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Saturday, June 28, 2008

India wholsale Inflation 14 June, Foreign Exchange Reserves, Rupee

India's inflation accelerated again in the week ended 14 June, hitting the fastest pace in 13 years, and suggesting there may well be more interest rate increases to come from the central bank. Wholesale prices rose 11.42 percent in the week to June 14, following an 11.05 percent rate in the previous week, according to a government statement in New Delhi yesterday.

The Reserve Bank of India this week increased its key rate to a six-year high of 8.5 percent, joining other central banks across Asia in raising borrowing costs as soaring fuel and commodity prices stoke inflation. Some analysts are speculating that Governor Yaga Venugopal Reddy may lift the Indian benchmark by as much as 100 additional base points before the end of the year.

The RBI raised the repurchase rate by 0.5 percentage point on 24 June and lifted the cash reserve ratio to 8.75 percent from 8.25 percent, to prevent money in the banking system from fanning inflation. The move followed a quarter-point increase in the benchmark interest rate to 8 percent on June 11.

Money supply in India's banking system grew 21.4 percent from a year earlier to 41 trillion rupees ($953.5 billion) in the week ended June 6, more than the Reserve Bank's target of 16.5 to 17 percent for the fiscal year ending March.

Soaring food prices are also stoking inflation in India, where more than half the population of 1.1 billion survive on less than $2 a day. Food product costs, including bread, salt, cooking oil and tea, jumped 14 percent in the week to June 14 from a year earlier, according to today's report. Fuel price inflation rose 16.4 percent in the week ended June 14 from a year earlier. India on June 4 raised retail prices of fuels for the second time this year. Higher fuel prices led to higher transportation costs, making manufactured products and food items more expensive.

The index of manufactured products, which has a 64 percent weight in the inflation basket, rose 9.7 percent.

Foreign Exchange Reserves

India’s foreign exchange reserves rose $1.8 billion during the week ended June 20 despite sustained selling by foreign portfolio investors, indicating that the Reserve Bank of India (RBI) was a net buyer of forex assets in the market. The rise in reserves comes after a sharp decline of nearly $5 billion in the previous week. According to the latest data released by RBI, forex reserves, including gold and SDR (special drawing rights) rose $1,794 million during the week ended June 20 to touch $312.5 billion. While foreign currency assets rose $1,789 million, reserves with IMF rose $5 million. The value of gold and SDR — currency with the IMF — remained unchanged during the week.

Thus $1,794-million forex worth of assets were absorbed by the central bank during the week although these assets, even if expressed in dollar terms, include the impact of movements in the value of non-US currencies (such as euro, sterling, yen) held in the reserves. The central bank obviously intervenes to buy and sell assets denominated in a variety of currencies, and even though the currency break-down of India's reserves is not made public, the central bank does reveal the break-down of the SDR-dollar, sterling, euro yen and non-SDR currencies. This data suggests that, over the years, the share of non-SDR currencies - such as the Canadian dollar, yuan and the Australian dollar - in the reserves has been going up.

The Rupee

India's rupee fell by the most in three weeks last week, after crude oil rose to a record and demand consequently rose from importers.India's oil imports have averaged $7.7 billion a month this year, compared with $5.4 billion in 2007.

The rupee seems to be heading for its worst quarter in a decade as accelerating inflation has prompted global funds to sell more Indian equities than they have bought so far this year. The rupee is in fact now the second-worst performer among the 10 most-traded Asian currencies excluding the yen this quarter, and the rally in oil lead the rupee to retreat from the three-week high it touched on Thursday following the decision by the central bank to raise its benchmark interest rate by the most since 2000.

The rupee was down 0.5 percent to 42.88 against the dollar by the 5 p.m. close in Mumbai. That is the biggest fall since June 9.

Wednesday, June 25, 2008

Reserve Bank of India Raises Rates Again

India's central bank raised interest rates for the second time in a month this morning and raised the amount lenders need to set aside as reserves in an attempt to slow spriraling inflation which is now running at a 13-year high. The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent. The increase was the biggest since 2000 and followed a quarter-point rise on June 11.

Before today, Reddy had raised the repurchase rate eight times in the past two and a half years and increased the cash reserve ratio seven times since December 2006 in an ongoing attempt to slow money supply growth and cool inflation.

India's central bank also signaled it will keep raising borrowing costs if needed. The central bank said in a faxed statement that a "heightened vigil'' was now needed to anchor inflation expectations, which is really another way of saying that the RBI has been "wrong footed" by the sudden acceleration in inflation and underscores the fact that they now recognise that they blew their opportunity to raise rates more forcefully earlier in the day.

The rupee rose slightly from near a 14-month low after the announcement, rising 0.1 percent to 42.92 per dollar as of 9:41 a.m. in Mumbai.