The value of the Rupee: update as of October 2015

RBI Watch                                                                                                 Indian Rupee

Please also read my April of 2014 blog titled "Is the Rupee fairly valued?" 

   

The Federal Reserve should raise the target fed funds rate at its December meeting

Central Bank Watch

Employment numbers in the U.S.  suggest that the country is at near full employments levels. There is some evidence appearing of wage increases.

GDP continues to grow steadily at about the 2% level, less than the trend growth of about 3% before the 2008 financial crisis. Inflation continues to run below the Federal Reserve’s target of 2%. This looks like the ‘new normal’. Note the expansion in the US economy post-crisis is now one of the longest in US since 1900.

The situation in China is currently stable. The government recently announced that families would be permitted to have two children. China’s central bank announced another round of easing. There is a shift in the economy from investment to consumption.

The Federal Reserve now needs to start normalising interest rates in the U.S. At 1.5% inflation, the fed funds rate would normally be in the region of 2.5 to 3%. Keeping interest rates unusually low for extended periods will create major distortions in the U.S.  economy and the rest of the world. Please read this paper by Paul Mason on this subject.

To get to a fed funds rate of 2.5 to 3%, the Federal Reserve needs to do it in gradual steps over the course of the next two years. The sooner it starts the better.

A China or an emerging markets shock is still possible. If the Federal Reserve believes it needs to respond to it, it can when interest rates are at the normal level. Similarly the Federal Reserve can respond to a recession in the U.S. – a recession can well be on the cards in the next two years after one of the longest expansions in U.S. history.

Monitoring the NaMo Bull Market in Stocks: Update as of October 2015

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether the market  is cheap or expensive.