For those of you who are wondering what is happening with Indian Economy, here is a quick update.

We know inflation is alive and kicking. Food prices are at a high.
Growth has slowed down from 9% (which we saw over this year).

A slowing growth and rising inflation is called STAGFLATION.  

S-T-A-G-F-L-A-T-I-O-N is the word that I am humming now. I was discussing this with an eminent economist here in the US and he quickly told me… “In order for stagflation to really take hold, you would need some concrete evidence that unemployement is increasing — otherwise, we’re just talking about inflation.”

A very good point indeed. The trouble I have is, Indian govt doesn’t produce the unemployment numbers like US. I won’t be able to make a reasonable judgement with unemployment.

OK, now govt has two things to do. (it always had a twin mandate)

a. Keep up growth (And hence employment to masses).
b. Contain Inflation.

For (a), the easiest thing that Govt can do is to lower interest rates but that will hamper (b).

Now its all about playing the cards right, which of the above is important now ? (b) seems to be the priority now ****, contain price rise, ward of Communists wrath, put up a good face in the elections next year.
Now that the direction is clear, here are my predictions

a. If US situation continues to detoriate, govt could let lose the USD/INR a bit more. USD/INR = 38 looks a possibility in the near term
b. Once (a) plays out and US situation continues to detoriate and goes past the recession zone, inflows into India go pale and USD/INR could appreciate past 40.

So USD/INR volatility is here to stay which is why FM is worried.  ****** ( How nicely a straddle can work )

In short, India is in the problem zone which I have been talking about for the last 2 years.
We are COMPLETELY at the mercy of US / Global growth.

How is this going to affect us ? Thats a topic for the next article.