Search Now

Recommendations

Friday, February 16, 2007

TOP STORIES


Govt in fire fighting mode against inflation

With inflation refusing to fall from a new two-year high and a growing popular discontent becoming evident, the Government unleashed a slew of fresh measures aimed at stemming the runaway rise of essential commodities. The most potent among the steps announced this week were the surprise CRR hike by the Reserve Bank of India (RBI) and the marginal increase in petrol and diesel prices. Other measures included ban on exports of wheat, milk and milk powder and liberalised import of corn. The last couple of measures are unlikely to have a big impact on inflation as India doesn't export much of wheat, milk or milk powder. At the same time, domestic prices of corn is ruling below international prices. So, the removal of restrictions on the import of corm is also not expected to have a desired effect on prices.

But, what is likely to have a major impact is the 50 basis points increase in the CRR to 6%. The rise will be staggered, with the first installment coming in on Feb 17 and the next on March 3. This is expected to suck out about Rs140bn from the banking system. Tuesday's decision comes on top of a 0.5% increase in the CRR in December 2006 to impound Rs135bn. The central bank said that the decision to hike the CRR was taken "in view of the paramount need to contain inflation expectations and in the light of current liquidity conditions." The RBI cited the recent data such as FY07 GDP estimate of 9.2%, 10.8% growth in industrial production during April-December 2006-07 and the spike in inflation to a two-year high of 6.58% as the reason for lifting the CRR to 6%. It also reiterated that credit growth and money supply are growing at a rate well above its comfort levels.

The move spooked the stock market, with banking shares bearing the brunt of the selloff amid fears of a hit on their profitability. Several public sector banks announced a hike in their PLR though home loan and consumer loan rates were left untouched. With the latest RBI tightening measure, interest rates on a range of products such as home loans, auto loans, personal loans and even commercial loans will inch up. The one positive fallout will be that deposit rates will rise and in some cases may even cross the double digit mark. Two days after the CRR hike, the Government lowered petrol and diesel prices by Rs2 and Re1, respectively. The move may bring down the transportation cost for truck operators, which in turn could have a moderating effect on essential items. Whether these measures bear some fruit for the Government or not only time will tell. For now though, the heat is clearly on for the Congress-led UPA regime, especially considering the upcoming assembly polls in Uttar Pradesh.

Inflation climbs further


he Government and the RBI have more worries to contend with. India's inflation, based on the Wholesale Price Index (WPI), rose to 6.73% in the week ended Feb. 3, due to an increase in food and manufactured product prices, data released by the Government showed on Thursday. This was ahead of the consensus estimates of stable inflation rate and much higher than the figure of 3.98% in the comparable period last year. The WPI rose by 0.2% to 209.2 from 208.8 in the previous week. The index for the Primary Articles (weight 22%) group was up 0.5% at 216.1 as against 215.0 in the previous week. The index for Fuel, Power, Light and Lubricants (weight 14.2%) group declined by 0.4% to 320.8 from 322.1 for the previous week. The index for Manufactured Products group (weight 63.75%) rose by 0.3% to 181.9 from 181.4 in the previous week. The Government revised the inflation rate for the week ended Dec. 9 from the preliminary estimate of 5.32% to 5.63%. The final WPI for the same period stood at 208.3 as compared to a provisional estimate of 207.7.