Wholesale prices jumped 8.1 percent in the week ended May 17 from a year earlier, according to Finance Minister Palaniappan Chidambaram speaking in New Delhi yesterday.
Bond prices fell after the inflation figure was released. The price of the benchmark 8.24 percent note due April 2018 fell as low as 100.91 per 100 rupee face amount as of 12:28 p.m. Friday in Mumbai from 101.33 earlier.
India's economy expanded 9 percent in the year ended March 31, slower than the 9.6 percent rate recorded in 2006, as reported in this earlier post. and grew at an 8.8 percent year on year rate in the three months to March, identical with the rate in the previous quarter.
Inflation in India is being fueled by higher energy and commodities prices. Crude oil prices have doubled from a year ago and touched an all-time high of more than $135 a barrel on May 22, raising concern India's import costs will rise. India relies on crude oil from overseas to meet three-quarters of its energy needs. The fuels index, which has a 14 percent weight in the inflation basket, rose 7.79 percent from a year earlier, today's report showed. The manufactured products index gained 7.84 percent. Prices of dairy products increased 11 percent, fruits and vegetable prices rose 4.2 percent.
Indian Oil Corp., India's biggest refiner, reported its first quarterly loss in more than two years as the government forced refiners to sell fuels below cost to cushion consumers and contain inflation. The company posted a loss of 4.14 billion rupees ($97 million) in the three months ended March 31.
Foreign Exchange Reserves
Foreign exchange reserves rose $2 billion during the week ended May 23, though the central bank sold dollars during the week to meet importers demand. According to the latest figures released by the Reserve Bank of India in its weekly statistical supplement (WSS), total foreign exchange reserves including gold and special drawing rights (SDR) rose $2,090 million during the week ended May 23.
Almost the entire growth in reserves during the week was on account of the growth in foreign currency assets which went up $2,085 million. Reserves with the IMF rose $5 million, though the value of SDRs and gold in reserves remained unchanged during the week.
The central bank reportedly sold dollars during the week to meet oil importers demand. Besides, the dollar also strengthened vis-a-vis major currencies during the week. However, foreign currency assets when expressed in dollar terms also incorporate the effect of appreciation/depreciation of non-dollar currencies (such as euro, sterling, yen) held in reserves.
The Rupee
India's central bank said this week that it will provide foreign currency to oil refiners against the so-called oil bonds to help them meet the rising cost of crude oil while ensuring the stability of the financial markets. The Reserve Bank of India will buy the securities, issued to oil companies by the government as compensation for selling fuel below cost, through designated commercial banks and provide equivalent amount of foreign exchange. Such purchases will be subject to a limit of 10 billion rupees ($235 million) a day.
India's rupee broke five consecutive weeks of losses after the government eased rules for companies borrowing overseas, effectively doubling the limit on the amount of Indian debt overseas investors can hold, thus encouraging further capital inflows. The rupee climbed 0.8 percent to 42.4575 a dollar at the 5 p.m. close in Mumbai on Friday, up from 42.785 on Thursday.
The government increased the limit on overseas borrowings by infrastructure companies to as much as $100 million from $20 million. The limit for other companies was raised to $50 million from $20 million. Global funds can buy up to $5 billion of government bonds and $3 billion of corporate bonds, raising the caps from $3.6 billion and $1.5 billion respectively.
Policy makers are seeking more inflows from overseas since the rupee dropped more than 4 percent in May to a 13-month low after crude oil advanced to a record, increasing import costs for Asia's third-biggest economy. Global funds sold $3.5 billion more of local shares than they bought this year, compared with a net purchase of $17.2 billion in 2007, a record.
The benchmark stock index has dropped 19 percent this year as a slump in the global credit markets and India's inflation at 3 1/2-year high deterred investors.
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