Current interest rates are too risky

Thu, 26 Aug Pre-Open

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It is time China, US and Europe do what India did. Infact, India has done it four times in the past five months. On the other hand, countries like Malaysia, South Korea, Taiwan and Thailand have done it at least once this year. We reckon you should have guessed it by now. In case you haven't, we are talking of interest rates.

Jim Rogers, one of the most famous investors of our times, has opined that most countries increase interest rates to contain a surge in inflation. "Everyone should be raising interest rates, they are too low worldwide", Rogers is believed to have told Bloomberg.

Indeed. China's central bank has not increased rates since November 2007. The US Federal Reserve's policy of keeping interest rates at record lows has been in existence for more than 18 months now. And the European Central Bank has kept its key interest rate at a record low of 1%. Thus, all of these major economies seemed to have kept interest rates too low for too long. This strategy has often proved to be disastrous in the past. And there is no reason why it may not lead to the same outcome in the future as well.

Rogers believes that the world never got out of the first recession. He further added that the Chinese economy is a fraction of the US and Europe combined whereas the Indian economy is a quarter of China. Thus, even if both these economies were to grow, they won't be able to bail out the whole world.

Little wonder, Rogers is continuing to stock up on commodities. A slowdown from here would prompt Governments to go in for a fresh round of money printing and this would lead to further currency devaluation. Thus, as per Rogers, commodities are the way to go. "Commodities will go above their old high sometimes in the next decade even if they grow 5%-6% annually", the bow tie sporting investor is believed to have said.

We believe that Rogers has covered himself quite well here. Even if his thesis of a continued recession is wrong, inflation and economic growth would ensure that commodities still scale new highs. Thus, recession or not, commodities seem destined to go higher.

Investors in India though can also invest in good quality stocks apart from commodities. For economic growth in the long term is not an issue for India and thus, good quality stocks provide an attractive avenue for enhancing wealth just as commodities are likely to do.