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Saturday, May 24, 2008

India Inflation May 10 2008

India's inflation held above the central bank's target for a third straight month at the start of May, raising the distinct possibility that commercial lenders may be ordered to increase reserves for a third time this year. Wholesale prices rose 7.82 percent in the week ended May 10 from a year earlier, after gaining 7.83 percent in the previous week,

In fact it is quite likely that inflation is rather higher than this as the government is likely to revise the preliminary wholesale-price estimate in two months after receiving additional data. The commerce ministry today reported that the inflation rate broke the psychological threshold of 8% in the week ended March 15 revising its figure for the week to 8.02 percent, the highest since September 2004, and up from the earlier estimate of 6.68 percent.

The index of fuel products, with 14 percent weight in the inflation basket, rose 7.39 percent in the week ended May 10 from a year earlier, today's report showed. Prices of aviation turbine fuel rose 10 percent. The manufactured price inflation rose 7.73 percent.

With inflation having held above the Reserve Bank of India's target for a third straight month now, it seems likely that commercial lenders will once more be obliged to increase their reserves with the central bank, and if this happens it will be the third time this has happened this year. The Reserve Bank last month twice asked lenders to set aside more funds, raising its cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent. With inflation actually now possibly running at close to 9% (when the data are ultimately revised I suspect that this is the sort of number we will see) and the repurchase rate at 7.25 percent, India presently has a negative interest rate of around 1.75%, which is very accomodative given the current inflation. Of course the reason the bank is relying on reserve increases to try to slow lending is obvious, since increasing the repo rate will only make "carry" more attractive, and possibly increase inflationary pressures by attracting even more funds, as Stephen Jen argues forcefully in this posting on the Morgan Stanley Global Economic Forum. The only other serious demand management tool the Singh administration has at its disposal I think is the fiscal deficit situation, and this should be being given much more importance.

India's Foreign Exchange Reserves

India's foreign exchange reserves rose again in the week ending May 16 to US$314.08 billion up from the US$312.50 billion registered a week earlier, according to the latest data in the Weekly Statistical Supplement released by the Reserve Bank of India on Friday.

Foreign currency reserve assets rose to US$304.11 billion from US$302.57 billion. Meanwhile, gold reserves remained unchanged at US$9.42 billion. Special Drawing Rights, or SDRs, decreased to US$11 million, down from from US$18 million. India's reserve position with the International Monetary Fund grew during the week to US$525 million.

The Rupee

The rupee declined for the fifth consecutive week this weeking, stringing together the worst run in almost two years, as record crude oil costs spurred demand for dollars needed to buy it. The rupee was down 0.5 percent on the week closing at 42.705 to the dollar at the 5 p.m. on Friday in Mumbai.

The rupee thus fell to its lowest level since April 2007 as companies paid more for the raw materials they need. Higher oil costs may well continue to slow growth in India's economy, which depends on imports to meet three-quarters of its annual energy needs.

The current-account shortfall widened to $5.4 billion in the three months ended Dec. 31, from $3.7 billion a year earlier and $4.7 billion in the preceding quarter, the central bank said on March 31. That was after the country imported oil worth $71.8 billion in the year through March 31, 23.5 percent more than a year earlier.

Of course a lot on the rupee valuation and on the inflation front now depends on the future course of monetary policy at the Reserve Bank of India.

Fiscal Deficit

As well as a current account deficit which the IMF currently estimates at 3% of GDP for 2008, India is also running a fiscal deficit, and central bank Governor Yaga Venugopal Reddy is currently warning that the deficit continues to be high with some of the pressures on the shortfall still not being reflected in the data.

According to government auditors at the end of March India's budget deficit in the first 11 months of the fiscal year to Feb. 29 reached 73.4 percent of the annual target, but this may be understating the true position.

Finance Minister Palaniappan Chidambaram stated in February that India's budget deficit for the year to March 2009 is estimated at 2.5 percent of gross domestic product, compared with the revised estimate of 3.1 percent for the previous fiscal year.