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  • No Relief From Inflation

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    Indicus Analytics
    31 vistas3 páginas
    The RBI, the Interest rates, and Inflation RBI is showing a surprising reluctance to increase interest rates; while some are singing praises for an RBI that is more sensitive to industry needs, others are lamenting its lack of action to address India’s inflation problem. And there is a serious inflation problem, which is not going away soon. First, consumer price inflation has consistently been above 7% levels since April 2008 that is we have had two years of above average and extremely high consumer price inflation already. Second, with growth on a stronger footing, companies are getting their pricing power back - price rises in food, commodity and energy have now been making their way into the manufactured product space. Consumer price inflation for rural areas (CPI-AL) stands at 15.77% in March and for urban industrial workers (CPI-IW) was at 14.86%. Consumer inflation will come off its highs, though very gradually and will continue to rule in the 8-10% range in the year ahead. Meanwhile inflation in wholesale prices (WPI) is touching 10 percent currently. It will move down towards 5.5% levels only by the third quarter (October- December) of this year; but this will largely be the base effect working, and month on month rises will continue throughout the year. The government feels that food price inflation will fall dramatically by itself. Perhaps that is why it is holding more than double the amount of food stocks than what is required. Even if the government’s prediction is right, and food price inflation falls, manufactured items and energy prices are going to rise over the next few months. The March HSBC Markit PMI showed input prices had reached their series record high i.e since 2005 and in April, input and output price indices rose higher again. Global prices are creeping upward. Higher crude prices (already touching $86), iron ore, coal, steel (the average global price of steel is up 12% in April month on month), rubber (prices expected to rise 35% in the second half of the year) - all these are going to seep into the domestic markets. Further economic growth is unhindered and is bound to put upward pressure on commodity and asset prices. But if the new RBI continues to go soft on interest rates and puts in moderate rises of 25-50 basis points at each review this year, the ball is back in the government’s court. What will the government do? No more energy price increases, its ability to increase minimum support prices will also be compromised, and it may need to control expenditure growth in its welfare programs. So while the RBI recognises the pressures in the system, why are rates still a record low in a whole decade? The reason is quite clear to all and as it says from its own review – it has decided that its hands are tied. The government’s borrowings programme needs to be accommodated by the RBI, sufficient liquidity needs to be provided, yields cannot be allowed to rise too high. We have consistently maintained that loose purse strings, with no effort to raise efficiency in distribution systems, will only result in inflationary pressures mounting in the system. With political expediency being the order of the day, we can expect little in the way of significant reform in the way the government operates. The new RBI will do the bare minimum of what it is expected to on the inflation front. But there has been little help from the government till now - the fiscal roadmap reducing the deficit over the next few years will not be sufficient. The damage has been done. A long hot and sweaty summer lies ahead.

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    The RBI, the Interest rates, and Inflation RBI is showing a surprising reluctance to increase interest rates; while some are singing praises for an RBI that is more sensitive to industry needs, others are lamenting its lack of action to address India’s inflation problem. And there is a serious inflation problem, which is not going away soon. First, consumer price inflation has consistently been above 7% levels since April 2008 that is we have had two years of above average and extremely high consumer price inflation already. Second, with growth on a stronger footing, companies are getting their pricing power back - price rises in food, commodity and energy have now been making their way into the manufactured product space. Consumer price inflation for rural areas (CPI-AL) stands at 15.77% in March and for urban industrial workers (CPI-IW) was at 14.86%. Consumer inflation will come off its highs, though very gradually and will continue to rule in the 8-10% range in the year ahead. Meanwhile inflation in wholesale prices (WPI) is touching 10 percent currently. It will move down towards 5.5% levels only by the third quarter (October- December) of this year; but this will largely be the base effect working, and month on month rises will continue throughout the year. The government feels that food price inflation will fall dramatically by itself. Perhaps that is why it is holding more than double the amount of food stocks than what is required. Even if the government’s prediction is right, and food price inflation falls, manufactured items and energy prices are going to rise over the next few months. The March HSBC Markit PMI showed input prices had reached their series record high i.e since 2005 and in April, input and output price indices rose higher again. Global prices are creeping upward. Higher crude prices (already touching $86), iron ore, coal, steel (the average global price of steel is up 12% in April month on month), rubber (prices expected to rise 35% in the second half of the year) - all these are going to seep into the domestic markets. Further economic growth is unhindered and is bound to put upward pressure on commodity and asset prices. But if the new RBI continues to go soft on interest rates and puts in moderate rises of 25-50 basis points at each review this year, the ball is back in the government’s court. What will the government do? No more energy price increases, its ability to increase minimum support prices will also be compromised, and it may need to control expenditure growth in its welfare programs. So while the RBI recognises the pressures in the system, why are rates still a record low in a whole decade? The reason is quite clear to all and as it says from its own review – it has decided that its hands are tied. The government’s borrowings programme needs to be accommodated by the RBI, sufficient liquidity needs to be provided, yields cannot be allowed to rise too high. We have consistently maintained that loose purse strings, with no effort to raise efficiency in distribution systems, will only result in inflationary pressures mounting in the system. With political expediency being the order of the day, we can expect little in the way of significant reform in the way the government operates. The new RBI will do the bare minimum of what it is expected to on the inflation front. But there has been little help from the government till now - the fiscal roadmap reducing the deficit over the next few years will not be sufficient. The damage has been done. A long hot and sweaty summer lies ahead.

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    31 vistas3 páginas

    No Relief From Inflation

    Cargado por

    Indicus Analytics
    The RBI, the Interest rates, and Inflation RBI is showing a surprising reluctance to increase interest rates; while some are singing praises for an RBI that is more sensitive to industry needs, others are lamenting its lack of action to address India’s inflation problem. And there is a serious inflation problem, which is not going away soon. First, consumer price inflation has consistently been above 7% levels since April 2008 that is we have had two years of above average and extremely high consumer price inflation already. Second, with growth on a stronger footing, companies are getting their pricing power back - price rises in food, commodity and energy have now been making their way into the manufactured product space. Consumer price inflation for rural areas (CPI-AL) stands at 15.77% in March and for urban industrial workers (CPI-IW) was at 14.86%. Consumer inflation will come off its highs, though very gradually and will continue to rule in the 8-10% range in the year ahead. Meanwhile inflation in wholesale prices (WPI) is touching 10 percent currently. It will move down towards 5.5% levels only by the third quarter (October- December) of this year; but this will largely be the base effect working, and month on month rises will continue throughout the year. The government feels that food price inflation will fall dramatically by itself. Perhaps that is why it is holding more than double the amount of food stocks than what is required. Even if the government’s prediction is right, and food price inflation falls, manufactured items and energy prices are going to rise over the next few months. The March HSBC Markit PMI showed input prices had reached their series record high i.e since 2005 and in April, input and output price indices rose higher again. Global prices are creeping upward. Higher crude prices (already touching $86), iron ore, coal, steel (the average global price of steel is up 12% in April month on month), rubber (prices expected to rise 35% in the second half of the year) - all these are going to seep into the domestic markets. Further economic growth is unhindered and is bound to put upward pressure on commodity and asset prices. But if the new RBI continues to go soft on interest rates and puts in moderate rises of 25-50 basis points at each review this year, the ball is back in the government’s court. What will the government do? No more energy price increases, its ability to increase minimum support prices will also be compromised, and it may need to control expenditure growth in its welfare programs. So while the RBI recognises the pressures in the system, why are rates still a record low in a whole decade? The reason is quite clear to all and as it says from its own review – it has decided that its hands are tied. The government’s borrowings programme needs to be accommodated by the RBI, sufficient liquidity needs to be provided, yields cannot be allowed to rise too high. We have consistently maintained that loose purse strings, with no effort to raise efficiency in distribution systems, will only result in inflationary pressures mounting in the system. With political expediency being the order of the day, we can expect little in the way of significant reform in the way the government operates. The new RBI will do the bare minimum of what it is expected to on the inflation front. But there has been little help from the government till now - the fiscal roadmap reducing the deficit over the next few years will not be sufficient. The damage has been done. A long hot and sweaty summer lies ahead.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Descargue como DOC, PDF, TXT o lea en línea desde Scribd
    Marcar por contenido inapropiado
    de 3

    No relief from inflation

    Indicus Analytics
    Published: ET

    14

    12

    10

    0
    J an-01 J ul-01 J an-02 J ul-02 J an-03 J ul-03 J an-04 J ul-04 J an-05 J ul-05 J an-06 J ul-06 J an-07 J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10

    -2

    WPI inf lation Repo

    The RBI, the Interest rates, and Inflation

    RBI is showing a surprising reluctance to increase interest rates; while some


    are singing praises for an RBI that is more sensitive to industry needs, others
    are lamenting its lack of action to address India’s inflation problem.

    And there is a serious inflation problem, which is not going away soon.
    First, consumer price inflation has consistently been above 7% levels since
    April 2008 that is we have had two years of above average and extremely
    high consumer price inflation already. Second, with growth on a stronger
    footing, companies are getting their pricing power back - price rises in food,
    commodity and energy have now been making their way into the
    manufactured product space.

    Consumer price inflation for rural areas (CPI-AL) stands at 15.77% in


    March and for urban industrial workers (CPI-IW) was at 14.86%. Consumer
    inflation will come off its highs, though very gradually and will continue to
    rule in the 8-10% range in the year ahead. Meanwhile inflation in wholesale
    prices (WPI) is touching 10 percent currently. It will move down towards
    5.5% levels only by the third quarter (October- December) of this year; but
    this will largely be the base effect working, and month on month rises will
    continue throughout the year.

    The government feels that food price inflation will fall dramatically by itself.
    Perhaps that is why it is holding more than double the amount of food stocks
    than what is required. Even if the government’s prediction is right, and food
    price inflation falls, manufactured items and energy prices are going to rise
    over the next few months.

    The March HSBC Markit PMI showed input prices had reached their series
    record high i.e since 2005 and in April, input and output price indices rose
    higher again. Global prices are creeping upward. Higher crude prices
    (already touching $86), iron ore, coal, steel (the average global price of steel
    is up 12% in April month on month), rubber (prices expected to rise 35% in
    the second half of the year) - all these are going to seep into the domestic
    markets. Further economic growth is unhindered and is bound to put
    upward pressure on commodity and asset prices.

    But if the new RBI continues to go soft on interest rates and puts in
    moderate rises of 25-50 basis points at each review this year, the ball is back
    in the government’s court. What will the government do? No more energy
    price increases, its ability to increase minimum support prices will also be
    compromised, and it may need to control expenditure growth in its welfare
    programs.

    So while the RBI recognises the pressures in the system, why are rates still a
    record low in a whole decade? The reason is quite clear to all and as it says
    from its own review – it has decided that its hands are tied. The
    government’s borrowings programme needs to be accommodated by the
    RBI, sufficient liquidity needs to be provided, yields cannot be allowed to
    rise too high. We have consistently maintained that loose purse strings, with
    no effort to raise efficiency in distribution systems, will only result in
    inflationary pressures mounting in the system. With political expediency
    being the order of the day, we can expect little in the way of significant
    reform in the way the government operates.

    The new RBI will do the bare minimum of what it is expected to on the
    inflation front. But there has been little help from the government till now -
    the fiscal roadmap reducing the deficit over the next few years will not be

    12.0 14.0%

    10.0 12.0%

    10.0%
    8.0
    8.0%
    6.0
    6.0%
    4.0
    4.0%
    2.0 2.0%

    0.0 0.0%
    2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11*
    M inistry of Finance estimates of
    growth in 2010-11and 2011-12; Growth CPI IW inflation
    *Forecasted

    sufficient. The damage has been done. A long hot and sweaty summer lies
    ahead.

    Contact Sumita Kale (sumita@indicus.net) for comments.

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