Tagged: Rate hike

Inflation, a Major Policy Concern for China Government

China Government is geared up to control inflation in coming months. It intends to control inflation by controlling money supply and lending. Fears of asset bubble and price rise are haunting Chinese government. Analysts are expecting drastic measures from the Central Bank including further rate rises.

China increased interest rate by 25 basis points on Christmas surprising analysts. China inflation has reached 28-month high due to rising food and asset prices. Excess cash in the system is seen as major driver of inflation. The task of taming inflation will be a priority for the Chinese government in the next year, Reuters noted.

A deputy governor of Central Bank, Hu Xiaolian issued a statement on its website on Monday. Hu reiterated the central bank’s determination to drain excess cash from the financial system by using all tools at its disposal such as interest rates, reserve requirement ratios, open market operations and more.

Foreign investors view China’s inflation-controlling measures as a signal for strong growth of Chinese economy. Chinese officials are confident that the growth of Chinese economy is supported by strong and sustained recovery.

RBI to act ‘appropriately’ on inflation – Pranab

Reuters | Sep 11, 2010 | 3:04pm IST

RBI headquarters in Mumbai The Reserve Bank of India (RBI) will take ‘appropriate measures’ to tackle inflation, the finance minister said on Saturday, though he added that India could not go on a "reverse growth path". Pranab Mukherjee was speaking a day after data showed industrial output accelerated much faster than expected in July, strengthening the case for further monetary tightening by the central bank to tame near double-digit inflation. Recent signs of cooling growth in Asia’s third-largest economy, along with a sluggish global economic recovery, had tempered expectations for a rate increase at the central bank’s policy review on Sept. 16.

But economists said the surprisingly strong industrial performance boosted the chances of a rate rise next week. "Inflation is a concern. I am concerned that prices are increasing," Mukherjee said in Kolkata. "RBI will take appropriate measures as and when needed. But at the same time, I cannot go on a reverse growth path." Pranab Mukherjee said India would likely grow between 8.5-8.75 percent in the fiscal year ending next March, therefore possibly exceeding earlier growth estimates of 8.5 percent. Industrial output rose 13.8 percent in July from a year earlier, nearly double analysts’ forecasts for a 7.7 percent rise. It was the fastest growth since April.

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RBI can afford to be less hawkish – BarCap

Reuters | Aug 20, 2010 | 2:16pm IST

The Reserve Bank of India will probably pause after raising interest rates for a fifth time this year in September, signalling a less hawkish stance as inflation pressures begin to ease, an economist at Barclays Capital said. The Reserve Bank of India (RBI) has increased its main lending rate by 100 basis points since mid-March to rein in high inflation. The tightening policy has cooled headline annual inflation to just under 10 percent in July, after stubbornly staying in double-digits for five months. “The RBI is no longer behind the curve as far as managing inflation or inflation expectation is concerned,” Rahul Bajoria, regional economist at Barclays Capital, said in an interview. “So from that perspective I think the RBI can possibly afford to be slightly less hawkish from here on.”

Rising rates have also weighed on factory output, which rose at its slowest pace in 13 months in June at 7.1 percent from a year earlier. Exports grew an annual 30 percent in June, slower than 35 percent rise in May. Still, the RBI has forecast the economy will expand 8.5 percent in 2010/11 from 7.4 percent last year and the fastest pace among major economies after China. Bajoria reiterated the bank’s forecast for another 25 basis points increase in key rates by the RBI when it reviews policy on Sept. 16. “The market has fairly priced in both policy rate hike and liquidity constraints. Once the RBI has given its intention that repo rate will be the operating rate, I don’t think market is panicking on the liquidity situation,” he said. Continue reading

‘No rate hike’ on soft inflation numbers

ABC News | Wed Jul 28, 2010 | 4:24pm AEST

A surprisingly soft inflation number has all but ruled out the chance of an interest rate hike next week. The ABS Consumer Price Index’s headline figure rose 0.6 per cent in the June quarter compared with the previous quarter – that was well below the median analyst forecast of a 1 per cent rise. Of the 21 economists surveyed by Bloomberg the lowest estimate was for a 0.8 per cent rise, while many economists were a long way off the mark, with one forecasting a 1.2 per cent surge. The relatively modest 0.6 per cent June quarter increase leaves headline inflation at 3.1 per cent for the year to June. But the two measures of underlying inflation preferred by the Reserve Bank, which take out the most volatile price movements, rose only 0.5 per cent in the quarter. That meant the rate of underlying inflation was 2.7 per cent for the year to June, well inside the Reserve Bank’s 2-3 per cent target band. St George Bank’s chief economist Justin Smirk says today’s inflation data has taken the chance of a rate hike off the table at the Reserve Bank’s August meeting next Tuesday. "It is without a doubt highlighting that right now the RBA does have clear time to wait, pause and ponder on the global events and just how our own economy is making the shift from being driven by public stimulus and back towards more private investment," he told Reuters. "So, there’s no rate-hike next week."

Longer rate pause

RBC Capital Markets senior economist Su-Lin Ong had been forecasting a much higher result of a 1.1 per cent headline inflation rate for the quarter. She says today’s soft figures may see the Reserve Bank keep interest rates on hold for some time to come. "I think the odds of further hikes have fallen quite substantially given today’s numbers," she told ABC News Online. "We think it’s unlikely the Reserve Bank will hike next week at its August board meeting and there’s a good chance that this pause that we’re seeing in this tightening cycle, that began quite aggressively, there’s a very good chance that this pause becomes extended and the RBA sits on the sidelines for the next few months at least." The Australian Chamber of Commerce and Industry’s Greg Evans says an extended pause is certainly what business is hoping for. "This firmly puts a rate rise in August on the backburner and indeed off the agenda," he said. "We believe that’s unambiguously good news for both business and also consumers, 

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INDUSTRY VIEW: RBI raises key rates

MSN News | Reuters | 27/07/2010

The Reserve Bank of India on Tuesday raised interest rates more forcefully than expected in the face of inflation that has held stubbornly above 10 per cent for the past five months. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 per cent, in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 per cent. Following are the views of industry officials to the policy.

PRAMOD MENON, CHIEF FINANCIAL OFFICER, JSW ENERGY

"The rate hike is well warranted and there should not be any problem until the rate of economic growth continues to be robust. There will be a slight impact on interest rates, but I believe, everybody is prepared for it."

SANTOSH SINGHI, CFO, AMTEK AUTO LTD

"The rates will firm up. This may lead to a liquidity crunch in domestic market in the coming months as many large projects are still rupee-funded. I do not think the OEMs (original equipment makers) will accept an increase in component prices because of a rise in rates. The only way we can compensate is increasing our volumes and scale of operations".

VIRENDRA MHAISKAR, CMD, IRB INFRASTRUCTURE DEVELOPERS

"In our case we have tied up the funds with a fixed rate for next three years, anticipating the tightening. We won’t be impacted at all. For the infrastructure (sector), it’s a counter-productive move on a long-term basis if the interest rates are hiked for the growth sector."

RUPEN PATEL, MANAGING DIRECTOR, PATEL ENGINEERING

"RBI has increased reverse repo by 50 basis points and repo rate by 25 basis points. CRR has remained unchanged at 6 per cent. Market anticipated much more tightening than what has been announced. As such we feel no negative impact on our sector for the action taken by RBI." 

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RBI raises rates to stamp on inflation

Reuters | Tue Jul 27, 2010 | 1:48pm IST

The Reserve Bank of India (RBI) raised interest rates more forcefully than expected on Tuesday, signalling its urgency to stamp on inflation that is on track to hit double-digits for the sixth month running in July. One-year overnight interest rate swap rates jumped after the Reserve Bank of India (RBI) notched up its fourth rate rise this year and said it was "imperative" to normalise policy in line with the economy’s growth and inflation. Before Tuesday, the RBI had promised a "calibrated" exit from the loose monetary policy adopted during the global downturn, which markets had taken to mean 25 basis point rate hikes on Tuesday and again at quarterly reviews set for October and January. "The dominant concern that has shaped the monetary policy stance in this review is high inflation," the RBI said. "With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations," it said.

Bond yields and swap rates rose in reaction to the RBI’s decision. The 10-year benchmark bond yield gained 3 basis points to 7.70 percent. The most-traded 1-year overnight indexed swap rate jumped 19 basis points to 6.1 percent, its highest since November 2008. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations. But its bumped up the reverse repo rate, used to absorb excess cash from the system, by 50 basis points to 4.50 percent. A 25 basis point rise had been expected. Analysts said the moves showed the RBI was trying to take more decisive action following criticism that it had acted too timidly so far to tackle rising prices that the authority acknowledged had spread beyond food to the broader economy. "Of course, they are behind the curve on inflation," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. "They are trying to catch the train that has left the station and they are running to accomplish that. Unfortunately, they were late to the races and this means they would have to tighten more than they would have if had they started earlier," he said. 

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PM maintains optimistic inflation forecast

Reuters | Sat Jul 24, 2010 | 12:09pm IST

Prime Minister Manmohan Singh on Saturday reiterated his prediction headline inflation would ease to 6 percent by December, a forecast more optimistic than that delivered by his economic advisers a day before. The prime minister’s Economic Advisory Council had said inflation would be at 7-8 percent by the year-end, compared with 10.55 percent in June, and its chairman recommended strong monetary action to tame runaway prices. Singh’s statement comes amid a growing divergence between the government and the central bank on the need for monetary tightening to cool inflation that has been in double digits for five straight months.

New Delhi puts high food prices as the cause and argues normal monsoon rains would cool inflation, while the Reserve Bank of India (RBI) says demand-side factors will continue to keep up pressure on inflation. On Saturday, Singh backed his officials’ view. "The present high rate of inflation is mainly due to food price inflation," he told a conference of top federal and state policymakers gathered to assess the country’s development plans. "The government has taken a number of steps to curb inflation. With a normal monsoon, which is the expectation at present, the rate of inflation will abate in the second half of the year."   

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RBI may need to get more aggressive

Reuters | Fri Jul 23, 2010 | 10:53am IST

RBI Inflation in India has spread beyond food and fuel prices and is becoming entrenched; meaning the Reserve Bank of India (RBI) may have little choice but to tighten policy more aggressively than now expected. A majority of economists polled by Reuters this week expect the RBI to raise interest rates by 25 basis points for a fourth time since March in its quarterly review on July 27. Most also expect the central bank to notch up rates by just another quarter point before the end of the year, given a tightening of market liquidity in recent weeks and uncertainty about the strength of global recovery. However, trends in broad money growth, the credit-deposit ratio and rising imports suggest inflationary pressures are likely to remain and may pose a bigger challenge later on, calling for a more aggressive action.

PACE OF IMPORT GROWTH MAY WIDEN TRADE GAP FURTHER

With India expected to grow more than 8 percent this year and next, imports are expected to pick up. Since export growth is weak, rising imports threaten to push up the trade deficit up substantially, in turn widening the current account deficit, which reached $13 billion in the January-March quarter, its biggest since 1981. A more decisive monetary tightening to curb domestic demand would help keep India’s external imbalances in check.

RESERVE MONEY GROWTH THREATENS TO PUSH INFLATION HIGHER

Reserve money has been rising rapidly in recent months. Before the financial crisis, reserve money consistently led broad money growth, the central bank’s key monetary gauge. Between 2000 and 2007 the annual change in reserve money had a 0.6 correlation with the year-on-year change in M3. That dropped to 0.4 for the ‘2000-2010’ 

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Inflation Will Quicken in July on Fuel, Government’s Top Statistician Says

Bloomberg News | Jul 19, 2010

India’s inflation will accelerate in July, the government’s top statistician said, increasing pressure on the central bank to raise interest rates next week for a fourth time in five months. “The inflation number in July will be higher than in June, in large measure because of what has happened to fuel prices,” T.C.A. Anant, 52, said in a July 16 interview in New Delhi, without providing details. The benchmark wholesale-price index jumped 10.55 percent in June after climbing 11.23 percent in April, the most in 19 months, a report showed last week. Prime Minister Manmohan Singh’s government on June 25 allowed state-run refiners including Indian Oil Corp. to raise prices of gasoline and diesel in a bid to cut its oil subsidy and narrow the budget deficit. Governor Duvvuri Subbarao is due to announce the next monetary policy decision on July 27.

“The full impact of the fuel price revision on inflation numbers is yet to be seen,” the New Delhi-based Federation of Indian Chambers of Commerce & Industry said in a report on July 17. “While normalization of the monetary policy is expected and the Reserve Bank of India would continue to tighten rates in the months ahead, premature and aggressive rollback of easy money policy can jeopardize growth.” Subbarao has increased the reverse repurchase and repurchase rates by three-quarters of a percentage point since mid-March. The reverse repurchase rate is 4 percent and the repurchase rate is 5.5 percent.  

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Hungary under pressure to agree with IMF, central bank eyed

Reuters | Mon Jul 19, 2010 | 3:52pm IST

Hungary’s markets sold off on Monday after talks with lenders fell through at the weekend, rattling investor confidence in the government’s policies and raising concerns over the country’s debt vulnerability. Hungary’s government had insisted on a new financial sector tax this year and rebuffed lenders’ calls for further austerity measures, the economy minister said on Monday. The forint plunged over 2.5 percent versus the euro and yields surged 20-30 basis points as the collapse of the talks — intended to review the IMF/EU financing deal Hungary struck in 2008 — dealt the second major blow to investor confidence since the new centre-right government took power in May. In early June, officials alarmed markets by comparing Hungary’s problems with those of Greece.

The International Monetary Fund and European Union have both said the government needs to take tougher measures to rein in the budget deficit. Analysts said market weakness could spill over to other markets in the central European region, and the sell-off would likely to push the Hungarian government to reach agreement with its lenders soon. "Arguably continued adherence to the current IMF programme had anchored both markets and Hungary’s (credit) ratings: the fact that Hungary is now going off-piste suggests both may be under threat," said Timothy Ash at Royal Bank of Scotland.

RATE RISE TALK

Hungary, which runs central Europe’s highest public debt at about 80 percent of gross domestic product (GDP), won’t be able to use remaining funds in its 20 billion euro ($26 billion) loan secured in 2008 until it reaches a deal with the IMF and EU. Even though Hungary is not under immediate financing pressure, such delays would raise its financing costs, potentially forcing the central bank to raise interest rates and putting pressure on Hungary’s ratings, analysts said. The central bank will hold a regular rate meeting on Monday with a rate decision 

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Instant View: May industrial output up 11.5 pct. y/y

Reuters | Mon Jul 12, 2010 | 11:23am IST

  • A car plant in Gujarat India’s industrial output in May rose at a slower-than-expected 11.5 percent from a year earlier, data showed on Monday.
  • Manufacturing production rose 12.3 percent in May from a year earlier.
  • April’s annual growth rate was revised downwards to 16.5 percent from 17.6 percent.
  • Industrial output rose 10.4 percent in the 2009/10 fiscal year (April-March), faster than an upwardly revised 2.8 percent in 2008/09.

Analysts’ Views

Rupa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai:

"The data is absolutely in line with my projection. I was expecting growth to cool off on a rapid rise in input costs. From next month onwards, high base effect too will moderate the growth momentum."

Deepali Bhargava, Economist, ING Vysya Bank, Mumbai:

"A moderation in IIP is as per our expectations. Though we were looking for a number closer to 13.5 percent, a bigger moderation may reflect rising cost pressures both for consumer durables and capital goods industry. We expect WPI inflation to breach 11 percent in June, hence I stick with the 25 basis points rate hike call."

Sonal Varma, Economist, Nomura, Mumbai:

"The next few months we are likely to see a much weaker IIP growth numbers as the base effect is adverse and I think a part of the inventory restocking phase is coming to an end and the production is normalizing now. I think 

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May factory output moderates; inflation eyed

Reuters | Mon Jul 12, 2010 | 3:17pm IST

A steel factory in Agartala India’s industrial output rose at its slowest pace in seven months in May, but the slower-than-forecast growth is not expected to stop the Reserve Bank of India (RBI) from raising interest rates later this month. Industrial output rose 11.5 percent in May from a year earlier, well below analysts’ forecast of a 16 percent rise and the revised 16.5 percent growth in April, data showed on Monday. Frederic Neumann, economist at HSBC in Hong Kong, said the slowdown reflected capacity constraints rather than cooling of demand. Neumann predicted that the Reserve Bank of India would follow up its unscheduled quarter-point rate rise early this month with another one at its quarterly policy review on July 27. "Slower pace of expansion in industrial output in May is not reflective of a fall in final demand. As a result, we continue to see the RBI hiking policy rates by 25 basis points," he said in a note.

Finance Secretary Ashok Chawla said industrial output was expected to keep growing at a double-digit clip in the current fiscal year to March 2011. Analysts said annual production growth has most likely peaked with the strong statistical base effect gradually fading and the latest Manufacturing Purchasing Managers’ survey for June also suggesting moderation. Among the sectors, capital goods and consumer durables were the main drivers of growth, even though the pace of expansion slackened. Capital goods output grew 34.3 percent year-on-year, down from nearly 70 percent in April, while production of consumer durables rose 23.7 percent compared with 32.7 percent in April. "Slower industrial production growth is consistent with PMI data released earlier this month…that suggest that Asian manufacturers are facing stiffer headwinds after a very strong start to the year," said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong. However, headline inflation is expected to have accelerated to 10.8 percent in June from 10.16 percent in May and wholesale price data on Wednesday is expected to have a greater impact on the RBI’s rate decision than output numbers.  

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Fuel inflation jumps; rate hike seen coming

Reuters | Thu Jul 8, 2010 | 12:20pm IST

India’s food inflation eased, but fuel inflation accelerated in late June and a recent hike in fuel prices kept the case for the Reserve Bank of India (RBI) to top up its last Friday’s rate hike when it reviews policy on July 27. The second straight weekly fall in food inflation would give little cheer to policymakers as the recent fuel price hike could push up by over 1 percentage point what is already the highest headline inflation level among the G20 major economies. Data released on Thursday showed the food price index rose an annual 12.63 percent in the year to June 26, slower than the previous week’s 12.92 percent, largely as prices in the year-ago period were high. The fuel price index went up by 18.02 percent during the period, compared with the previous week’s 12.90 percent. The index will see another jump in its next reading, with the government having raised fuel prices from June 26.

The primary articles index rose by 16.08 percent, compared with 14.75 percent in the previous week. Following the fuel price decision, the RBI lifted its key rates earlier-than-expected by 25 basis points, the third hike so far this year, as it struggles to bring down inflation that a senior government official said could hit 11 percent in June. "When the full pass-through of the hike comes, there will be more of an impact on the prices of commodities," N.R. Bhanumurthy, an economist with New Delhi-based think tank National Institute of Public Finance and Policy said. "I would expect another 25 basis points hike in the July 27 review and after that one more round of an off-cycle hike."

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IIP data calms rate hike pressure on RBI – Moody’s unit

Reuters | Wed May 12, 2010 | 4:22pm IST

The slow growth in India’s industrial production will reduce pressure on the Reserve Bank of India to hike rates, Moody’s Economy.com said in a note on Wednesday. The 13.5 percent growth in industrial output was the sixth straight double-digit monthly expansion, driven largely by robust manufacturing output. This compares with the median forecast in a Reuters poll for a rise of 15 percent and February’s figure of 15.1 percent. “With the external situation highly uncertain and India’s financial system highly vulnerable to sudden capital outflows, now is not the time to aggressively withdraw liquidity and hike borrowing costs,” Nikhilesh Bhattacharyya, Associate Economist, Moody’s Analytics, wrote.

The Reserve Bank hiked its key policy rates by 25 basis points each on April 20 and there were expectations that there was a possibility of an inter-meeting move on or before the July 27 policy review. However, these worries have been calmed mainly owing to the uncertain global economic conditions. Moody’s Economy.com also said it expects industrial production growth to decelerate further over the coming quarters and move closer to its trend rate.    Continue reading

RBI lifts key rates, CRR; signals more tightening

Reuters | Tue Apr 20, 2010 | 3:04pm IST

The Reserve Bank of India (RBI) on Tuesday raised key interest rates by 25 basis points, as expected, to battle near double-digit inflation, signaling gradual tightening ahead to sustain growth and manage record government borrowing. The Reserve Bank of India’s measured steps, which included raising the cash reserve ratio (CRR) requirement for banks by 25 basis points, increased the likelihood of another rate rise before its next quarterly review in July, some watchers said. The yield on the 10-year benchmark bond traded at 8.01 percent, down 7 basis points on the day, after easing to 7.98 percent after the RBI announcement, its lowest since April 13, as some players had bet on a bigger 50 basis point rise. The main 30-share BSE index was up 0.4 percent.

"The policy statement is not hawkish enough to address the concerns on the inflation front," said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai. Price pressures are spreading beyond food to costs of fuel and manufactured goods such as cars. March inflation reached 9.9 percent year-on-year, its fastest pace in 17 months. However, the RBI is under pressure from the government not to raise rates aggressively, with New Delhi worried it could dent economic growth and also complicate its borrowing, which will reach a record $100 billion in the current fiscal year. "RBI at this juncture is more constrained by the management of the government’s record borrowing programme," Nitsure said.

The RBI is expected to raise rates by a further 100 basis points over the next 12 months, according to the one-year overnight indexed swap (OIS) rate at 4.95 percent. That is in line with a Reuters poll ahead of Tuesday’s review, which forecast 100 basis points of tightening by the end of 2010. "The next scheduled  

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