Inflation December 22 2007

India's inflation held below the central bank target for a sixth straight month as the government continued to keep a cap on fuel prices despite the fact that global crude oil surged to a record. Wholesale prices rose 3.5 percent in the week ended Dec. 22 from a year earlier, faster than the previous week's 3.45 percent gain, the Ministry of Commerce and Industry said today in New Delhi.




The Indian government may raise auto fuel prices by the end of January for the first time in 18 months according to Oil Minister Murli Deora yesterday. That could reignite price pressures and prompt the central bank, which targets 5 percent inflation, to keep its benchmark interest rate at a 5 1/2-year high at its Jan. 31 monetary-policy meeting.

India imports almost three-quarters of its energy needs, and has not allowed increases in fuel prices even as crude oil prices have risen 79 percent from a year ago.

The 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.

Inflation in the third week of December rose as the index of fuels, with 14.2 percent weight in the inflation basket, rose 0.5 percent and the index for manufactured products, including sugar, cement and edible oils, rose 0.1 percent.

India's Balance Sheet 2007

1/. The rupee rose 12.3 percent against the USD during 2007, the most since 1974, closing the year against the dollar at 39.415 at the 5 p.m. close in Mumbai from 44.28 at the end of 2006. The rupee has declined some 0.6 percent since touching 39.185 on Nov. 7, the highest intraday level since Feb. 23, 1998.

2/. Overseas investors had bought $16.9 billion more local stocks than they had sold in the year up to Dec. 27, more than doubling their net purchases in 2006, according to the Securities & Exchange Board of India.

3/. Foreign direct investments this year through August totaled $12.9 billion, compared with $11.1 billion for the whole of last year, according to the latest data from the commerce ministry.

4/. Export growth slowed to an average annual rate of 17 percent in the 10 months up to October, from 21.3 percent a year earlier, according to commerce ministry data.

5/. The Reserve Bank of India bought a record $12.5 billion dollars in October, the 12th straight month of such purchases. The bank's currency purchases from April 1 to October were already up 76 percent (at $47.3 billion) when compared with the entire previous fiscal year, according to the Bank's monthly bulletin published on Dec. 14.


6/. The current-account deficit widened more than expected in the three months through September to $5.5 billion from a revised $5.2 billion in the previous quarter as the trade gap increased because of rising imports, according to data published by the RBI today. The capital-account surplus more than doubled in the quarter to $34.75 billion from the preceding three-month period as capital inflows and overseas borrowing by local companies increased.

7/. Overseas investors bought $2.24 billion of local-currency debt this year, almost tripling their purchases from last year, data provided by the market regulator show.

8/ And last but by no means least, during the nine months between 1 April and the end of December 2007, India’s foreign exchange reserves increased by US$73,54 billion (see chart below). This compares with the average annual increase of US$38 billion over the prior three years. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a much lesser extent by the conversion of non-dollar reserves into dollars. As can be seen, since mid November the pace has slowed notably due to the widespread perception that the Reserve Bank is determined to try and put a brake on the rise in the rupee. Whether it in fact proves able to do this without producing more inflation is what remains to be seen. I personally doubt it.