India highly prone to global credit crisis

Citigroup cites India’s very high ratio of total external finance to forex reserves and high level of mobile capital compared to the reserves as the main drawbacks, making the country highly vulnerable to the global financial crisis.

“Regardless of the future path of the financial crisis in the US, global economic and market conditions are likely to change. The world will probably no longer be the same as the one of the past decade. The global turmoil will further tighten liquidity and lead to a dramatic slowdown in global assets inflation,” says the Citigroup report. The report adds: “Rising capital outflow risks could also add greater pressure on the Indian rupee, won, peso and rupiah.”

A fund manager of a domestic brokerage house said selling by hedge funds in the Indian market is like throwing a stone in the sea. Since the depth of the sea is not known, it will be difficult to ascertain where the stone is headed or how far hedge funds will continue with their selling spree.

Source: Business Standard

Quick Inflation tutorial - 1

Inflation:
Symptom - Rising prices ( usually this is considered as cause )
Cause - increase of money supply in market
Consequences of Inflation - Dont tell me u dont know yet!!
Worst case scenario - Hyperinflation

Increase in price of a certain good can happen in any of the following cases:

1. Increasing the supply of money

2. A decrease in the supply of goods and services

3. An increase in demand, i.e. population increase

The last two cases will result in increase of a particular good and not general price levels in the market.
What is generally explained by authorities as cause for inflation could be any or a combination of below listed reasons:

1. Cost-push inflation as a result of arbitrary demands of labor unions.

2. Profit-push inflation resulting from the greed of businesses raising prices.

3. Crisis-driven inflation resulting from acts of nature or weather.

These reasons are said to account for a large rise in the general price level (not just a relative rise in some prices, such as the price of oil), the economy’s output must shrink by a large percentage. In practice, “supply shock” cases are seldom large enough to account for much inflation and are typically short-lived. For example, of the 9.2 percent U.S. inflation rate in 1980 (as measured by the GDP deflator, gP = 9.2 percent), the negative growth of real GDP (due, in part, to the OPEC oil price shock of 1979–1980) accounted for only 0.2 percentage points (gy = −0.2%). [Source]

Inflation is an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, an increase in the quantity of money caused by government.

I will deal how it happens in later post.