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Thursday, August 07, 2008

India's Inflation Breaks The 12% Barrier At The End of July

India's inflation accelerated to the fastest pace in more than 13 years at the end of last month. Wholesale prices rose 12.01 percent in the week to July 26, after gaining 11.98 percent the previous week, accroding to the commerce ministry in New Delhi this morning.

The fastest price gains since 1995 have prompted the Reserve Bank of India to raise interest rates three times in two months, squeezing in the process bank liquidity and consumer spending. Pressure will once more be on the RBI to raise rates again soon, but looking at the current evolution in oil prices they may well be tempted to hold fire for a bit. Light, sweet crude for September delivery was dancing around $118.79 a barrel in afternoon trading on the New York Mercantile Exchange today, with prices were alternating between being in positive and negative territory. Crude has now fallen more than $6 over the previous three days, bringing prices $30 lower than its July high above $147 a barrel. Fuel price inflation in India was 17.12 percent in the week ending 26 July, compared with 16.9 percent in the previous week, and this globally driven oil inflation seems to be about to peak in terms of its impact on India.

Foreign Exchange Reserves

Foreign exchange reserves fell to $305.474 billion as on August 1, from $306.603 bilion a week earlier, the Reserve Bank of India (RBI) said in its weekly statistical supplement on Friday. Reserves rose to a record $316.171 billion in late May and the decline since then is largely due to dollars given by the RBI to refiners in exchange for their oil bonds and intervention in the currency market to support a falling rupee. RBI ended the special scheme for refiners on July 29.

The Rupee

The rupee advanced again this week on speculation rising stocks will encourage overseas fund managers to buy more of the nation's assets, and touched its highest level in almost three months this on optimism a slump in crude oil prices will reduce import costs. The rupee has now been the second-best performer in the past month among the 10 most-traded currencies in Asia outside Japan as the Bombay Stock Exchange's Sensitive Index, or Sensex, surged more than 13 percent.

The rupee gained 0.7 percent on the week and closed at 42.0625 per dollar on Friday in Mumbai, the highest since May 12. The Sensex rose for a fifth week, the longest winning streak in 10 months.

Funds based abroad bought $403.7 million more Indian equities than they sold on Aug. 6, the most in two weeks, according to the Securities and Exchange Board of India. They have sold a net $6.5 billion this year, compared with a record net purchase of $17.2 billion in 2007.

Foreigners have bought $230 million worth of shares so far in August after selling more than $307 million in July.

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