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Friday, February 22, 2008

India Wholesale Inflation and Foreign Exchange Reserves February 9 2008

India's wholesale inflation accelerated more than expected to a six-month high in the first week of February as prices of vegetables, fruits and lentils rose. Wholesale prices climbed 4.35 percent in the week ended Feb. 9 from a year earlier, faster than the previous week's 4.07 percent gain, the Ministry of Commerce and Industry said today in New Delhi.

The index of manufactured goods, accounting for 64 percent of the inflation basket, rose 0.4 percent in the week. Primary articles, with 22 percent weight, rose 0.6 percent, the statement said. Such week on week increases are, of course, quite large.

Indian inflation is likely to accelerate further in coming weeks on higher energy and food costs, and in particular following the government decision last week to raise gasoline prices by about 4.5 percent, the first increase since June 2006. Crude oil reached a record $101.32 per barrel in New York on Feb. 20.

Bonds remained lower after the release of the inflation report. The price of the most-traded 7.99 percent note maturing in July 2017 fell 0.04, or 4 paise per 100 rupee face amount, to 102.65 as of 12:45 p.m. India's central bank last month left its benchmark interest rates unchanged near a six-year high, citing concern that fuel and food costs may continue to fan inflation.

The aggregate inflow of funds seems to have resumed in the week ending 15 February, after falling back slightly in the previous week (see chart below) as importers bought dollars in large quantities according to foreign exchange reserve data from the Reserve Bank of India. However, even if aggregate totals are rising, there is some evidence that some areas of investment are losing ground, at least according to data from the Securities and Exchange Board of India, who note that funds based abroad have sold Indian equities worth $2.9 billion more than they have bought so far this year, after making record net purchases of $17.2 billion in 2007. A sign of some hesitation in global risk appetite perhaps. One result of this has been that the benchmark Indian share index has lost 14 percent this year after advancing 47 percent last year.

Meanwhile the rupee headed for a third weekly decline, its longest losing streak since July 2006, as the falling currency may have encouraged companies to continue to increase their purchases of the dollars they need to pay for imports.

The rupee fell this week past the 40-per-dollar level for the first time since September after oil prices climbed to a record, stoking speculation Indian refiners will buy more dollars to pay for costlier crude imports, and looks set for its biggest weekly loss since November following the data showing that overseas funds also withdrew part of their investments in Indian equities.

The rupee weakened 0.8 percent this week to 39.995 per dollar as of 10:28 a.m. in Mumbai this morning. The currency fell as low 40.2375 on Feb. 20, its weakest level since Sept. 19, 2007.