The Rupee, Wheat and Various

India's rupee exchange rate is market-determined, according to the latest statement by Finance Minister Palaniappan Chidambaram. This seems to indicate that he is prepared to accept the idea of relief for those facing problems amid the currency's fluctuations. The rupee itself has weakened 0.5 percent this week to 39.555 against the dollar, reversing slightly three previousweeks of gains, although it has risen almost 12 percent so far this year.

``We don't have a view on the rupee,'' Chidambaram told reporters in Mumbai today. ``It is market-determined. The rupee's appreciation or otherwise gives rise to stress in some sectors. We will address those problems.''

The government, which said capital inflows have caused the rupee to strengthen, wants exporters to be more competitive and productive to cope with the effects of the rising rupee. A higher rupee makes Indian goods more costly overseas and erodes the revenue of the South Asian nation's exporters. The Indian government is considering the refund of some duties as a relief measure for exporters. It has also cut customs duty on some products and has also announced subsidized loans and tax breaks to try to help exporters.

``You must also see the real effective exchange rate,'' Chidambaram said. ``The rupee has risen against a basket of six currencies by about 6 percent.''

India was the world's third-biggest wheat buyer last year, and the government has now indicated that local supplies will determine the extent of imports.

``It's not a factor of prices alone, it's a factor of food security,'' Farm Minister Sharad Pawar said in New Delhi today. ``We won't compromise on food security.''

India, the world's second-biggest wheat user, has imported 1.79 million tons since July, helping support the doubling in prices this year on the Chicago Board of Trade.

The government said Dec. 18 it is confident of meeting an output target of 75.5 million tons as favorable weather spurs planting. Farmers may sow wheat on 27.5 million hectares (68 million acres), compared with an average 26 million hectares, the farm ministry said. A harvest of 75.5 million tons would be the biggest since 2000.

State warehouses held 9 million tons on Nov. 23, enough to meet demand for nine months, Food Corp. of India, the nation's biggest buyer of grains, said last month. Prices have more than doubled in the past year as drought and increased demand eroded global inventories.

Agriculture Minister Sharad Pawar also said that India's sugar industry faces low prices and demand because of ``unprecedented'' output, cutting income for the sugar industry and farmers, To cope with excess supplies, the government will keep 5 million tons of the sweetener in storage, he told the annual meeting of the Indian Sugar Mills Association in New Delhi today. Compensation for farmers is also being worked out, he said.

A global glut has slashed refined sugar prices 12 percent in the past year, making the sweetener the worst-performing agricultural commodity over that period. World output may exceed demand by 11.1 million tons this year, led by a record output in India, the International Sugar Organization has said.

``Indian sugar industry is today faced with a situation of very high stocks, low prices of sugar and lack of demand,'' Pawar said. ``Depressed prices of sugar have resulted in accumulation of cane-price arrears'' of 26 billion rupees ($657 million) for farmers in the year that ended on March 31.

To give the sugar industry liquidity, the government plans to ask state-run banks and lenders to give loans against the expected production for the year ending Sept. 30, 2008. The loan will be repayable in four years. The plan will give sugar producers about 38 billion rupees.

India's Wholesale Inflation Slows Again

India's wholesale inflation slowed again in the first week of December as food costs declined, giving the government some room to raise prices of gasoline and diesel for the first time in more than a year. Wholesale prices rose 3.65 percent in the week ended Dec. 8 from a year earlier, slower than last week's rate of 3.75 percent, the Ministry of Commerce and Industry said today in New Delhi.




Inflation has held below the Reserve Bank of India's 5 percent target for five months. Still, price pressures may be reignited as the government may have to increase retail fuel costs if crude oil rises further, according to the central bank.

The relevant ministers are due to meet next week to discuss increasing fuel prices, according to Oil Minister Murli Deora speaking last week. India hasn't increased retail fuel prices so far this year, although global oil rates have risen more than 50 percent. The slowdown in prices will help Prime Minister Manmohan Singh to sustain the fastest pace of economic growth in 60 years and will reassure the central bank that short term prices are not likely to exceed the 5 percent year-end target.

The Reserve Bank is scheduled to meet in the last week of January to review interest rates, and has already raised its benchmark interest rate nine times since October 2004 in its battle to control inflation.

Economic Growth

India has mow been expanding at a rate of aprroximately 9 percent since April 2005, making it the fastest after China among the world's top 15 economies, and the Singh government would like to be able to accelerate growth to a 10 percent pace by 2012.

Indian policy makers succeeded in curbing inflation, which reached a two-year high of 6.69 percent in January, in part by capping the retail prices of gasoline and diesel to protect consumers from the increase in crude prices. The wholesale inflation rate dropped to 2.97 percent in October, the lowest since July 2002.

The Indian government caps gasoline and diesel rates to help keep inflation down and protect the poor, who make up half the country's 1.1 billion people. Gasoline and diesel prices were last changed on Feb. 15, when they were cut for the second time in 2 1/2 months. Cooking gas prices haven't been raised since November 2004 and kerosene since April 2002.

India recently went back to importing wheat (for the second time this year) in order to replenish depleted stockpile, and federal farm secretary P.K. Mishra has warned that India's harvest level may fall unless the main wheat-growing states receive more rainfall. If this happens India may need to import wheat for the third year in succession in 2008.

The Uncomfortable Rise Of The Rupee?

Well I'm afraid I'm not quite done with the Economist on India yet (see this extensive post to read the story so far), since our sterling correspondent, undaunted by the failure of all that vindaloo curry he had been eating to overheat anything more than his own digestive tracts our is now worrying about, guess what, the rise of the rupee.

As he says, in a post whose title I have ironically cited in this one:

The rupee's rise may be less dramatic than that of the Philippine peso, Brazilian real or Turkish lira. But it is uncomfortable nonetheless.

Quite so, just like a strong vindaloo without the obligatory mango lassi as accompaniment it a rising currency produces its own kind of dispeptic discomfort. But hold on a second, mightn't a rising currency in India actually be good news, and in any event inevitable. Nothing it seems is ever good news where India is concerned for our valiant correspondant, and everything needs to be tinged with it's due dose of schadenfreund.

So what then is all the fuss about? Well the rupee certainly is rising. Here is a chart showing how it has risen vis-a-vis the US dollar over the last 2 years.




As the Economist India corresponent points out, India's currency has strengthened by about 15% against the dollar in the last year alone, and by over 10%, on an inflation-adjusted, trade-weighted basis, since August 2006. And why is this. Again our correspondent is pretty much to the point:

This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.

Although I can't for the life of me understand why the latest data he has is from back in March. Can't this guy ever do a professional job? Data up to the start of December is readily available here, and fascinating reading it is, as you can see it in the chart below.



As we can see, while the net inflow of external funds in the year to March - as proxied by the level of foreign exchange reserves held at the Reserve Bank of India -was $45 billion, the net inflow between 31st March 2007 and the start of December has been $74.4 billion, or not that far from double the whole amount that entered in whole fiscal 2007/2008 in just 9 months (and $41 billion of this since 15 August). This is, of course staggering, but unfortunately, it seems, you aren't going to read about just how staggering it is in the pages of the Economist since over there we are still looking at last years data (the last time I cricised them they said I was cross, this time I am angry aren't I, does it show?). As can be seen directly from the chart, the money really started to flow in from mid-September and the very fast rate of inflow continued till mid November.


Now the locus classicus on all this is certainly Morgan Stanley's Chetan Ahya, really it was this post of his which alerted me to the extent and significance of what was happening.

Over the seven weeks ending November 2, 2007, India’s foreign exchange reserves have increased by US$34 billion (annualized inflow of US$250 billion). Indeed, the trailing 12-month sum of FX reserves has increased to US$100 billion. This compares with the average annual increase of US$38 billion over three years prior to these seven weeks. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a very small extent because of conversion of non-dollar reserves into dollars. During the last seven weeks in which FX reserves have shot up, we believe that capital inflows would have been US$35 billion. Out of this, not more than 10% has been on account of FDI inflows. Non-FDI inflows including portfolio equity and external debt inflows form a major part of these inflows.

While the inflows are pouring in at the annualized run rate of US$250 billion, in our view, currently the country can absorb only about US$40-50 billion of capital inflows annually without causing any concern on attended risks of overheating. The key question policy makers are grappling with is how to manage these large capital inflows. As the strong growth in domestic demand has resulted in overheating of the economy recently, the central bank does not want to leave such large capital inflows fueling the domestic liquidity. Not surprisingly, the central bank has accelerated the pace of the sterilization by way of issuance of market stabilization scheme (MSS) bonds and an increase in the cash reserve ratio (CRR). Over the last 12 months, the RBI has sterilized about 58% of the foreign inflows. The sterilized liquidity (excess liquidity) stock including reverse repo less repo balances, MSS bonds, government balances with the RBI and the increase in the cash reserve ratio has shot up to US$77 billion as of end-October 2007 from US$19 as of end-October 2006.

Now while the issue of whether or not India is overheating raises its head again here, the context is quite different, and it is clear that the Reserve Bank of India is now struggling with the problems that may arise in the wake of such a massive influx, especially if it continues, as it may well do if the problems in the developed economies experience in 2008 turn out to be greater than may appear to be the case at present, and again if not all the emerging economies are as sound as they appear to be. Also, India is hardly to blame for this state of affairs, since the money is leaving one place (the developed economies following the sub-prime bust, rather than intentionally going somewhere. It is just that, amongst all that growing risk you can see out there, India looks to be as good a safe haven as you can find these days.

But this is not the moment to take all this into those still uncharted waters. If you want to read more on this aspect of things, then I cannot recommend a better source than Claus Vistesen's Compass and Charts Needed. For my part, I think all I want to register here is that something profound and important is taking place, and not simply a tepid repeat of events we have seen all to often in the past. Starting from this recognition, let the debate as to where we go next, and what to do about it, commence!

Trichet On India and Global Financial Architecture

This one here, is a must read.


The Growing Importance of Emerging Economies the Globalised World and its Implications for the International Financial Architecture
Jean-Claude Trichet

Speech by Jean-Claude Trichet, President of the European Central Bank delivered at the Tenth L. K. Jha Memorial Lecture, organised by Reserve Bank of India, Mumbai on November 26, 2007.

The consultations involved both mature and emerging economies, including the euro area, the United States, Japan, China and Saudi Arabia, again illustrating the fact that large current imbalances are no longer an issue for mature economies only, but a truly global issue. We at the ECB welcomed these discussions as a way to foster the implementation of the agreed strategy to address global imbalances. Evidently, these discussions are also of relevance to India. Large current account imbalances worldwide go hand-in-hand with sizeable cross-border capital flows. India has been confronted with challenges posed by strong capital inflows. This is why addressing imbalances is in the interest of the international community as a whole.......



We have learned indeed that the world economy is changing constantly. The emerging economies, which played a relatively modest role in the global economy 20 years ago, occupy a far more important place today, but one which will be dwarfed in importance by their role in the future.

India GDP Components

The following charts either come from (or have been derived from) the document Revised estimates of Annual National Income, 2006-07 and Quarterly Estimates of Gross Domestic Product, 2006-07, published by the Central Statistical Office on 31 May 2007.9,5
12,0



More to Come.

Bank Loans and Mutual Funds

Bloomberg last Friday:

India's central bank today curbed bank loans to mutual funds by mandating that such amounts will be treated as the lenders' direct investments in stock and bond markets.

Banks are required to limit investments in capital markets to less than 40 percent of their net worth. Funds may borrow from banks only to meet ``temporary liquidity needs'' and as per the capital market regulator's guidelines, Mumbai-based Reserve Bank of India said in a notice on its Web site.

An inspection of the financial records of some banks showed they had extended ``large loans to various mutual funds and also issued irrevocable payment commitments to stock exchanges on behalf of mutual funds and foreign institutional investors,'' the central bank said. These transactions weren't included by the banks as part of their capital market investments.

The Securities and Exchange of India has ruled that a mutual fund may borrow only up to 20 percent of its net assets and for periods of not more than six months.

Banks must not give loans or other forms of financial assistance, such as payment guarantees, to foreign institutional investors, the Reserve Bank said.

The monetary authority has allowed domestic banks six months to comply with the instructions.