Posts tagged inflation
September inflation edges upto 8.6%
The WPI for the month of September 2010 stood at 8.62% compared to 8.5% in the previous month. The figure was almost in line with the market expectations which were pegged at around 8.5%. The central bank is sure to take the cues from these high figures in its monetary policy meeting scheduled on 2nd November and is likely to take actions keeping inflation control as its primary agenda. RBI has already raised policy rates by 125 basis points in five equal hikes this calendar year and was expected to pause, but sticky inflation could force it to continue with monetary tightening.
- The sub-group of primary articles rose by 17.45% y-o-y against 10.63% in Sep’09 while it rose marginally by 1.5%% on m-o-m basis mainly due to lower prices of fruits, vegetables, condiments and spices. However, the prices of pulses, cereals and eggs declined putting a cap on further rise in the food prices
- In the same sub-group, the non-food articles increased by 18.2% y-o-y due to higher prices of raw silk, raw cotton, copra, flowers and fodder. However, in comparison to last month, prices of raw jute and certain varieties of oil-seeds declined. The index for minerals jumped by leaps and bounds to register a growth of 28.48% m-o-m due to increase in the prices of crude, barites, etc
- The second sub-group of fuel, power, lights and lubricants increased to 11.06% y-o-y from -8.09% in Sep’09, continuing the uptrend since past few months. Ironically, it registered a degrowth of 0.27% m-o-m due to lower prices of turbine fuel, bitumen and naphtha
- The third sub-group of manufactured products increased marginally to around 5% y-o-y compared to the last month’s growth. It registered a growth of 0.31% m-o-m mainly because of increase in the prices of textiles, rubber related products, rubber related products etc.
- Food products rose by 0.72% m-o-m due to higher prices of oil-seed, oil-cake, vanaspati, vegetable seeds and copra. Sugar prices declined by 2.30% together with a decrease in the prices of salt, ghee, and gur. Cotton textiles and man-made textiles showed a huge increase compared to the previous y-o-y figures, which can be accounted for an increase in the prices of their raw-materials.
Author:Rahul Sonthalia, Research Head, Kredent
New WPI pleases all, inflation eases to 8.5%
The WPI for the month of August 2010 stood at 8.5% compared to 9.78 in the previous month. The figure moved less compared to the market expectations which hovered around 9.5%. The above figure is based on the new WPI series in which the base year has been changed from 1993-94 to 2004-05 as the old base was not able to gauge the change in the market prices. The new series includes 676 items compared to the 435 items and boast of almost all the commodities being inclusive which are used by the middle-class families. The inflation figures as per the old base year came at around 9.5%. Less than-forecasted figures helped the market with an upward movement.
- The sub-group of primary articles rose by 15.76% y-o-y against 9.84% in Aug’09 while it declined by 0.28% on m-o-m basis mainly due to lower prices of fruits, vegetables, and pulses. But prices of cereals, tea, coffee, milk and fish rose, stopping a further decline in the food prices
- In the same sub-group, the non-food articles increased by 16.04% y-o-y due to higher prices of oil-seeds, flowers, raw silk, copra, coir fibre etc. But, compared to last month, prices of soybean, raw rubber and jute declined. The index for minerals rose to 0.98% m-o-m which was due to increase in the prices of crude petroleum, barites, etc
- The second sub-group of fuel, power, lights and lubricants increased to 12.55% y-o-y from -9.68% in Aug’09 which was in continuation of the previous month’s trend. It registered a growth of 0.14% m-o-m due to higher prices of aviation turbine fuel and furnace oil
- The third sub-group of manufactured products jumped to 4.78% y-o-y from -0.33% in Aug’09. It registered a growth of 0.16% m-o-m mainly because of decrease in the prices of sugar, food articles, textiles and paper products
- Food products rose by 0.58% m-o-m due to higher prices of oil, oil-seed, tea-leaf, mixed spices and wheat flour. Sugar prices declined by 0.19% while there was an increase of 1.46% in edible oils due to higher prices of oil-seeds. Cotton textiles and man-made textiles showed a slowdown, decreasing by 0.16% and 0.27% due to decrease in the prices of raw cotton, jute and fibre. Wood and wood products increased by 0.54% while movement in industrial equipments mainly remained unchanged
WPI August
Author:Rahul Sonthalia,Research Head,Kredent
July Inflation just under double digits @9.97%
The WPI for the month of July’10 stood at 9.97% compared to the previous month’s figure of 10.55%. It registered a growth of -0.54% in July’09 on a y-o-y basis . The inflation figures this month is the lowest in the past six months. They just managed to miss the double-digit by few marks. The figures were almost in line with the expectation
The benchmark indices were almost flat after the data release while there was also no major movement in INR. The RBI in its monetary policy review in mid-September now, is not expected to increase the interest-rate as it had said earlier that it would wait for the inflation figures to consider any further hike in the interest-rates
- The sub-group of primary articles rose by 14.94% y-o-y against 7.64% in July’09.It registered a growth of 1.85% m-o-m mainly because of high growth in the food articles, which increased by 0.90% m-o-m. Food articles increased more than last month due to rise in prices of mutton, fish milk, eggs, cereals and pulses
- In the same sub-group, the non-food articles increased by 0.80% m-o-m due to higher prices of fodder, oil-seeds, raw jute, rubber and silk and increase in the price of copra, etc. The index for minerals rose to 19.25% m-o-m which was due to higher prices of flluorite, magnesite, iron ore and steatite
- The second sub-group of fuel, power, lights and lubricants increased to 14.29% y-o-y from -10.37% in July’09 which was pretty high. It registered a growth of 3.21% m-o-m due to higher prices of LPG, high speed diesel oil, aviation turbine fuel and petrol
- The third sub-group of manufactured products jumped to 6.15% y-o-y from 0.10% in July’09. It registered a degrowth of -0.14% m-o-m mainly because of increase in the prices of edible oils, manmade textiles plastic products and machinery and machine tools
- Food products declined by 0.61% m-o-m due to lower prices of bran, butter, khansari, coffee powder and gur. Sugar prices declined by 2.55% while there was an increase of 1.27% in edible oils due to higher prices of oil-seeds. Cotton textiles and man-made textiles surged by 0.38% and 0.48% due to increase in the prices of raw cotton, jute, raw silk and fibres. Rubber and plastic products increased by 0.06% while machinery and machine tools increased by 0.22%
Author:Rahul Sonthalia, Research Head, Kredent
RBI likely to raise rates in todays monetary policy review
RBI is going to announce the First quarterly review of monetary policy in some time and unlike last time, expectations are quite clear this time. Last time, in April, analysts were divided in opinions about a 25 bps hike or a 50 bps hike or no action by RBI. But this time, analysts are almost certain that RBI would raise the policy rates by 25 bps taking the Repo rate to 5.75%.
Inflationary concerns
RBI has time and again stressed on its concerns on inflation. In the last policy announcement RBI had anticipated that inflation will come down in a gradual manner. But inflation is still reigning in double digits. For June, WPI increased by 10.6% over last June. Increasingly, it is seen that inflation has become more broad-based and manufacturing as well as fuel price inflation has also been rising. For food articles as well, though the growth rate is moderating, but is still at high levels and is not expected to go down substantially unless new crop comes in the market which would be only towards October. Thus inflationary concerns are quite strong and RBI would like to take some action to tame it.
Economic Growth
Economic activity has continued to grow at a good pace. GDP growth for the last quarter was above 8% and for the next year, the growth rate is expected to be higher than last year. IMF in its last World Economic Outlook (WEO) update has projected a growth rate of more than 9% for India in the current year. In recent months, IIP has moderated but is still growing by double digits and some sectors in IIP are showing very good growth. Monsoon has been good till now implying that agricultural growth will also be good and give a boost to the farm income and rural spending levels. This will support RBI’s decision to raise rates.
Liquidity and interest rates
Liquidity conditions have tightened significantly since the last policy announcement. Since May end, when telecom companies made 3G and Broadband wireless access (BWA) payments to the Govt, liquidity has dried up. Banks have been borrowing on an average above Rs 50,000 cr from RBI from its two repo windows on a daily basis. Short term rates (90 day Commercial paper, 90 day T-Bill, call rates) all have moved up. Long term yields, though had come down by about 50 bps from the levels seen in April, but after the July 2 hike in policy rates have hardened by about 20 bps.
In a short time, Dr D V Subbarao is going to announce the First quarterly review of monetary policy and he likely to increase the policy rates by 25 bps.
Author:Praveen Bajaj
Bond market/ G-Sec update
Yields on Government securities rose to the highest level in two weeks following the mid-term 25 bps rate hike by RBI on last Friday. Benchmark 10 year bond, 7.80% 2020 security rose 8 bps to 7.64% from 7.56% close of last week.
As expected, yields opened stronger on Monday, but later were dragged down due to buying in the securities. Due to reduced fiscal deficit, RBI had announced a reduced borrowing last week. Same was expected for the week as well. But RBI announced the issue of securities worth Rs 12,000 cr. Along with this, rally in US treasuries kept the sentiments up in bond market. Yields weakened till 7.57% on Wednesday.
Liquidity conditions eased slightly compared to the last week. Amount borrowed from RBI’s repo window averaged above Rs 50,000 cr for the week. Indian Financial Services Secretary R Gopalan commented that liquidity crunch in the Indian banking system was expected to ease in the next 10-15 days.
Benchmark 10 year bond daily movement
However, with the release of stronger weekly inflation figures, yields again started hardening. the primary articles index moved up by 1.4% marking a YoY inflation growth of 16.08% as compared to 14.75% observed a week earlier. The Fuel and power index rose steeply by 4.5% taking the inflation rate to 18.02% compared to 12.9% a week earlier. The index factored in higher prices of petrol, diesel, kerosene and LPG as announced by the Government on June 25th.
Markets clearly are factoring in another rate hike at the July 27 announcement of First quarter review of monetary policy. All fixed income market rates have hardened. While commercial paper rates were seen hardening since June beginning, G-sec rates have started hardening recently. Next week we have Index of Industrial Production (IIP) and WPI monthly release both of which would be important guiding factor for RBI to decide on interest rates.
To read earlier updates click here
Author:Praveen Bajaj
European Central Bank (ECB) in 2008 = RBI in 2010
I am sure that the subject of my article would be very confusing for some of you or may be strange for a lot of you. What I am trying to convey with this one is again some graduation level economics which I studied during my Macroeconomics paper in 2005, which I believe the world central bank’s heads are forgetting or trying to overlook over more complex understandings.
The core objective of any Central Bank is to do a through analysis of the forthcoming economic situation of an economy (growth and inflation) and accordingly adjust the liquidity flow into the system. It also involves taking into account any major local or global events that could shape up the economic situation in the country and hence being prepared for the same.
Thus, in nut shell I would say that the core objective of any monetary policy is to manage liquidity into the system so that the economy grows (with minimal inflation), but this decision should be based on ex-ante analysis and not ex-post analysis.
This precise mistake I believe ECB committed in July 2008. In July 2008, when the global credit crisis was almost about to reach its peak, the global growth outlook was bleak and most of the central bank’s around the world were either growing through rate cuts or on the verge of doing so, ECB announced a rate hike of 25 bps, which as per experts is one of the many important reasons of the current EU turmoils. The move as said by Mr. Trichet was” mainly on account of “heightened concerns at the ECB about inflation in Europe”.
The inflation which was just a temporary phenomenon in EU because of the high commodity prices, made ECB think beyond the US Sub-prime and Global credit crisis and took a rate hike decision, saying that “the crisis was one belonging to US and will not have impact on EU”. Thus in October when the US crisis started spreading wide the EU was down of out because of the decision in July.
The same is what RBI has done on Friday, going by its ex-post and probably present rate hike analogy has gone ahead with a rate hike. Its done probably at a time when the Indian banking system is already crunched for liquidity because of 3G and BWA auctions, can have a long repercussion. The RBI also said like EU said in 2008 that“Inflation is a bigger concern than EU Crisis”.
Thus going further, I strongly believe that if this EU crisis spreads more (which has high chances) Indian economic growth and more importantly the stock indices could see a blood bath. The Indian markets as of now is quite insulated from the global turmoil, but like EU in 2008 this move by RBI on Friday could lay the foundation for a big Index correction.
Author:Rahul Sonthalia, Research Head, Kredent
Equity market update
Equity market indices witnessed the first weekly decline in 3 weeks. Sensex declined 0.6% for the week to close at 17460 against the last week’s close of 17574.
After last Friday’s decline, the week opened on a positive note but for the week hovered in a range. However bearish sentiments on the last two days took the indices in red.
Conference Board of US corrected its outlook for Chinese economy which led to about 3.36% decline in metal index. Moody’s Investor service placed Spain’s credit rating on review. There are concerns that country’s credit rating will be downgraded. US ISG Manufacturing Index showed a possible decline in manufcturing activity. These factors led to selling in the market.
On domestic front, Indian exports for the month of May grew at 35% which added to the positive sentiments. Banking shares, as expected, traded with negative sentiment due to rate hike concerns. Low weekly inflaton figures however, relieved some of those concerns and created positive sentiments.
Two big stories of the week, rate hike by RBI (read MB update here) and the US Non farm payrolls (which shows a loss in jobs) report came in after market hours and thus these are not factored in this week’s movement. Due to these factors, it is expected that markets would open weak on Monday but then will move in a rangebound manner.
Author:Praveen Bajaj
Bond market/ G-Sec update
After a hefty 8 bps points jump on Friday of last week due to decision to free up fuel price (read MB update here), G-sec markets opened the week on a strong note. Announcement by RBI that the borrowing amount for the week will be at the reduced levels kept the sentiments up. Yields on benchmark 10 year bond 7.80% 2020 fell 6 bps to 7.59%.
Following 3 days also witnessed buying and yields fell to 7.52% till Thursday. This was the lowest close on yields since June 9, 2010.
Benchmark bond daily movement
Positive sentiments in the bond market were also enhanced due to the rally in US treasuries. Primary articles’ inflation came in at a lower figure of 14.75% for the week ended 19 June compared to 17.6% for the earlier week. Fuel index also came in lower at 12.9% compared to 13.18% for the earlier week. This also kept the sentiments positive in bond market.
Friday however saw some correction with profit booking coming in at higher levels. Yields on benchmark bond increased 4 bps to 7.56% over Thursday. On a weekly basis, the yields have decreased 10 bps.
Govt sold bonds worth Rs 10,000 cr all which were fully subscribed and yields were at the expected level. Liquidity in the system remained tight with average volumes on Repo window stood at Rs 63,400 cr.
The rate hike of RBI (read MB update here) was announced after market hours and hence the weekly closing yield does not factor in the hike. It is expected that bonds will open on a weaker note on Monday and the sentiments would carry on for the week. Thus yields should trade with a positive bias for next week.
Author: Praveen Bajaj
RBI raises rates again
As predicted by our analyst Rahul Sonthalia (click here to read) and myself (click here to read) in our earlier articles, RBI has raised the policy rates almost a month before the scheduled 1st quarterly review of monetary policy due at the end of July.
In an after market hour announcement today, RBI raised the repo and reverse repo rate by 25 bps each to 5.50% and 4% respectively (click here to read about repo and reverse repo rates).
Inflation
Anticipation of a rate hike got all the more eminent after the decision to raise the fuel prices and freeing up the price of petrol last week. The move was expected to raise the WPI inflation by about 90 bps. For the month of May, WPI was at 10.16%, above the 10% mark. Though food inflation has been easing, other major indices, fuel index and manufactured products inflation has been rising. RBI in the release noted “There has been some moderation in food price inflation, but the price index of food articles continues to increase. More importantly, the prices of non-food manufactured goods and fuel items have accelerated in recent months”.
Money markets
As compared to earlier rate hikes, this rate hike assumes all the more importance as money markets are facing liquidity crunch. Volumes at repo window have been high during the week, averaging about Rs 60,000 cr for the week. Call rates are also high. This would increase the cost of borrowing of the banks. As for liquidity, RBI has extended the time limit for additional liquidity support and second LAF window till July 16 to ease the liquidity conditions.
Rates of banks
However, it is expected that it would still not lead to an immediate rate hike by the banks as base rate mechanism of pricing loans is being implemented from July 1. Impact of the same on corporate borrowing will be determined only after some time. Thus as of now, corporate borrowing may not get affected.
Market reaction
Since this announcement was done after the close of all the markets, there has been no reaction of the markets. However equity markets have been in negative for most part of the week and still indices are expected to open weak on Monday. Yields on bonds increased after the fuel price announcement last week but the same retraced back most of the gains during the current week. But for the next week again, yields are expected to open strong on Monday.
Author:Praveen Bajaj
Govt Securities update:June 26, 2010
For the first 4 days of the week, government securities moved in a range. Benchmark 10 year bond, 7.80% 2020 bond moved in between 7.55% and 7.61%.
Results of buyback of securities, in which RBI accepted amount of Rs 806 cr against a notified amount of Rs 10,000 cr. This led to a slight increase in the yields on Monday.
Outflow of funds for payment of Broadband Wireless Access (BWA) auctions kept liquidity conditions tight. Amount accessed through the Repo window touched a high of Rs 82,915 cr on Thursday and averaged around Rs 70,000 cr per day of the week. Comments from officials that liquidity easing measures to be taken took some pressure off the bond market.
Primary articles’ inflation for the week was at elevated levels at 17.6% compared to 16.86% last week. This again put pressure on the bonds and yields rose in the first half of trade on Thursday.
Rally in US treasuries after the announcement from Federal Reserve that low rates will be retained for an extended period of time kept the sentiments on a bullish side. These mixed sentiments kept the yields in a range.
However on Friday, after the announcement of market linked oil prices, yields jumped to the weekly high of 7.68% (click here for MB update). The benchmark bond closed the week at 7.65%, 9 bps higher than last week’s close of 7.56%.
For the next week, we expect the yields to trade on a bullish side due to inflationary concerns. Liquidity situation might ease but concerns of rate hike due to high inflation will overshadow the ease in liquidity.
Author:Praveen Bajaj
