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Saturday, December 23, 2006

Inflation On The Increase

Wholesale inflation accelerated this week in India, to 5.32 percent.

The inflation rate rose to 5.32 percent in the week ended Dec. 9 from 5.16 percent in the previous week, the Ministry of Commerce and Industry said in its weekly statement in New Delhi today. The inflation rate had been estimated at 5.35 percent, according to the median forecast of 10 analysts surveyed by Bloomberg News.

Prime Minister Manmohan Singh's government wants to slow inflation to 4 percent as it faces seven state elections in 2007, the most important in the province of Uttar Pradesh which sends almost a seventh of lawmakers to parliament.

All of this is making the life of the RBI more difficult, since raising interest rates, which is proving difficult enough to do at the long end, only serves to suck in more money, due to the interest rate differential and the anticipated rise in the currency that the inflow produces:

Commercial banks' loans to companies have risen about 29 percent since April 1 from the same period last year, according to central bank data. The pace is close to the fastest since the Reserve Bank started collating information in 1971.

To curb inflation, the Reserve Bank of India announced on Dec. 8 an increase in the amount of cash lenders have to set aside to cover deposits, trying the third different policy tool in five months to curb inflation.

A higher cash-reserve limit will leave lenders with 135 billion rupees ($3 billion) less cash, and help slow lending, according to the central bank.

The move came after interest rate increases by the central bank failed to slow the record pace of bank lending. The central bank increased the overnight lending rate for the fourth time this year on Oct. 31. It raised its overnight borrowing rate three times this year in a bid to make fewer funds available to banks for lending.

Thursday, December 21, 2006

Growth 2007

Credit Suisse is forecasting 10% growth in India next year. They may be right, but my feeling is that it is more likely to be because of s shift into infrastructure than because of the consumer demand element:

India will overtake China next year as the world's fastest-growing major economy on rising consumer and government spending, Credit Suisse's chief Asia economist Dong Tao said.

Credit Suisse raised its 2007 growth forecast for India's $775 billion economy, Asia's fourth biggest, to 10 percent from 8.5 percent, Tao said. China's $2.2 trillion economy is expected to grow 9.9 percent next year from 10.4 percent in 2006, he said.

India had the highest average salary increase in the Asia- pacific region in 2006 gaining 13.8 percent in 2006 compared with 14.1 percent gain in 2005, according to human-resources consulting firm Hewitt Associates Inc. Salaries in India may rise by 12.3 percent to 15 percent in 2007.

``The private consumption story in India is growing,'' Credit Suisse's Tao said in a phone interview from Hong Kong today. ``At this moment, India surpassing China as the world's fastest growing major economy is a possibility. India is more resilient toward a global slowdown compared to China.''

India now wants to draw investments from Japan and narrow the gap in overseas funding with China, which began unshackling its economy in 1978, 13 years before India. India's northern neighbor got $60 billion of foreign direct investment in 2005 compared with India's $7.5 billion.

``Capacity additions in the steel, auto, metals and consumer goods sector seem to be gathering pace in response to strong consumer spending and a pick-up in public investment spending in the power, roads and highway sectors,'' Tao said.

Industries such as steel and cement are also benefiting from Prime Minister Singh's decision to increase spending on roads, ports and other infrastructure by a quarter to 992 billion rupees ($22 billion) in the year that started April 1 in a bid to attract overseas manufacturing companies and spur growth to 10 percent over a decade.

Surpassing China's expansion rate for the first time at least two decades may help lure the overseas investment India needs to replace dilapidated port and roads and create manufacturing jobs. Prime Minister Manmohan Singh needs rapid growth to lift 350 million people out of poverty in the world's second-most populous nation.

India's Reserves and Infrastructure

This is a very strange story. They want to try and recycle reserves to finance infrastructure projects. Now either this is a piece of midwinter madness, or they have thought of something which neither I nor anyone else has:

India is exploring whether it can use a part of its near-record foreign-exchange reserves of $175.5 billion to fund the nation's bid to modernize roads, ports and airports, the finance minister said.

Prime Minister Manmohan Singh said in October that the nation will need as much as $320 billion over the next five years to improve roads, ports and other infrastructure, underscoring the key nature of public works in attracting companies, generating jobs and speeding up economic expansion to cut poverty. India's economy has grown by an average of about 8 percent in the past three years.

``I've asked the finance secretary to prepare a note on how the foreign reserves can be used for'' funding infrastructure, Finance Minister Palaniappan Chidambaram said in New Delhi today.

The government will set up a panel to look into the financing of infrastructure projects headed by Deepak S. Parekh, chairman of Housing Development Finance Corp., the finance minister said. The panel will submit its initial report within 6 weeks, Chidambaram told a conference on infrastructure.

The world's second-fastest-growing economy after China is expected to grow by 8 percent this year, the central bank said.

India, which is aiming to cut its fiscal deficit to 3 percent of gross domestic product, should eliminate wasteful expenditure, Chidambaram said, reiterating the $320 billion investment needed for infrastructure.

India's foreign-exchange reserves have grown fourfold in the past five years, enough to cover more than a year of imports.

n 1991, they dipped to a record low of $975 million, barely enough to pay for a week's imports, prompting Singh, then finance minister, to initiate economic policies that led to the opening up of local markets to international investors.

India's foreign-exchange reserves rose to a record $175.5 billion in the week ended Dec. 1, before dropping the following week. The reserves comprise overseas currencies, gold and special drawing rights with the International Monetary Fund.

Any move to use the reserves for funding long-term projects may have an impact on the country's deficit and the central bank's ability to tackle volatility.

``We need to see the details of how exactly the government intends to go about this and what impact it may have on the fiscal deficit,'' said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. ``The central bank may be reluctant because they need a buffer to prevent volatility in the financial markets.''

Many central banks buy or sell dollars from their reserves, to stem gains in the local currency or to provide support when it declines in the event of panic selling of assets by overseas investors. India's public debt was about 83 percent of gross domestic product as of March 31.

Reducing infrastructure bottlenecks may encourage companies such as Intel Corp., the world's largest computer chip-maker, and Ford Motor Co. to invest more in India. Manufacturing makes up 17 percent of India's economy, half the level in China.

Better infrastructure in neighboring China, which began opening its economy in 1978, 13 years before India did, helped it attract $60 billion of foreign direct investment in 2005, compared with India's $50 billion since 1991.

India, which spends a seventh of China's $150 billion investment in public works each year, according to Morgan Stanley, has boosted spending by a quarter to 992 billion rupees ($21 billion) since April 1 to modernize its transportation and communication links.

The finance minister refused to comment on the government's bond sale plan when asked whether there would be any changes on account of buoyant tax collections.

Rupee On the Rise

As was to be expected the Rupee is once more rising:

India's rupee rose to the highest in almost three weeks as companies including ICICI Bank Ltd., the country's largest lender by market value, said they'll bring money home by raising loans overseas.

The currency climbed the most in a week after ICICI signed an agreement to raise $1 billion in syndicated loans denominated in yen. An offer by Oracle Corp. to buy an additional stake in local software maker I-Flex Solutions Ltd. closes Dec. 23, which may help bring in capital from abroad.

A faster pace of growth in Asia's fourth-biggest economy, which averaged 9.1 percent in the first three quarters of the year compared with last year's 8.25 percent, is fueling investments and equity purchases by overseas funds.

The currency's gains were limited by concern refiners will step up their purchases of dollars to settle import bills due by the end of the month, said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai.

The rupee's rise was also slowed by speculation some investors abroad will reduce their equity holdings to lock in gains after the Bombay Stock Exchange Sensitive Index, or Sensex, outperformed Morgan Stanley Capital International Emerging Markets Index this year.

The Sensex has added 42 percent compared with 26 percent gains in the Morgan Stanley index.

``We have several factors toward the end of the month that will add pressure on the rupee to weaken,'' Babu said. ``We have to watch what global funds do.''