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Saturday, June 21, 2008

India Wholesale Price Inflation June 7 2008, Foreign Exchange Reserves

India's inflation accelerated to a 13-year high after record crude oil costs forced the government to raise retail fuel prices. Stocks and bonds fell on concern the central bank will have to raise interest rates again. Wholesale prices in India were up by 11.05 percent in the week to June 7, after an 8.75 percent increase in the previous week, according to an Indian government statement in New Delhi today.

Obviously this sudden surge is creating pressures all over the place to do something. Finance Secretary D. Subbarao told reporters yesterday that "The first line of defense is monetary policy action", meaning that the Reserve Bank of India is about to take further anti inflation steps. Reserve Bank of India Governor Yaga Venugopal Reddy met Prime Minister Manmohan Singh and Finance Minister Palaniappan Chidambaram later in the day to discuss inflation and some measured are clearly anticipated.

The fuels index, which accounts for roughly 14 percent of the inflation basket, rose 7.8 percent in the week from the previous seven days. Prices of diesel surged 21 percent, liquefied petroleum gas prices climbed 20 percent, and mineral oil prices gained 12.9 percent.

India raised retail gasoline and diesel prices earlier this month, joining China, Indonesia, Malaysia and Sri Lanka, as a near doubling of crude oil prices pushed up costs and threatened to substantially erode company profits. Petrol prices were raised by 11 percent to 50.56 rupees ($1.2) a liter in New Delhi on June 4. Diesel costs were increased by 9 percent and cooking gas by 17 percent. The last time energy prices were raised was back in February.

Crude oil prices hit an all-time high of $139.89 a barrel on June 16, raising concern India's import costs will surge. India relies on crude oil from overseas to meet three-quarters of its energy needs.

Indian Oil, India's biggest refiner, posted its first quarterly loss in more than two years in the first quarter of this year. The loss in the three months ended March 31 was 4.14 billion rupees compared with a profit of 16.1 billion rupees a year earlier. Profit at Bharat Petroleum Corp., India's second-largest refiner, fell 91 percent.

Bonds and stocks fell on concern faster inflation will prompt the Reserve Bank of India to raise borrowing costs, hurting economic growth. The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 3.22 percent to 14,602 in Mumbai. The yield on the benchmark 10-year bond rose 17 basis points to 8.64 percent as of 2:31 p.m. in Mumbai.

In an attempt to contain inflation, India's central bank raised its repurchase rate to a six-year high of 8 percent from 7.75 percent on 11 June. This followed two increases in the cash reserve ratio required of banks in April. Governor Yaga Venugopal Reddy and his team will next meet on July 29 to review interest rates.

Foreign Currency Reserves

India's foreign exchange reserves fell by a rather large quantity - $4.96 billion - in the week ended June 13. This was the sharpest drop in over two-and-a-half years. The decline is largely the result of intervention from the Reserve Bank of India (RBI) who have been in the forex market selling dollars in an attempt to keep the rupee from breaching the 43-mark against the dollar.

The last time there was such a large fall in reserves was in December 2005, when there were huge redemption pressures on the central bank on account of the India Millennium Deposits (IMD) scheme of State Bank of India.

The RBI has been consistently intervening in the forex market over the past couple of weeks, with the rupee under pressure from oil companies which bought dollars to provide for soaring crude prices. RBI has now started selling dollars to oil companies directly, in exchange for oil bonds, which seems to have taken some of the pressure off the forex market.

Meanwhile, credit and deposits continue to show a much lower rate of year on year growth. According to data released by RBI in its weekly statistical supplement on Friday, bank credit was up 25.9%.

Loans extended by banks during the fortnight ended June 6 touched Rs 23,80,418 crore, up Rs 16,001 crore, from the previous fortnight’s levels. While food credit dipped by Rs 5,105 crore, non-food credit moved up Rs 21,106 crore during the fortnight.

Aggregate deposits with commercial banks was running at Rs 32,56,979 crore as of June 6, up Rs 21,447 crore over the previous fortnight’s levels. While demand deposits rose Rs 2,026 crore, fixed term deposits with commercial banks rose Rs 19,421 crore. Investments in government and other approved securities by banks rose Rs 6,181 crore to Rs 10,07,069 crore as on June 6. The total stock of money in the system went up Rs 22,655 crore during the fortnight ended June 6, to touch Rs 40,99,957 crore.

At the current levels, the annual Y-o-Y growth in money supply is running at 21.4%, well above the central bank’s comfort levels of 17-17.5%.

The Rupee

The rupee halted a two-week slide this week as the RBI bought the currency to try to brake the fall and avoid further inflation being induced by imported energy. The rupee strengthened last Friday, rising 0.1 percent to 42.925 per dollar as of the 5 p.m. close in Mumbai, following release of the latest foreign-currency reserves data which showed the biggest drop in 2 1/2 years. However the rupee declined to its lowest level in 14 months during the previous week, threatening to push up the cost of imported commodities and oil, and is now Asia's worst-performing currency in 2008, having fallen 6.5 percent against the dollar during the last quarter.

In comparison Brazil's real has climbed 10.9 percent over the same period, while Russia's ruble has gained 4.4 percent and China's yuan 6.3 percent. The difference between India and other members of the soc called BRICs group is that Russia is a net exporter of oil, while Brazil is the world's biggest exporter of beef, coffee, orange juice and sugar. China posted a record $262 billion trade surplus in 2007 and has $1.68 trillion of currency reserves.

India imports about 75 percent of its oil, which has almost doubled in price in the past year. The rising cost added to the shortfall in the india's current account, a broad measure of trade and investment flows. The deficit widened to a record $13.4 billion in 2007, central bank data show.

In addition India's fiscal deficit is widening, and may well reach 9 percent of GDP in the coming fiscal year, up from 6 percent last year. Thus there is a real short term danger that was a win-win positive cycle, may turn into a lose-lose negative one, as the rupee falls further and inflation rises higher.