How hungry and able is consumer: Economic Times: 16th September 2025

 

Why corporate borrowers need to track the credit default swap rates: Mint: 14-15 September 2025

 https://www.livemint.com/opinion/online-views/sovereign-ratings-india-credit-p-moody-s-fitch-government-bonds-cds-brazil-south-africa-israel-insurance-swaps/amp-11757666673267.html

Why targeting headline inflation is essential to control inflationary expectatio...Forbes September 9 2025

 The credit policy targets headline inflation, which is the practice in almost all countries. The Monetary Policy Committee (MPC) also targets the same in India as this has been the mandate from the start and not changed when it was reviewed after running for the first term. However, each time the policy is announced, there is the economist’s debate on why core inflation should be targeted as, in the last year or so, it has run lower than headline inflation. The reason is that, last year, food inflation was high, which increased headline inflation while core inflation was relatively low.

An ideological issue is whether policy should narrowly focus on core inflation, which is theoretically what can be targeted by monetary policy. The logic here is that food prices cannot be influenced by policy. There can be no argument here as prices of pulses or cereals are not dependent on interest rates but supplies. Therefore, core inflation makes more sense. Or so goes the argument.

The argument here is that monetary policy deals with the entire economy and not just the ‘core inflation’ sectors. Policy is to impact inflationary expectations and adjust the real interest rate accordingly. After all, the rate influences not just lending but also savings and, hence, cannot ignore the broader macros. Therefore, the headline inflation number should be under focus.

Now let us look at how inflation has behaved in the last 15 years or so since the CPI index was instituted. The average headline inflation has been 5.8 percent since 2012-13. In the last 10 years, which is roughly when the MPC was actioned, it was 5 percent. And in the last five years, it was 5.7 percent. The corresponding numbers for core inflation were 5.6 percent, 5 percent and 5.2 percent. Therefore, we can see convergence of the two series inflation averages. The differences are mainly due to the food segment, which kept the headline numbers higher in general. Hence, if one went by pure numbers, the rate action should have largely been unaffected on almost all occasions, though monthly trends could have led to different outcomes. Quite surely, the MPC would have looked at these trends when coming to a decision.

An issue which comes up here is that if the core inflation argument is based on the premise that interest rates do not affect food prices, does this hold for core inflation at the theoretical level? Clothing and footwear (weight of 6.5 percent) is rarely financed by loans, though credit cards are used. Normally, purchases are based on need, which can be a festival where interest rates may not matter.

The same holds for, say, housing rent (10 percent), household goods (3.8 percent) which is rarely based on leverage. This can also be said about education (4.5 percent), personal care (3.9 percent), health (5.9 percent), recreation (1.7 percent). A part of transport inflation (1.3 percent) may be affected by policy, though prices are rarely affected by demand conditions.

Therefore, when one looks at policy targeting, it has to be headline inflation as this is what drives decisions on savings as well as investment. The repo rate has to be aligned with real interest objectives, which may not be overtly stated. Just like it is said that some minimum inflation is needed for industry to produce, as there has to be profit made, the same holds for savers where there needs to be an incentive. Further, even industry looks at both interest rates and inflation when taking decisions. Foreign funds look at comparable real interest rates when taking a decision to invest. High inflation economies can be a deterrent, especially if monetary policy is not aligned. Last, targeting headline inflation is essential to control inflationary expectations.

Based on these arguments, it stands to reason that monetary policy should continue targeting headline inflation. Should it target wholesale price inflation instead, where manufacturing has a higher weight and so does core products? This can be a different discussion as the WPI (wholesale price index) is more susceptible to excess demand forces, which can be influenced by interest rate policy. But this is not the mandate of the MPC, which looks logical, too, for two reasons. The first is that the WPI is incomplete as it excludes services. The second is that it does not represent the major segment of the economy: The consumer.

Hence, the present practice of targeting CPI headline is appropriate. It can be argued which number it should be and whether 4 percent or the band is appropriate. But, quite certainly, the argument for targeting core inflation is not convincing. As a consolation, for those who favour core inflation targeting, as pointed out in the beginning, there has been a tendency to converge with the headline numbers and would, hence, not have changed the outcomes.

The silent de-dollarisation: Financial Express 10th September 2025

 US treasuries are considered the safest forex asset as the dollar continues to be the main global currency. In fact, the US virtually controls the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments system, as all banks get linked to this set-up. When the Ukraine war started, all payments to Russia were blocked by the US which had imposed sanctions on the aggressor. The blow was severe but also a signal to other nations of such possibilities. US treasuries, hence, are still preferred by all central banks; but things have been changing.

The US’s infallibility was questioned when the debt ceiling issue emerged on several occasions. These limits were then raised, but discussion has focused on exploring alternatives to the dollar. This is why countries have been diversifying their forex holdings, even as the dollar remains dominant.

Shifting patterns in US debt holdings

A look at the ownership pattern of US treasury securities is interesting. Over the last 10 years or so, the US’s total public debt increased from $18.15 trillion in March 2015 to $36.21 trillion in March 2025—an increase of almost 100%. The share of foreign holdings, largely those held by various central banks, was as high as 34% in 2015. It has come down to 24.9% in March 2025. This does reveal two things that are reflections of each other. First, central banks are diversifying their holdings. Second, the US government is less dependent on foreigners for subscribing to their debt, which is compensated for by domestic holders.

Further, the holdings of the Federal Reserve has come down from 41.4% in March 2015 to 31.8%. This can be explained by the fact that when the Fed went into the quantitative easing mode, banks tended to sell their treasuries to the Fed for liquidity. As this process eased, the Fed’s share tended to move downwards. Mutual funds have increased their treasury holdings—the share has gone up from 6.4% to 12.2%. The support provided by the Fed is still very significant, at almost a little less than a third. This can be contrasted with the Reserve Bank of India’s holding of central government debt—12-13%. Clearly, the US government’s dependency on the central bank is greater.

The same also gets reflected when the share of currencies in overall forex reserves at the global level is considered. Between 2016 and 2025, International Monetary Fund data shows, the dollar’s share has come down from 65.5% to 57.7%. In contrast, there has been an increase for other currencies like the euro (19.6% to 20.1%), pound sterling (4.7% to 5.2%), yen (3.7% to 5.1%), and renminbi (from virtually nil to 2.1%). Such diversification is also the result of the gradual change in the balance of power across the world economy. While the dollar is still dominant, countries are investing in other hard currencies. The euro will continue to be the second most dominant currency as all member countries hold their forex assets in this form. It will get progressively popular as its acceptability has been growing, given the orderly management of the economy since the 2011 euro crisis.

Gold’s resurgence as a safe haven

It has also been observed that central banks have been increasing their gold holdings as part of their forex reserves over time. World Gold Council data for June 2015-June 2025 shows some interesting patterns. All big economies have increased the share of gold in forex reserves. Covid-19 was the turning point, followed by the Russia-Ukraine war, leading to sanctions being imposed by the US. With the tariff issue causing further uncertainty, gold becomes the natural safe haven.

Gold share in forex reserves rose from 5.9% to 13.1% for India, from 1.7% to 6.7% for China, 8.3% to 16.6% for the UK, 10.1% to 19.4% for South Africa, and 6.3% to 13.2% for Australia. In a way, there is a case to believe that countries are de-risking their interests from the idiosyncratic policies followed in the US. Even developed countries like Germany, Italy, and France have increased their share of gold holdings by over 10 percentage points during this period. It is not surprising that the price of gold has received an impetus due to this demand factor.

The recent episodes of tariffs, sanctions, and interference of the US in economic decisions of sovereigns would only hasten this shift away from the dollar. The world has already started moving towards more free trade agreements as well as economic blocs that the US is opposed to. As these agreements become stronger and wider in terms of coverage of nations, it is natural that the currencies used will tend to change. The payments systems will also see the rise of alternative channels to SWIFT. The lesson is that the US needs to be more flexible in taking on the role of the anchor nation and currency vis-à-vis developing and maintaining the global economic order.

With GST 2.0, bonanza for consumption and investment: Indian Express 4th September 2025

 The GST 2.0 regime will be effective from September 22 and has been timed really well. This would be the start of the festival season, where typically Indian households buy consumer goods and book homes. These are auspicious times, and households have held back purchases ever since it was announced on Independence Day that there was a rationalised scale to be announced in September.

The timing is significant for two reasons. First, a common lament from FMCG companies was that urban demand was down due to high inflation in the past. With GST rates being rationalised in the downward direction, this will be the cure for sure. There should be an immediate fall in prices that should spur demand. In fact, savings on FMCG products across the board should release significant resources for households to spend on other goods. Second, the tariff issue has reached a dead end with the 50 per cent rate now a reality. With several inputs now having lower GST rates, the exporters will get some relief on the cost side, which can aid in removing a part of the tariff disadvantage.

How do prospects for consumption look? The government has announced that the overall revenue loss would be Rs 48,000 crore. This is not as large as has been estimated by analysts. There is a gross revenue foregone of Rs 93,000 crore, of which Rs 45,000 crore is being recouped by higher duties on a set of luxury items. Any revenue foregone is a gain for the consumers

The way the GST council has segregated goods is interesting. All necessities go at a lower rate of 5 per cent or are exempt from the tax. Comforts, which include consumer goods, go at a lower rate of 18 per cent, while luxuries, including sin goods, go with a higher rate of 40 per cent. This is probably the most equitable way of rationalising rates. Demand for necessities and comforts should go up. In fact, for consumer goods, including auto, it is a major boost as costs come down substantially. An entry-level car of Rs 5 lakhs will save Rs 50,000 as GST, which is a big gain. The same holds for two-wheelers and tractors. For sin goods and luxuries, the GST does not matter as demand is inelastic. There could not have been a better reclassification.

Will government fiscal balances be affected? The revenue foregone of Rs 48,000 crore can be absorbed in the budget, given that other revenue has been buoyant and the RBI transfer of surplus was higher than expected. Therefore, in the absence of any slippages, the fiscal deficit number can be maintained at 4.4 per cent. The compensation part for states has not yet been announced. But given the intrinsic buoyancy in the economy, there should not be a major challenge. In fact, higher spending by households should generate a secondary chain of GST revenue for the Centre and states. Bond yields have reacted positively, which vindicates this position.

How about GDP growth? Prima facie, consumption should increase immediately, and if the pent-up demand for the last two years is clubbed with tax cuts as well as the income tax relief given by the budget, we can expect a big jump in spending. This, in turn, should also help the industry as capacity utilisation improves and companies go in for fresh investment at the secondary stage. This could materialise towards the end of the year, depending on how good the spending is. Therefore, the two major engines of consumption and investment should be positive during the second half of the year, which will add to GDP growth.

The biggest impact will be on inflation as consumer prices come down. The government will have to ensure that companies do not hold back these gains, and the anti-profiteering clause needs to be implemented with alacrity. The core inflation part will see a decline, which will have a soothing effect on headline inflation. The advantage is that this benefit will flow over a period of a year, as lower prices will get reflected over higher base numbers in the last 12 months. This can help in moderating the inflation projections of the RBI in FY27, too.

Will this impact credit policy outcomes? Here, there is a shoulder shrug. Lower inflation will prevail in the coming months, which will bring down projections for sure, providing more room to the RBI when it comes to rate cuts. On the other hand, growth prospects look better after this announcement, and the rate of 6.5 per cent does look very much on the cards. If so, then it will be a subjective call to take on rates as inflation will trend lower while growth will hold up. A pause for the time being looks more likely.

The GST council, however, has not included fuel products, which presently have the highest effective taxes when excise and VAT are combined. This will probably be the last frontier that has to be addressed at some point in time, as the rates are way above those of other goods and services.

The GST has been one major success story in the process of reforms, which has withstood several challenges, including Covid, where revenue ground to a halt, thus affecting overall collections. This made compensating states a challenge. This was overcome quite successfully and the system has reverted to normal to enable the council to bring about this rationalisation. Growth in collections is a direct function of overall growth, which has to tick to enable the same. The present dispensation rationalises rates as well as corrects inverted duty structures where inputs are taxed at higher rates than the final output.

Hence, the government and RBI have set the right preconditions for growth: The former through the fiscal incentives on income tax and GST and the latter on interest rates. Theoretically, this should work well, and the final result will be known in the next two quarters.

GST rationalization can be key to increasing consumption: Free Press Journal 1st Sept 2025

 https://www.freepressjournal.in/analysis/gst-rationalisation-can-be-key-to-increasing-consumption

Ruminations on inflation targeting: Business Line 3ed September 2025