Reuters | Fri Jul 23, 2010 | 10:53am IST
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’
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.
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
Reuters | Mon Jul 12, 2010 | 11:23am IST
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.
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
Reuters | Mon Jul 12, 2010 | 3:17pm IST
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.
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."
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