Is India on the verge of 2008 Crunch ?

Is India on the verge of 2008 Crunch   ?

Some TRANSMISSION MECHANISM FAILURE Indicators in regard to that :-

1.   Bond Market Vigilance:- If  supply of money  growth is considered as inflationary, LONG TERM BONDS will be relatively less attractive because of HIGHER EXPECTED FTURE ASSET PRICES  & will increase Long-Term Rates.

( Increasing Money Supply to stimulate economic activity could lead to an increase in expected inflation rates & long-term bond yields even when short term rates are falling).

This scenario is less relevant in the current context of the Indian Economy in my opinion.

2.       Liquidity Trap :- Demand for money is very much elastic & Individuals hold more money even without a decrease in Short Term rates.

( Money Supply Growth is increasing but short-term rates are still not decreasing because High Cash Balances by the Individuals instead of some investment in the securities)

This scenario is most relevant in the current context of the Indian Economy in my opinion & that’s what Indian economy is going through.

3.       Quantitative Easing (QE):-Banks with excess reserves because of Purchase of Securities by APEX BANK

                                                but  banks are not willing to lend & hence economic growth still poor.

( Money supply increased by the Apex Bank & also decreased short term rates almost to zero but still Banks are not ready to take the lending risk).

This scenario is also most relevant in the current context of the Indian Economy in my opinion.

Was one of the reasons for credit bubble that collapsed in 2008.

In UK, DURING 2008-2009, British Govt. made a BIG BLOCK purchase of government Bonds which were having the maturity due of 3-5 years & the government intent was quite clear to everyone i.e. to reduce Interest rates to encourage the Industrialist, individuals to borrow & to generate excess reserves for banks but because of uncertainty about the future, banks behaved conservatively & thus transmission mechanism failed here.

Also, In the US DURING 2008-2009 Fed bought a Handsome amount of Assets (except Short-Term Treasury securities ) were purchased like Mortgage Securities from banks to reduce Interest rates to encourage the Industrialist, individuals to borrow & to generate excess reserves for banks in an attempt to revive the housing markets specially, but because of  about the future, banks behaved conservatively & thus transmission mechanism failed here as well.

But when the above transmission mechanism failed, then  US  introduced another fresh round of QE2 by purchasing by making another big purchases bigger than QE1 & even bought the securities with credit risk they got some stimulus to economy but in this also it is  just that Bank’s balance sheets got improved & it’s a kind of risk shifting from private to Public ( This method won’t be very viable in the Indian Economy as per my opinion).

DEFLATION IS VERY DIFFICULT TO REVERSE in comparison to INFLATION.

(JAPAN is a best example from the history).

Steps that Indian Government should considered to overcome this SLOWDOWN :- NEXT BLOG