcement of QE3 will prompt the RBI Governor not to cut the interest rate as he is already able to see the inflationary effects of QE3.

It will be a very interesting week to follow & I, like everybody else is keeping my fingers crossed. I expect the Government to continue with economic reforms and stay the course.