Friday, May 30, 2008

Boom in oil prices and agricultural produce prices spell trouble for capital/money markets

Only days after writing a piece on the oil crisis in the country, I'm back writing on it again. The high prices of oil have taken their first toll - oil companies are heavily withdrawing money from state-owned and national banks. Due to government's refusal to allow market forces to decide the prices yet, these cash-strapped companies can no longer afford to sell oil at present rates. Their withdrawals have created a temporary shortage of cash, to the extent that SBI had to borrow Rs. 13,000 crore from the RBI (Reserve Bank of India).

Even though the Government is facing pressure from all sides, and logically, defying the basic laws of economics, the Government refuses to budge and is seeing the budget go in a loss this year.

How do you think that Government supports such huge subsidies for agriculture, oil, fertilizer, other consumer needs?? They raise the much-need capital through bonds. With a higher subsidy this year, the bond supply is going to increase further, and consequently bond prices will go down (less demand, more supply). This in turn, is likely to push interest rates up and reduce liquidity in the market, which is indirectly, a good way to curb inflation too. But bad for the overall economy. Therefore, the major blame can be put on the government and government alone!

On the other hand, if petrol/diesel prices are increased throughout India, where would the common man, that is, you and me, go? Scooter and car sales would stop, we'd have very less to spend and most probably, inflation would move at double-digits. Lets keep our fingers crossed and explore ways to set all this right!

Think my argument was valid, or totally trash, shoot off a comment on the comments page.

No comments:

Post a Comment