India Price Inflation 22 March 2008

India's inflation accelerated at the fastest pace in more than three years at the end of March leading to increased expectations that the central bank will allow the rupee to strengthen and possibly even raise borrowing costs, in all probability as early as this month. Wholesale prices rose 7 percent in the week ended March 22 from a year earlier, faster than the previous week's 6.68 percent, the Ministry of Commerce and Industry said in New Delhi today.




The difficulty for policymakers is that the current spike in Indian inflation is being primarily driven by higher global commodity prices in agriculture, fuel and metals feeding through to domestic inflation, rather than excess domestic demand (overheating) and there are not too many things that they can really do about this.

Palm oil prices have risen 56 percent in the past year, reaching a record last month, and wheat in Chicago has almost doubled in the past year to an all-time high of $13.495 a bushel on Feb. 27. Crude oil gained 5.8 percent in the first quarter, and is up 62 percent from a year ago. Prime Minister Manmohan Singh has recently scrapped import duties on edible oils and maize and banned exports of pulses and rice in an attempt to restrain price rises.

Foreign Exchange Reserves

India's foreign-exchange reserves rose by US$4.5bn in the week ended March 28 to a record US$309.2bn. Foreign-currency assets increased by US$4.5bn to US$299.1bn, the Reserve Bank of India said today.

Gold reserves were unchanged at US$9.56bn. The nation's reserves with the International Monetary Fund (IMF) rose by US$5mn to US$437mn, while its special drawing rights with the IMF increased to US$19mn. According to central bank, the rise in the value foreign-currency assets is in part the result of changes in the value of the dollar against the euro, yen and other currencies during the period.

India's foreign-exchange reserves rose by US$110bn during the financial year that began April 1, 2007, the bank said. That's roughly a 50% increase in a year. India's total reserves comprise overseas currencies, gold and special drawing rights with the International Monetary Fund.





Rupee


The Indian rupee climbed to its highest close in five days on today, following data which showed that Indian inflation shot to a three-year high. The new triggered hopes the central bank would let the currency appreciate in an attempt to rein-in prices. The rupee ended the day at 39.95/96 per dollar, 0.18 percent above Thursday's close of 40.025/035. The consensus view is that the Reserve Bank of India (RBI) will either raise rates at a policy review on April 29 or allow additional appreciation of the rupee, or both.






India's benchmark lending rate at 7.75 percent is 550 basis points more than the U.S. federal funds rate of 2.25 percent, making investments in Indian assets more attractive. Goldman Sachs said in a note after the inflation data the central bank may raise rates by 50 basis points in April and also expects it to allow the rupee to rise by 4 percent in 2008/09.






However looking at the week as a whole the rupee slipped back 0.2 percent against the dollar on increased stock sales, from 39.8875 on March 28. External investors have consistently sold more stocks than they bought this year as the benchmark share index slumped in four of the past five weeks. Net share sales by global funds reached the highest in almost two months on April 1, according to the Securities & Exchange Board of India.


The rupee was up 12.3 percent last year, the most since at least 1974, as foreign money managers bought an all-time high $19.5 billion of local shares and bonds. The Bombay Stock Exchange Sensitive Index, or Sensex, is down 24.4 percent this year following the 47 percent gain in 2007.