Posts tagged india inflation
Case for a 50 basis points on May 3??
“Sakhi saiyan to khub hi kamat hai…..mehngai daayan maare jaat hai….” goes a number from a popular bollywood flick and rightly so atleast for RBI.
Since the last 15 months or so…RBI has been trying to battle the rising inflation by raising rates (What are policy rates?) eight times since March last year. However inflation, now it seems, is getting out of RBI’s control. Over the last one year, there have been many a concerns over structural bottlenecks in the economy which have been causing inflation. Well this might be true, I am not arguing against that. But even if Government decisively acts against structural cause of inflation, it would be some time before anything (like improving storage warehouses, improving transportation facilities, improving public distribution system etc) can be done and it impacts the mighty inflation. More >
Indian equity markets:Overvalued Zone…?
Well some say that the Indian equity markets are all set to become mother of all the bull markets and from here there is no looking back. While others say that we are currently in a kind of over bought zone and a correction of at least 200-300 points in the Nifty index is definitely warranted.
While, what i see this is as the events holds the key to this. In the month of April there are three very important news flow that will shape the directions for markets:
- The Q4FY10 earnings of India Inc.
- Indian WPI for the month of March
- RBI’s Q4 credit policy release on 20th April
While inflation is a cause of concern, given the way the food price and other key individual indices are behaving, this will also have a major impact on RBI’s Q4 policy guideline. I believe that there is a strong possibility of at least a 50 bps hike in the key policy rates. This I believe could be a problem story for the ever singing markets of ours.
On the other hand the corporate India is expected to show decent Q4 numbers, however much of this growth I believe is already factored into the stock prices and hence there is nothing much left on the table that should excite the investors. Infosys Q4 results tomorrow morning will set the stage for the rest of India Inc.
Hence, I strongly believe that instead of chasing the markets at a broader level, it makes sense to invest in good stocks with reasonable valuations.
As Mr. Lynch Says
“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.” – Peter Lynch
Author name: Rahul Sonthalia, Research Head, Kredent
Rating upgrade, rate hike – Growth on track
Equity markets continued the uptrend with all major markets closing in the green for the week. The Sensex was up 500 points. On the global front, nothing much changed vis-a-vis risk appetite as stand-off over Greece continued to haunt the Euro, which shed 300 pips during the week. The week also saw concerns over asset bubble in China and more pressure being put on China to appreciate its currency. While the global outlook continues to be bleak over the sovereign risk, the domestic outlook gained a fillip with S&P raising India’s rating from negative to stable. This seems to be a reward for the fiscal prudence being followed by the government and also the stable economic and political environment. Inflation crossed RBI target of 8.5 % and was 9.89% for Feb 2010 prompting RBI to raise policy rates by 25 basis points. USDINR was in range for the week and did not break 45.60 and 45.33 on either side. We see continued consolidation in this range with importer buying and state-bids conflicting with the positive sentiment that would otherwise take the pair downwards.
Currency markets at crucial point….
Markets seem to come out of the consolidation mode and increase in risk appetite saw the US Dollar being sold across the board. Almost all markets closed in the green and all currencies except the JPY saw strength against the greenback. The Dollar index closed below a key support level at 80 before closing 79.83. Sustained move below these levels would initiate further downside for the dollar. The Euro saw movement of 250 pips with 1.3800 being tested on Friday in the European market. The INR strength continues buoyed by strong fundamental coming on the back of a strong IIP numbers for a second month in a row. Movements on both side were very erratic with 45.38 levels bringing in importers and state bids while 45.63 level bringing further shorts into play. We would maintain an intraday range of 45.38-45.63 with bias tilted towards buying the dips. Technically 45.28 is yet to be tested and exporters are “not yet” panicking. Once exporters start panic booking with a simultaneous drop below the 45.28, it is likely to bring further downside.
Market Developments
Global Outlook
- The US Dollar fell against all majors except the Japanese Yen, breaking out of its tight range against the Euro and testing its recent lows. A limited week of economic event risk initially left the heavily-traded currency relatively motionless, but the latter half of the week saw the Greenback considerably lower through Friday’s trade. The declines were perhaps surprising given a significantly stronger-than-expected US Retail sales report on Friday morning; robust spending gave modest hope that the US consumer may prove more resilient than previously predicted. CFTC data is mixed with Dollar’s net long positions fell from $5.58 billion to $3.99 billion, however Euro shorts rose to another record of 74551 contracts suggesting that 1.3800 would be hard to break. After the break of 80 levels in the dollar index we feel that 78.56 would a decisive level to watch. A busy week of economic event risk likewise promises considerable volatility in the days ahead.
- EUR/USD was encouraged by better equity market and stronger than expected EU Industrial Production to hunt for stops through 1.3750, despite initially hampered by Russian selling. Prices made a run close to 1.3800, but lost momentum. Equity markets were majorly buoyant for the major part of last week with S&P 500 breaking January’s high of 1150. Nikkei managed to rise 382 pts to close at 10751. Markets are cautiously looking at the upside after the consolidation which has lasted for almost two months. However only a weekly close above the 1.3800 levels should show more upside. Market is still short ahead of FOMC next week and that’s going to limit dips within a range of 1.3600-1.3800.
- The British Pound rose to 1.5200 levels and may continue to rise if the Bank of England is able to convince the markets about its current stance The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. Rating agency Fitch said the UK’s AAA credit rating may be jeopardized if it doesn’t do more about its fiscal shortfall reminding us that political risk could be a major factor in the United Kingdom.
- Commodity currencies continue to be bullish on the backdrop of strong economic data from Canada, Australia and New Zealand. Australia is the first country to raise rates to 4%. RBNZ left rates unchanged at 2.5% and reiterated the already stated stance of removing stimulus in the middle of 2010. The key risk for commodity currency comes from the tightening policies to cool down China.
- Key Data for the coming week are Euro-Zone Employment and US industrial production on Monday. Tuesday would be crucial with Euro-Zone CPI, ZEW survey, US Housing data and the most important FOMC rate decision (rate may not be hiked but the wordings need to be watched). On Wednesday we would see the UK Jobless and other unemployment figures for the UK with Thursday bringing focus back to the weekly jobless claims. Friday would see housing, retail sales coming out of various regions.
Inflation After Effects
India’s WPI inflation rose by 4.78% y-o-y in November compared to1.34% in October. 4.20%. It was more than the Bloomberg consensus street expectations of around 4.2%. This was mainly on account of higher manufactured product prices which has a weight of around 63% on the index. This I believe is a clear signal of More >
Inflation: Managing the necessary evil
Almost halfway into the 3rd quarter and well into the busy season, the economy is well set to make a comeback with projected growth of 6% upwards. With markets again close to the pre-crisis levels and major sectors looking up, it is only a question of time when we are able to leave the recession blues behind us. While this seems good news, market participants having become accustomed to easy monetary policy for the past year are keenly watching when the central bank reverses its stance. One of the factors driving this sentiment is inflation which has clearly been the baritone of the last two quarterly policy statements of the RBI Governor. While the base effect of last year played out for most part of this fiscal, it is projected to become a threat by March 2010.
While inflation projected to break 6% levels by March 2010 it is a question of time when the central bank is compelled to raise interest rates. However, many market participants believe that inflation is not a prime concern as it is heading towards the levels where it should be. While we would partly agree to that, we would like to look at the levels where policy makers would want to stop the prices to spiral any more. With the monthly release of data and the new series for WPI being launched shortly, it is very apparent the authorities have partly found an alternative (apart from raising interest rates) to manage inflation in the short term.
Raising interest rates in the current scenario is just not an option as the economy is still suffering from a supply driven inflation due to bad monsoon and lower production levels during the recession. Credit growth is yet to pick up to the normal levels. Hence managing inflation statistically seems to be a very smart move on the part of the policy makers. Measures like increasing the time frame of release of data would help in smoothing out effect of the numbers. Further, incorporating electronic goods would drive down the manufactured item index which is likely to constitute 80% of the WPI. While it is anyone’s guess as to when the new WPI series would come into effect, we would try to look at few ways in which the inflation might pan out in the next 4 months. While we would forecast the inflation we still believe that the WPI still continues to a flawed number with many components (around 15-18% of many components) not been for many months. We believe that the monthly release would ease out volatility and would also manage short term spikes.
Here we look at 4 likely scenarios which would help us identify the paths inflation is going to take in the remaining period of the current fiscal.
Case 1:- Assuming the index remains the same as on October 2009 for the remaining part of the year.
Case 2:- Taking monthly average growth rates for various components of WPI for the last year (Oct-08 to Oct-09) i.e. the current inflation cycle
Case 3:- Taking monthly average growth rates for various components of WPI from the last inflation cycle between Jun-07- Oct-08
Case 4:- Outlines the most likely scenario that policymakers might be able manage without much ramifications
Conclusion
From the four scenarios presented above we can see that inflation would be definitely above 6% by March 2010. While all the scenarios are closely likely, keeping in mind political ramifications we expect Case -4 to be the most likely path that would be followed in coming months. It is evident that food inflation constituting around 3.4% of the WPI is at its historic highest levels. Although the government does not have any impending threat vis-a-vis elections food inflation close to 20% (as in Case 2 following the growth rate of past 12 months) does have very serious political ramifications. Hence we can safely assume that food inflation would either not be allowed to rise very high and policy makers would cap the food prices to a certain level. With the current scenario the policy makers have effectively managed inflation and we believe the numbers can be and would be “managed” smartly, kept under control around the projected levels of around 6-7% before the central bank is comfortable in raising interest rates sometime early next fiscal.
INFLATION: Change, but not yet wholesale
- The Cabinet Committee on Economic Affairs has given its approval on the much needed & awaited revamp of the WPI
- WPI taken to be a major indicator of Inflation in India will now be calculated on a monthly rather than a weekly basis
- This change in the periodicity was based on the recommendation of a working group headed by economist Mr. Abhijit Sen, member Planning Commission
- Monthly system, followed globally, will be followed for manufactured subgroup in tandem with the overall WPI
- However, in order to monitor prices of agriculture commodities & petroleum products, a price index for primary & fuel, power, light & lubricant group will be reported on a weekly basis
- The first such weekly report was released on the 5th Nov for the week ending 24th Oct, 2009
- Reporting of the monthly WPI will commence on the 14th November, 2009
- The working group had made other important recommendations as well, which the govt. will likely implement later
- These recommendations are likely to address the issues faced by the old calculation system
- Most pertinent being data in-availability of most of the manufactured articles
- Earlier the WPI was compiled with prices of only 20% of the manufacturing articles, remaining being estimated from these
- It was for this reason why there was such variance between the provisional data & the revised data
- Among the more important recommendations of the committee were updating of the Base year from 1993-94 to 2004-05 & expanding the commodity number
- The current WPI with 435 articles & Base year 1993-94 does not properly capture the current trend in the basket of goods
- Service goods & items like mobiles which are now important are largely missing
- An increase in the weightage of the manufactured articles in the WPI was also recommended
- These proposals were criticized by RBI sensing that monitory policy would then become difficult to review
- So for now the Cabinet is only implementing the periodicity change while saying that the other changes will follow soon
- The govt.’s move may be a first definitive step in correcting the flaws of the WPI but the discrepancy b/w CPI & WPI remains
Kredent ANALYSIS – While the bureaucrats argue that the move is aimed at aligning our inflation reporting frequency with that followed by other major economies, market participants believe that the move is aimed at subduing the hysteria around inflation ahead of it attaining high levels
Author: Rahul Sonthalia, Analyst, Kredent Group
Inflation at 1.51%
Inflation for week ending October 17 at 1.51%
Indian inflation measure WPI showed prices rose by 1.51% for the weekending October 17, 2009 over corresponding week last year. The rise was less than analyst’s expectation of 1.59%. Rise in index last year during this week was 10.58%.
As compared to last week the benchmark measure remained unchanged whereas compared to week ending September 19, WPI declined by 0.45%.
Index of ‘Primary articles’ which has led to build up inflation showed a rise of 8.67% YoY infact declined over the last week as well as from month ago. MoM, prices of primary articles have declined by 1.16%. All fish lovers who saw prices rising for October 10 rejoiced a bit with decrease in prices for fish marine component (6% current week compared to 14% last week).
Fuel, Power, light and lubricants which was responsible for the high inflation rate last year has declined by 6.2% over last year. MoM decline in fuels index is 0.26%.
‘Manufactured products’ is the only component in WPI which has shown a increase over the last week. The index grew 0.14% over the week and 1.56% over the year but MoM declined by 0.41%. Food products component of Manufactured products has increased by 17.4% over the previous year.
As reported last week as well, primary articles and food products having a weight of 22% and 11% respectively have led the increase in prices this time. RBI in the recently released 2nd Quarter review of monetary policy also expressed its concern on the increasing inflation. RBI governor expects inflation to reach 6.5% by December end. Last year’s inflation and this year’s are very different in the respect that last year it was a worldwide phenomenon but this year none of the major economies are experiencing inflation till now. This is one aspect because RBI needs to take a more cautious approach in taming inflation.
In direction towards exiting from an accommodative policy approach, RBI increased the statutory liquidity ratio (SLR) by 1% to 25%. This is not expected to have much effect as overall banking industry has a SLR of about 27%. But increasing inflation as well as RBI move has further strengthened the concerns of an early interest rate increase. Both equity markets and G-Sec markets have already reacted to such concerns. Benchmark G-sec yields rose from a low of 7% around Sep 24 to 7.4% before the announcement by RBI following which yields have dropped to 7.29% currently. Nifty is down from 5150 levels seen around Oct 17 to 4711 on Oct 30.
Indian markets have already started feeling the impact of increasing inflation but where exactly this end up and how effective RBI proves in controlling the inflation along with balancing growth is an important question which will be answered only in coming few months.
India Inflation Up 1.21%
Wholesale Price Index (WPI) crept up by 1.21% over last year for the week ending October 10, 2009. After remaining in the negative territory for 3 months from June-August’09, benchmark inflation index registered a growth of more than 1% for the first time after May’09.
Rise in inflation is mainly led by the increase in prices of primary articles (weight 22.05%) which have grown by 8.27% over the year. Food articles, having a weight of 15.4% in the index have been the driving force. For the current week, fish-marine, moong and rice showed the maximum increase. Non food articles and minerals, other constituents of primary articles have declined marginally.
Fuel price index remained in the negative territory declining 4.68% over the year whereas manufactured products having the maximum weight of 63.75% grew by 2.94%.
Inflation, as measured by WPI, has been consistently moving upwards since June’09. This has been induced largely due to base effect of high prices last year. Increase in WPI is expected to gain momentum in the coming months as base effect wanes further. As per our analysis, taking the index figures for current week and projecting the same for the current financial year, rise in WPI is expected to touch 3% by October end, 5% by early December and 6% by late January. Add to this the perceived increase in prices of food articles due to poor monsoons and these growth rates can be seen coming at an earlier date. One factor which might comfort inflation wathcers is the manufactured articles. IIP has been growing at a good pace and it commands a good weightage of 63.7% which might keep the index in check but demand for manufactured articles could play a spoil sport.
RBI has kept an inflation target of 5% for the year 2009-10 and as this is expected to be breached a policy action from RBI is expected. RBI in this case has a dual role: managing inflation as well as facilitating growth. Timing of any policy response would be of critical importance in balancing the two contrasting objectives. RBI’s forthcoming policy announcement on Tuesday, October 27, 2009 would give important signals. Impact of the fact that WPI would be released monthly from the current weekly release also needs to be assessed.
What RBI will do would be closely watched but as of now latest WPI figures have pulled down equity markets and has raised concerns of an earlier increase in interest rates.
Keep watching this space for further updates and analysis of RBI’s actions.
Author: Praveen Bajaj, B.Com(H), MBA (SCMHRD)
