‘The beast isn’t tamed yet’. The RBI governor said this in his own, long, pedantic style. The beast clearly is inflation. The markets didn’t get what it wanted. Rates wouldn’t go down too fast, too soon. Hardly surprising, isn’t it? The central bank makes decisions based on empirical evidence. It needs to have the right numbers before it in order to take hard decisions. But, the business of the stock market is very different from that of the central bank. The stock market works on the basis of expectations. Smart investors make decisions expecting things to get better. When the evidence shows up in the numbers all the smart people would have bought stocks. Markets can never work on evidence. Central banks can work only on hard evidence. The trouble starts when stock investors look to central bankers for market direction and the government looks at the central banker to make that leap of faith. Making that leap of faith is the stock investor’s job. When the beast is finally tamed, the genie will be out of the bottle and out of your reach.
The wall of fear is virtual. Crash it in your mind.
Inflation is a statistic that is generated year one year. We measure the growth in prices over the trailing twelve months. Simply put, it helps us measure rising costs. When the prices in the previous year (base prices) were higher and present year prices haven’t grown too much, inflation tends to fall. We are stepping into a phase when the base prices will be high and prices will not grow too fast. If the prices stop rising as fast as they did last year, that itself will bring inflation down over the next four quarters. Interest rates are usually kept high to dissuade people from consuming more. Lower rates would result in higher consumption. When inflation is already high it is not possible to drop interest rates. Rates will drop only after inflation reduces. The waiting period cannot be shortened. It will have to play out over time.
Believe in the economy now. Evidence will follow.