Concerned over high inflation, the Reserve Bank on Friday raised key interest rates by 25 basis points, its 12th such hike since March, 2010, making auto, home and other loans more expensive. RBI also said it will persist with its anti-inflationary policy stance, even as growth slows in Asia's third-largest economy.The apex bank is now expected to raise interest rates one more time in 2011. Earlier it was predicted that a Friday increase would be the last of the year. Finance Minister Pranab Mukherjee said the 25 basis points rate hike by the Reserve Bank will help in moderating inflation to a comfortable level without hurting growth. But finance secretary R.S. Gujral said the government is concerned about high inflation and slowing growth.Corporate India, meanwhile, has become increasingly gloomy as rate increases continue and growth slows."There seems to be no other alternative for RBI ... but I think government has got to look at alternatives now," said Sunil Sikka, president of Havells India, which makes electronic equipment."Increasing the repo every now and then is a demand dampener," he said. "The cost in any case is passed on to the consumer. I don't know how it is going to help, so far it has not."FM Supports Move"I am hopeful that measures taken (by RBI) would get us back to a more comfortable inflation situation earlier rather than later... while (leaving) scope for growth to pick up in the second half of the year," Mukherjee told reporters in New Delhi.The RBI lifted its policy lending rate, the repo rate, by 25 basis points to 8.25 percent, in line with expectations, as it persisted in a thus far largely futile fight to curb inflation.The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems.It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns.The central bank said it was too soon to ease back from its anti-inflationary bias."A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement.Inflation Up, Growth DownHeadline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year.India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices."RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me, is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai.The benchmark 10-year bond yield rose 4 basis points after the RBI kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement.While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 per cent.Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years.Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters.The rupee, which plunged to a near two-year low against the US dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill. Industry UnhappyJSW Steel CEO Vonod Nowal said: "When growth is taking place, inflation takes place. When people have the capacity to pay, RBI need to balance it; they should not always use this tool of rate hike. Interest rates are already high, if they are further going to increase them, then it will further affect the business environment.""This will definitely create a problem for liquidity, somewhere it will slowdown the infrastructure investment as well as manufacturing growth. It is going to further impact already sagging capital expenditure by the industry."Crompton Greaves CFO Madhav Acharya said: "I am not sure if 25 bps rate hike is going to help RBI to contain the situation too much. So my understanding is that the interest rate hike will continue for some bit of time. For the slowdown in growth, may be RBI does not have much of a choice there. With more interest hikes to come there will be some more effect on the capex."Sulajja Firodia Motwani, Joint MD, Kinetic Engg, said: "The inflation that we are experiencing is more to do with commodities like food... and increasing interest rates is not going to address that issue but instead it is going to slow down the investment, reduce demand for products."(With input from agencies)
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Concerned over high inflation, the Reserve Bank on Friday raised key interest rates by 25 basis points, its 12th such hike since March, 2010, making auto, home and other loans more expensive. Finance Minister Pranab Mukherjee reacted to the move saying tightening is impacting the country's economic growth.Following the increase, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is 7.25 per cent.The RBI, while announcing its mid-term review of the monetary policy, kept all other rates and ratios unchanged."The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank's comfort zone," the central bank said.Despite the RBI increasing key rates several times since March, 2010, inflation shot up from 9.2 per cent in July to 9.8 per cent in August this year.Going forward, the RBI said the monetary stance will be "influenced by signs of downward movement in the inflation trajectory..."India's economic growth has cooled as the cumulative impact of earlier rate increases and rising prices crimp demand, and an expected pause in tightening connects it to the Asia bandwagon of central banks rolling back on rate hike campaigns.The rupee rose for a second consecutive day on Friday after the coordinated action by major central bankers to add liquidity into the European banking system.India's domestic demand driven economy grew 7.7 percent in the April-June period, its weakest pace in six quarters, but outperformed even gloomier predictions.(Agencies)
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India's industrial output growth slumped to 3.3 per cent in July, its weakest annual pace in nearly two years, reinforcing expectations the RBI will pause its monetary policy tightening after one more rate rise this week.The output growth was much lower than 6.2 per cent forecast in a Reuters poll and added to the Reserve Bank of India's dilemma of combating inflationary pressures without further stifling economic growth.But analysts argue that data on Wednesday, which is expected to show inflation pushing towards 10 per cent, will sway the RBI to raise rates on Friday for the 12th time since March 2010, before it takes stock."We expect the RBI to continue its tightening stance on September 16," said Shubhada Rao, chief economist of Yes Bank in Mumbai. "There is a case building up for a pause thereafter."Indian stocks fell and the rupee slipped to its lowest level in more than a year on worries over the health of an economy that grew in April-June at its slowest annual pace in six quarters.The euro zone's deepening debt crisis and worries about the health of the US economy have rattled world markets, adding to the domestic concerns of Indian policymakers and another reason for the central bank to pause its tightening.This is similar to China, where economists argue the central bank will hold off on further monetary policy tightening after nine increases in bank reserve requirements and five rate rises since October, as inflation is peaking and economic growth is slowing down.For India though, inflation will remain a problem for a few months more, said the chief economic adviser to the finance ministry, Kaushik Basu."Inflation is going to be very close to 10 per cent (for the month of August)," he said on Monday. "We are expecting inflation to remain very difficult till the month of November, maybe December and then begin to slow down."India's headline inflation was 9.22 per cent in July. The median forecast of a Reuters poll suggested Wednesday's data will show it picked up to 9.6 per cent in August.The central bank has maintained that it has to fight inflation even at the cost of a loss of some economic growth. Most analysts in a Reuters poll expect the RBI to raise its repo rate on Friday by 25 basis points to 8.25 per cent.Still, the weak industrial output figures and global economic concerns have increased the risk that the central bank skips a rate rise this week, some analysts said.Other data, including an Indian purchasing managers' index and car sales have also suggested the rise in interest rates is weighing on the economy."Our base view is for a 25 bps rate hike by the RBI this week. But the probability of a pause has increased due to global uncertainty," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.Stocks Rattles, Rupee SlidesBSE Sensex extended losses after the data and closed the day down more than 2 percent. The rupee weakened to its lowest in more than a year.India's 5-year swap rate fell 6 basis points (bps) after the data to 6.59 per cent and the 1-year rate slipped 4 bps to 7.51 per cent. The 10-year benchmark bond yield fell 1 bp to 8.26 percent.July's industrial output growth was the weakest since October 2009.Overall industrial output growth was dragged down by a 15 per cent decline from a year earlier in capital goods production, the government data showed. In June, capital goods rose 38 percent from a year earlier.Annual growth in production of consumer goods and consumer durables rose compared to June, indicating consumer demand is still holding up somewhat in the face of rising interest rates.Some cautioned that such high volatility raised doubts about the reliability of the data."We think that this data cannot be a credible guide to RBI policy. Inflation will continue to hold the key for the September rate decision," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai.Manufacturing output , which constitutes about 76 per cent of the industrial production index, rose 2.3 per cent over a year earlier.Weakness in the West is taking a global toll on manufacturing. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, while China's manufacturing sector contracted slightly for the second consecutive month.(Reuters)
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India will borrow 2.2 trillion rupees ($44.9 billion) in the second half of the fiscal year that begins on Oct. 1, the government said, significantly more than expected, sending bond yields and swap rates higher.R. Gopalan, economic affairs secretary, said the government's borrowing in the second half of the fiscal year would be 528 billion rupees higher than had been budgeted in February.Investors had been expecting additional borrowing, if any, to be around 200-300 billion rupees.Slowing growth in Asia's third-largest economy and rising interest rates to fight high inflation have put pressure on government finances, and New Delhi is far behind target on its plans to sell holdings in state-controlled companies.The government had in the February budget pencilled in gross market borrowing of 4.17 trillion rupees for the 2011-12 fiscal year, to help bridge a fiscal deficit that is forecast to be at 4.6 per cent of the GDP.It has already completed borrowing of 2.5 trillion between April and September, and the full-year borrowing now stands at 4.7 trillion rupees.The benchmark 10-year bond yield spiked 8 basis points to 8.43 per cent immediately after the announcement. The benchmark 5-year swap rate rose 12 bps to 7.15 per cent and the one-year rate rose 6 bps at 7.96 per cent, traders said."Increased supply in an elevated policy rate environment would exert upward pressure on yields," said Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Bank said.Gopalan said the additional market borrowing was required due to lower government cash balances and a lower pool of small savings, but will not change the fiscal deficit target of 4.6 percent of gross domestic product for the current fiscal year.Gopalan declined to comment on whether the government would reduce its disinvestment target of 400 billion rupees in light of the current market turmoil.(Reuters)
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India's commodity exchanges are poised for steady growth over the next few years after annual turnover more than quintupled to $2.5 trillion since futures trading started in 2003, but political hurdles hinder more dramatic development.While a bill to strengthen market oversight and free up entry of financial institutions and the launch of new products has hung fire since 2005, government moves such as bans on some agricultural futures trading have fed regulatory uncertainty."The bill is critical not only for growth but also to unshackle chains that bind the market and restrict its forward movement," said Tanushree Mazumdar, vice president at the National Commodity Exchange, India's second largest."Besides allowing trading in options and indices, it will give more teeth to the regulator."But politicians worry that unbridled futures speculation will drive up food prices, particularly as double-digit inflation proves resistant to the central bank's efforts to rein it in with 12 rate hikes in the past 18 months.A government embarrassed by a wave of public protest over a slew of corruption scandals looks unlikely to take dramatic new steps to quickly alter the picture."There is no political will, no one wants to take a call in the government now," said Kuljeet Kataria, head of business alliance at broker Unicon Investment Solutions, which does $125 million to $167 million worth of futures trades every day."You could hope for something in a couple of years when these things settle down," he said, echoing a timeline suggested by at least two government officials who asked not to be named.Tremendous PotentialYet analysts see tremendous potential in Indian exchanges, even though they have lagged Chinese forward trading which made up 51 per cent of commodity derivative volumes traded worldwide last year, the World Federation of Exchanges says."Globally, commodity derivatives volumes are 35 to 40 times of the physical market but in India it is just 4 times," Nirmal Bang, a leading broking firm, wrote last month."We expect the Indian commodity futures market to reach at least 15 to 20 times by 2015," the firm added, painting a picture of dramatic growth in volume since physical commodities contribute 45 percent to Indian GDP.India, the world's biggest buyer of bullion and the second-largest grower of wheat and rice, has 21 commodity bourses, five operating at the national level, trading in about 80 commodities ranging from gold to carbon credits, though 8 to 10 commodities make up the bulk of volumes.Indian commodity futures volumes have grown to 112.52 trillion rupees ($2.5 trillion) in the financial year to March 2011 from 20.53 trillion in the year to March 2006. Average monthly volumes now stand at about 6 trillion rupees.Turnover in the commodity futures markets has outstripped that of equity derivatives, growing 30 percent since 2008 against a 22 percent increase in the latter, as investors found a "store of value" in commodities in a slowing global economy.Reforms-Driven GrowthBut future growth will only be unlocked by reform moves, including steps to allow foreign and domestic institutional investors, banks and insurance firms to trade and open up options and index businesses.Higher volumes will also spur consolidation of exchanges, much as in the United States. China has just three."Regional exchanges have already been marginalised and they won't be able to sustain themselves, they'll have a big challenge in surviving," said Anil Mishra, chief executive of the National Multi-Commodity Exchange of India, the country's third-largest, with turnover of $46 billion in the 2009/10 fiscal year.India must also overcome infrastructure deficiencies and build an effective warehousing system for its commodity derivatives market where 1 per cent to 5 per cent of total trades are settled by physical delivery, traders say.Although India is a top commodity producer and consumer, turnover on its commodity exchanges is just 5 per cent of those in China -- which limit the role of foreign companies and also do not offer options -- and less than half a percent of US futures trade.Since 2003, government intervention to control key commodity prices has led to several flip-flops in forward trading policy.The government banned futures trading in rice, wheat and two varieties of lentils in early 2007 and sugar in 2009 in its efforts to curb rising food prices. The ban on rice remains.Such moves have proved little help in controlling inflation, bolstering trading firms' views that fears about speculation driving up prices were unfounded and freeing up the futures market could only bring stability to commodity supplies.Also, the government is beginning to see that beyond the massive volumes, forward trading could bring price protection to farmers and their families, who make up almost 60 percent of the country's 714 million voters."The government can no longer ignore the fact that futures trading offers a great price discovery platform that farmers can benefit from," said D. H. Pai Panandiker, head of private think tank RPG Foundation. "Farmers can plan better when they know what price their produce is going to fetch."(Reuters)
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Stock markets around the world had a torrid time last week and the Indian ones were no exception. Concerns over a possible sovereign debt default by Greece and belied expectations of a third of quantitative easing (QE3) by the US Federal Reserve Board sent a wave of negative sentiment through Dalal Street, resulting in across-the-board selling by investors. In a word, liquidity (mainly from foreign institutional investors, or FIIs) just dried up. There was a massive fall on Thursday and Friday that wiped off 900 points from the Bombay Stock Exchange (BSE) Sensitive Index (Sensex), which ended the week with a loss of 772 points overall, closing at 16,162.06 points. On Thursday, FIIs sold over $251 million worth of stock."The volatility in the Indian market is the mirror of what's happening in the global markets," says Puneet Nanda, executive director at ICICI Prudential Life Insurance. "If you ask me when I see the market stabilizing, the answer is I don't know." he's not alone. many others believe the market could fall another 10 or even 15 per cent from here on; no one knows the fate of countries in the Euro-zone.At least for another few weeks, they say, fear and uncertainty will be the twin swords of Damocles hanging over the markets. Economic recovery in the US holds out no hope of certainty either (which matters because the US is opne-third of the global economy). Nanda is certain that there is still some pain left in the Indian market. "The next two-three quarters will be tough in terms of corporate performance," he says. There is little doubt that the slowdown will sooner or later impact corporate profitability. The bigger worry is the long-term, as going ahead (about 2 years from now, according to Nanda), when the the capacity bottle-necks will impact the topline or revenues of many companies. Is there any respite? Perhaps a fall in crude oil prices; they also fell, following the pessimism on the global economic outlook. Brent crude is down $5, trading at around $105 per barrel. Crude oil imports accounts for nearly 55 per cent of total Indian imports.So don't let the bull to charge this week. Markets will probably remain volatile ahead of the expiry date of futures and options (F&O) contracts at end September. Some short covering may help the market regain some of last week's losses, but overall the Sensex is expected to remain jittery, and take cues from its global counterparts.
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The Reserve Bank of India (RBI) remains bent on fighting domestic inflation despite weakening global conditions, officials with direct knowledge of policymaking said, a week before it is widely expected to raise interest rates once again.The RBI, which has lifted rates 11 times in 18 months, makes its mid-quarter review on September 16.Though senior bank officials are hawkish, RBI Governor Duvvuri Subbarao will not make a final decision before the release of August inflation data on Sept. 14, the sources said."We still have high food and non-food manufacturing inflation, good credit growth to industry and growth is also quite good according to our view," said an official with direct knowledge of the matter."So, domestic factors will continue to be the key driver for policy framing," the official said.RBI officials have kept up the hawkish talk in recent weeks even as fears mount that western economies are slipping back into recession, although the central bank is widely believed to be nearing the end of its tightening cycle as its earlier actions exact a toll on demand in Asia's third-largest economy.Also, the finance ministry is putting pressure on Subbarao, whose term was recently extended for two years, not to continue tightening for much longer. Finance Minister Pranab Mukherjee this week was quoted as saying that he hoped the RBI will not raise rates further.Senior finance ministry officials said continued steady rate increases may not have the desired effect of cooling inflation without overly disrupting growth."Yes, inflation still remains the big concern but I see that peaking off at the end of the year, but growth will also come into sharp focus," one of the officials told Reuters.Inflation FirstLast week's jump in food inflation, high non-food manufacturing inflation, the knock-on impact of a June fuel price increase and resilient credit growth all point to a need for continued vigilance, several RBI officials said, declining to be identified given the sensitivity of the matter.Headline inflation for July was 9.22 percent, much above the RBI's end-March 2012 projection of 7 percent. India's food price index rose 10.05 percent in the year to Aug. 20, its highest in nearly six months, while the fuel price index was up 12.55 percent."Inflation has not yet peaked. To some extent the global developments will have some impact on the external sector. We are cautiously hawkish," the first RBI official said.While advanced economies are struggling to ward off stagnation, central banks in emerging markets are confronted with high inflation and cooling growth.Brazil recently surprised with a rate cut despite still-high inflation, and market speculation that China may ease lending conditions for some small and medium sized companies has added to expectations the tightening cycle will soon end in emerging markets."Brazil cut rates after raising them sharply, so they had room to cut. We are anyway behind the curve," said another senior RBI official."So where is the room to even pause unless the global recovery concerns bring down commodity prices drastically?" the official said.Gross domestic product growth in India slipped to 7.7 percent in the three months through June, and with high inflation persisting, many economists are scaling down their growth forecasts.The RBI has raised its key rate by a total of 325 basis points to 8.00 percent since March 2010, including a sharper-than-expected 50 basis point hike in July, meaning its next move is not easily predicted.The minutes of the July meeting of the RBI's advisory panel on monetary policy showed that the majority favoured a pause or a quarter point increase.Subbarao overruled them.(Reuters)
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The Reserve Bank of India (RBI) will consider intervention in the foreign exchange market if pressure on the exchange rate is too great and disrupts real sector activity, Subir Gokarn, a deputy governor of the Reserve Bank of India said on Wednesday.Gokarn was speaking at the annual conference of Federation of Indian Chambers of Commerce and Industry (Ficci) in Mumbai.(Reuters)
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