Thursday, February 15, 2007

Solutions to Key talking points 6

1. Most of the time, with reduced inflation, the farmer gets a lower rate for his produce. At the same time he spends less on the goods he buys. But note that there is a negative impact on his savings. So he may be on the slight negative side.
Curbing inflation may mean that only the end price is reduced and may sometime have little impact on the price that the farmer gets. (E.g., in case of petrol price cut). In that case he does not get affected.

2. It will have downward impact.
Increased interest rates means more savings and lesser money supply in the market. Hence downward impact. Also real estate prices will go down and hence downward impact again.

3. It will have an upward impact.
No tax benefits mean that people don’t save as much and hence upward impact with increased money supply. But also note that this may be a little dented, since Government collects 30% of that money as tax and hence may be able to control the impact to an extent.

4. It will have a downward impact.
Real estate will go down. Though it is not a part of WPI/CPI, it will have a downward impact on inflation. The price of the tomatoes you buy from foodworld (or even the local market) also includes the real estate cost to certain extent. Lesser money in real estate market means lower money supply too and hence downward impact again.
The money (tax part) shifts hand from people to the Government. And hence Government has the ability to control better

5. Negative inflation is a sign of recession. Inflation is a sign of a growing economy. But if it is high, the positives from the growth are dented.

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Blogger Gyan-ee said...

For answer 4, look at it this way and it will be clearer.

When the tax benifit on the house loan is removed, it increases the effective interest rate on that loan. And hence the answer will be same as for Q2

11:28 PM, February 15, 2007  
Blogger Gyan-ee said...

One more little clarification on Question 3.

There are different tax saving bonds. If it is infrastructure bonds and mutual funds, note that the money is still in supply in the market. And hence removing benifit may not impact money supply there.
If will impact in case of fixed income or pension funds. Also note that some part of the mutual funds are invested in fixed income/ Govt bonds. So the money supply gets affected to that extent.

So on the whole, there will be an upward impact, but very little.

11:35 PM, February 15, 2007  

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