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Friday, September 19, 2008

Inflation Holds Steady Again, Forex Reserves Up Slightly

India's inflation held steady at the start of September, making it more likely that the Indian central bank will adopt a wait and see approach before adding to its three interest-rate increases since June. Wholesale prices were up an annual 12.14 percent in the week to Sept. 6 according to the commerce ministry in New Delhi. This follows a 12.1 percent rise in the previous week.

The inflation news follows a very turbulent week in the financial system, and the Reserve Bank of India announced on Sept. 16 a battery of measures to boost cash in India's financial system and sooth concern that the global credit crisis will worsen and have a negative impact on the Indian economy. the central bank said it would sell U.S. dollars and increase interest rates on some foreign-currency deposits to bolster the rupee, which fell the most in a decade during the week. Banks can now get more funds through an additional daily repurchase auction and via a temporary reclassification of eligibility to access funds through the repurchase auction.

Foreign Exchange Reserves Rise Slightly

India's foreign reserves jumped by 650 million to $ 289.461 billion for the week ended September 12 from $ 288.811 billion in the previous week. However it is not clear at this point which way reserves will now move. The global financial markets seem to be in a state of shock following the announcement of the proposed rescue plan for US banks, since few seem to really have any sort of clear idea of what the actual implications are likely to be.

Emerging-market stocks, bonds and currencies gained, extending last Friday's record rally this morning. The MSCI Emerging Markets Index of stocks was up 1.6 percent at 10:10 p.m. in New York, following a 10 percent gain on Sept. 19. The extra yield investors demand to own developing- nation debt instead of U.S. Treasuries shrank 11 basis points to 3.44 percentage points after narrowing 64 basis points on Sept. 19, according to JPMorgan Chase & Co. But US stocks are off again this afternoon, and it isn't really clear which way all this is now going to move.

The Rupee

On the other hand the rupee headed for its biggest two-day advance in a decade on optimism investors will return to emerging markets. The rupee rose 0.8 percent to 45.4525 per dollar at today's 5 p.m. close in Mumbai, adding to the 1.4 percent gain on last Friday. This constitutes a 2.23 percent advance since Sept. 18 and is the biggest two-day gain since January 1998. Eleven of the 15 most-active Asian currencies strengthened today.

The optimism reflected in this most recent rise is in part based on an assesment that the rupee had been declining largely on concerns that the credit-market turmoil in the U.S. would prompt overseas funds to cut holdings of emerging-market assets. The Indian currency had previously been Asia's second-worst performer in 2008, second only to South Korea's won, and had accumulated a 15.4 percent loss.