India Inflation April 19 2008

India's inflation accelerated at the fastest pace in more than three years in mid april, underlining the importance of the recent central bank decision to make commercial lenders increase reserves twice last month.Wholesale prices rose 7.57 percent in the week ended April 19 from a year earlier, after gaining 7.33 percent in the previous week, the government said in a statement in New Delhi today. Today's rise is the highest since November, 2004, when prices rose 7.68 percent.




Accelerating inflation prompted the Reserve Bank of India to raise its cash reserve ratio to a seven-year high only last week, with the central bank unexpectedly raising the cash reserve ratio to 8.25 percent from 8 percent. This is now the highest level since March 2001. The Indian government is also attempting to use administrative measures, and recently scrapped import duties on steel products - including pig iron, hot-rolled coils, ferrous alloys and zinc - and imposed an export tax on the overseas sales of some other steel products to augment local stocks.

The Reserve Bank of India now expects inflation of as much as 5.5 percent in the coming financial year (to March 31 2009), higher than last years target of 5 percent.

Finance Minister Palaniappan Chidambaram yesterday said he doesn't expect commercial lenders to raise interest rates after the central bank asked lenders to set aside more money. Banks are ``quite happy that only the cash reserve ratio has been hiked and policy rates have been untouched,'' Chidambaram said after meeting the chief executives of state- owned banks in New Delhi.

Central bank Governor Yaga Venugopal Reddy is reluctant to increase interest rates on concern it will further weaken an economy that the central bank expects will grow at the slowest pace since 2005 this year. India's $912 billion economy, Asia's third largest, may expand between 8 percent and 8.5 percent this year, the central bank said, after record average growth of 8.7 percent in the previous five years.



Meanwhile the rupee had its worst week in almost nine months this week as local companies bought more dollars to pay for imports. The rupee weakened to the lowest level in more than a month as the dollar rebounded against the euro and the yen on signs the Federal Reserve is finished with its interest-rate cuts after it said on April 30 that the seven reductions starting September were ``substantial.'' Demand for the U.S. currency also rose as refiners bought it to pay for oil shipments after the price of oil reached an all-time high this week.

The rupee declined 1.3 percent this week to 40.655 per dollar at the 5 p.m. close in Mumbai - that's the biggest fall since the five-day period ended August 17.

The value of Indian imports grew 27 percent to $236 billion in the fiscal year ended March, widening the trade deficit by 45 percent to $80.4 billion, the Commerce Ministry said yesterday. The problem is that the rupee's 3.2 percent decline so far this year may accelerate inflation. This danger alone may prompt the central bank to raise its benchmark interest rate for the first time in more than a year.

Indian Exports March 2008

India's exports slowed in March, missing the annual target for overseas sales, as a stronger rupee and weakening global growth hurt shipments of clothes, steel and other goods. March shipments were up 26.6 percent to $16.3 billion over March 2007, slower than the 35.3 percent gain in February. Exports in the fiscal year ended March 31 rose 23 percent to $155.5 billion over the previous year, short of a government target of $160 billion.

It looks like it may well be difficult for India to achieve this years export target of $200 billion, especially since the government has already banned shipments of some food products and other commodities in an attempt to contain prices. The US slowdown - the United States is India's biggest market - also threatens overseas sales.


India's imports in March rose 35.2 percent to $23.2 billion, widening the trade deficit to $6.9 billion from $4.3 billion a year earlier. Oil imports in March rose 77 percent to $8.63 billion, while non-oil imports gained 19 percent to $14.5 billion. Imports in the year to March 31, 2008, rose 27 percent to $236 billion, widening the trade deficit in the fiscal year to $80.4 billion.

Exports to the U.S. were up 9.8 percent in the eight months to Nov. 30, slower than the 12.8 percent gain in the same period a year earlier, according to the latest breakdown of exports released by the central bank.

Shipments to Europe rose 28.3 percent in the eight-month period from 16.4 percent in the year earlier, the central bank said. Shipments to the U.K. rose 24 percent and sales to the Netherlands jumped 102 percent.

Overseas sales are likely to slow this year as the government last month banned shipments of cement, rice and pulses and imposed an export tax on the overseas sale of some steel products to help contain inflation, currently holding near a three-year high.

The rupee gained 12 percent in 2007, the most in more than three decades, making the manufactured exports that make up about 15 percent of India's economy more expensive. The rate of currency increase has slowed somewhat in 2008, although the rupee is still up 2.5 percent so far this year.


India's economic growth is expected to drop back to between 8 percent and 8.5 percent this fiscal year, compared with an estimated 8.7 percent gain last year, the Reserve Bank of India said on April 29. The central bank has raised borrowing costs since October 2004 to damp inflation. The central bank on April 29 raised the so-called cash reserve ratio for the second time in two weeks, to 8.25 percent from 8 percent, to add to the government's efforts aimed at containing inflation.

Trade Minister Kamal Nath announced on April 11 that the government plans to focus on promoting exports to 10 countries including Mongolia, Bosnia- Herzegovina, Albania, Macedonia, Croatia, Honduras, Djibouti, Sudan, Ghana and Colombia.

India Raises Reserves Ratio

India’s central bank tightened cash conditions for the second time in less than a month on Tuesday, stepping up its fight against inflation, and signalled it stood ready to act again if price pressures built up. In a surprise move, the central bank said it was raising its cash reserve ratio (CRR) by 25 basis points to 8.25 per cent with effect from May 24 to control inflation-stoking cash in the banking system. It kept all other official rates unchanged.

The increase in the CRR, or the amount of funds banks have to keep on deposit with the central bank, follows a surprise announcement less than two weeks ago raising the ratio to 8 per cent in two stages of 25 basis points each. The first increase has already taken place and the second will be effective from May 10.

The central bank kept its key lending rate steady at 7.75 per cent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6.0 per cent. It has kept the repo rate steady for the past year after raising it five times between mid-2006 and March 2007 to address signs of overheating in the economy.


The bank forecast economic growth would slow in the fiscal year that began this month to a range of 8.0 per cent to 8.5 per cent from an estimated 8.7 per cent in 2007/08.

It said it aimed to push inflation back to ”around 5.5 per cent” this fiscal year, but with the goal of lowering it close to 5.0 per cent as soon as possible.

India's inflation accelerated to what is nearly the fastest pace in more than three years at the begining of April, maintaining pressure on the central bank to do more to restrain prices after squeezing the money supply last week. Wholesale prices rose 7.33 percent in the week ended April 12 from a year earlier, after gaining 7.14 percent in the previous week and 7.41 percent the week before, the Ministry of Commerce and Industry said in New Delhi today.