Rising food and commodity prices that are stoking inflation will probably dominate a meeting of the Asian Development Bank as the region's finance ministers seek ways to shield their economies from higher costs.
Japan's Fukushiro Nukaga, China's Xie Xuren, South Korea's Kang Man Soo and Southeast Asian ministers are meeting at the sidelines of the Asian Development Bank's annual gathering in Madrid this weekend. Inflation in Asia is expected to reach a decade-high this year even as economic growth cools, ADB predicts.
Crude oil has risen 85 percent, and rice prices have more than doubled since Asian finance ministers met a year ago in Kyoto, Japan. The increases have stoked social tensions and led to wider fiscal deficits as governments subsidize food and energy costs for their people.
``Inflation will be pushed to the fore over global growth concerns,'' said Tetsuo Yoshikoshi, an analyst at Sumitomo Mitsui Banking Corp. in Singapore. ``There's little Asia can do to avoid a global slowdown but cooperation to contain inflation, especially on food prices, is possible.''
Vietnam and other rice-producing nations have curtailed exports to maintain supplies and damp local inflation, pushing up prices for buyers such as the Philippines, the world's biggest importer of the grain. Corn, wheat and soybean prices have all reached records this year too.
``Several Southeast Asian countries are major rice producers and exporters and more can be done within the region to help each other out,'' said Joseph Tan, a strategist at Fortis Bank in Singapore. ``The question is whether there is the political will to do so.''
Slower Growth
Asian governments are predicting growth to be at the lower end of targets, or are reducing their forecasts even as they increase their estimates for inflation.
The U.S. economy grew 0.6 percent in the first quarter, matching the pace of the previous period, which was the slowest since 2002. The International Monetary Fund last month lowered its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
The Bank of Japan on April 30 said the world's second- largest economy will probably expand at a slower pace this year than it had expected six months ago, while almost tripling its forecast for core consumer prices. Indonesia lowered its growth estimate on the same day, and South Korea has said its economy entered a ``downturn.''
Foreign Reserves
Finance ministers from China, South Korea and Japan will gather for a meeting on May 4, before getting together with their counterparts from the 10-member Association of Southeast Asian Nations. Besides inflation and the outlook of the region's economies, issues that will be discussed include the pooling of foreign-exchange reserves and the development of bond markets.
Officials last year agreed to set aside part of their $3.4 trillion of foreign reserves to be tapped by member nations when needed, an expansion of a current arrangement that only allows for bilateral currency swaps.
The pool may ensure central banks have enough to shield their currencies against any speculative attacks after the Asian financial crisis a decade ago depleted the reserves of some countries. The ministers are expected to discuss the size of the pool, estimated at between $80 billion and $100 billion, and when they would start the arrangement.
`Counter Instability'
The ministers from South Korea, Japan and China will also discuss setting up a forum on the economy and financial regulatory issues when they meet in Madrid, South Korea's finance ministry said in a statement.
The three finance ministers ``will discuss setting up an Asian Financial Stability Forum to strengthen regional cooperation among the policy and financial supervisory authorities to counter instability of international financial markets,'' the ministry said.
``The purpose of the fund would be to heal wounds when they are still small should liquidity or financing problems arise,'' Hiroshi Watanabe, Japan's former top currency official, said in an interview last month. ``It would be like a first-aid measure that would provide care before the International Monetary Fund gets involved.''
Officials will also participate in seminars organized by the Manila-based ADB at the Madrid meeting from May 3 to 6. The lender's governors, who include Japan's Nukaga and Indonesian Finance Minister Sri Indrawati Mulyani, will discuss the ADB's strategy to boost infrastructure development and partnerships between companies and governments.
Fighting Poverty
At last year's meeting, the bank was rebuked by members on its long-term plan to focus on financing roads and ports instead of fighting poverty. The group is owned by 67 member countries, both from within and outside of the region.
The ADB was formed in 1966 to improve the welfare of people in the Asia and the Pacific. Two-thirds of the world's poor reside in the region, and about 600 million Asians survive on less than $1 a day.
The lender expects to disburse about $10 billion in loans in 2008, after lending $10.1 billion last year, ADB managing director Rajat Nag said in an interview in Singapore last week. It may issue between $9 billion and $10 billion in bonds this year, Nag said.
Friday, May 02, 2008
India Inflation Accelerates to Highest in 3 1/2 Years
India's inflation accelerated at the fastest pace in more than three years, vindicating the central bank's decision to order commercial lenders to increase reserves twice last month.
Wholesale prices rose 7.57 percent in the week ended April 19 from a year earlier, after gaining 7.33 percent in the previous week, the government said in a statement in New Delhi today. Economists had expected a 7.42 percent increase.
Prime Minister Manmohan Singh, seeking to stay in power in elections due next year, has adopted a series of measures to tame inflation that has doubled in the last five months on soaring food and commodities costs. Faster gains in prices prompted the Reserve Bank of India to raise its cash reserve ratio to a seven-year high.
``The government may take more fiscal measures as inflation will remain elevated for the next few months,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``Additionally, more monetary tightening cannot be ruled out.''
Rising demand for housing and record investment by companies is spurring demand in India's $912 billion economy for products including steel and cement, driving up prices. That prompted the government on April 29 to scrap import duties on steel products including pig iron, hot-rolled coils, ferrous alloys and zinc and impose an export tax on other steel products to augment local stocks.
Pig Iron
Prices of cast iron spun pipes jumped 51 percent in the week to April 19 from a year earlier and basic pig-iron prices rose 8 percent, today's report showed.
Manufactured products inflation, with a 63.75 percent weight in the wholesale price index basket, rose 7.42 percent, the highest in 43 weeks. Tea prices soared 17 percent.
Finance Minister Palaniappan Chidambaram today said the inflation will be curbed, with food prices being the first to ease. The government will take further measures to contain prices, he said speaking to reporters in the southern Indian city of Bangalore.
To add to the government's efforts to rein in inflation, the central bank on April 29 unexpectedly ordered lenders to set aside more reserves, raising the cash reserve ratio to 8.25 percent from 8 percent the highest since March 2001.
The monetary and fiscal steps will help moderate inflation in the next two to three months, central bank Governor Yaga Venugopal Reddy said after last month's policy statement.
Bonds Unchanged
The yield on the benchmark 8.24 percent note due April 2018 was little changed at 7.88 percent as of 12:05 p.m. in Mumbai.
The central bank said it expects inflation of as much as 5.5 percent in the year to March 31, higher than its previous year's target of 5 percent. The Reserve Bank may raise the so- called cash reserve ratio for the third time this year to as high as 8.75 percent, according to a Bloomberg News survey of nine economists.
``Raising the cash reserve ratio was a prudent policy response to the difficult challenge of slowing growth yet rising inflation,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``A repurchase rate hike would have been too damaging for an economy already weakening.''
Wholesale prices rose 7.57 percent in the week ended April 19 from a year earlier, after gaining 7.33 percent in the previous week, the government said in a statement in New Delhi today. Economists had expected a 7.42 percent increase.
Prime Minister Manmohan Singh, seeking to stay in power in elections due next year, has adopted a series of measures to tame inflation that has doubled in the last five months on soaring food and commodities costs. Faster gains in prices prompted the Reserve Bank of India to raise its cash reserve ratio to a seven-year high.
``The government may take more fiscal measures as inflation will remain elevated for the next few months,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``Additionally, more monetary tightening cannot be ruled out.''
Rising demand for housing and record investment by companies is spurring demand in India's $912 billion economy for products including steel and cement, driving up prices. That prompted the government on April 29 to scrap import duties on steel products including pig iron, hot-rolled coils, ferrous alloys and zinc and impose an export tax on other steel products to augment local stocks.
Pig Iron
Prices of cast iron spun pipes jumped 51 percent in the week to April 19 from a year earlier and basic pig-iron prices rose 8 percent, today's report showed.
Manufactured products inflation, with a 63.75 percent weight in the wholesale price index basket, rose 7.42 percent, the highest in 43 weeks. Tea prices soared 17 percent.
Finance Minister Palaniappan Chidambaram today said the inflation will be curbed, with food prices being the first to ease. The government will take further measures to contain prices, he said speaking to reporters in the southern Indian city of Bangalore.
To add to the government's efforts to rein in inflation, the central bank on April 29 unexpectedly ordered lenders to set aside more reserves, raising the cash reserve ratio to 8.25 percent from 8 percent the highest since March 2001.
The monetary and fiscal steps will help moderate inflation in the next two to three months, central bank Governor Yaga Venugopal Reddy said after last month's policy statement.
Bonds Unchanged
The yield on the benchmark 8.24 percent note due April 2018 was little changed at 7.88 percent as of 12:05 p.m. in Mumbai.
The central bank said it expects inflation of as much as 5.5 percent in the year to March 31, higher than its previous year's target of 5 percent. The Reserve Bank may raise the so- called cash reserve ratio for the third time this year to as high as 8.75 percent, according to a Bloomberg News survey of nine economists.
``Raising the cash reserve ratio was a prudent policy response to the difficult challenge of slowing growth yet rising inflation,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``A repurchase rate hike would have been too damaging for an economy already weakening.''
U.K. House Prices Decline, Construction Contracts
U.K. house prices posted the first annual decline since 1996 in April as mortgage lending dried up and the construction industry shrank the most in almost a decade, industry reports showed.
The average cost of a home declined 0.9 percent to 189,027 pounds ($373,082) in the three months through April from a year earlier, HBOS Plc, the U.K.'s biggest mortgage lender, said today. That was the first annual drop in HBOS's index since February 1996. An index of building activity fell to 46.1 from 47.2 in March, the Chartered Institute of Purchasing and Supply said.
The reports show Britain's worst property slump since the end of the last recession is deepening as lenders tighten credit standards. Mortgage approvals fell to the lowest level since at least 1999 in March and Persimmon Plc, the U.K.'s largest homebuilder, said April 24 it's postponed construction on new sites after an increase in cancellations.
```There's no doubt that the housing market continues to weaken and construction is having a hard time with lower business investment,'' said Philip Shaw, an economist at Investec Securities in London. ``Given where we are with the credit crunch, we wouldn't be surprised to see another rate cut in June.''
`Aggressive Action'
Bank of England policy maker David Blanchflower, the only Monetary Policy Committee member to vote for a half-point cut last month, said April 29 house prices may fall 33 percent in the next three years and the central bank may have to take ``aggressive action'' on rates to stave off a recession.
While the central bank has cut its benchmark rate three times since December, higher interbank lending costs have prompted HBOS and other mortgage lenders to withdraw their best offers.
The property slump comes just as the popularity of Prime Minister Gordon Brown's Labour Party sinks. The party is headed for its worst performance for more than three decades in local council elections, with a British Broadcasting Corp. projection putting it in third place with less than a quarter of the vote.
``People want to be assured that the government will steer them through these difficult economic times,'' Brown, who took over from Tony Blair in June after 10 years as finance minister, said today in London.
There are few signs that house prices will turn around anytime soon. The HBOS report comes two days after Nationwide Building Society said its index showed the first annual drop in house prices in 12 years. The Bank of England uses both reports when assessing the state of the housing market.
`Gaining Momentum'
``There is no evidence at all that the decline in prices is tempting any potential buyers back into the market and the fall in house prices is gaining momentum,'' said Malcolm Barr, economist at JPMorgan Chase & Co. The bank plans to publish revised house- price forecasts next week after today's figures.
The credit squeeze is also threatening commercial property. Banks and securities firms may cut as many as 40,000 jobs in London in the coming months, according to forecasts by analysts at JPMorgan Chase & Co, which will reduce demand for office space.
The pound rose 0.7 percent to 77.79 pence per euro today and climbed to $1.9870 against the dollar. U.K. stocks rose today and the Bank of England yesterday said yesterday the credit crisis has left investors too pessimistic about asset prices, raising the prospect of a respite for Britain's financial system.
HBOS said today house prices fell 1.3 percent from March, when they declined 2.5 percent. It expects a ``mid-single-digit percentage'' drop in values this year.
Property Stocks
Property-related stocks have plunged since credit markets seized up in August. Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, has dropped 60 percent; shares of HBOS and Persimmon have both dropped around 50 percent in the period.
``People should prepare themselves for the commercial and residential markets undershooting what people would see as a fair price in a good economic environment,'' said Ed Stansfield, property economist at Capital Economics in London.
The Bank of England will probably keep its benchmark rate unchanged at 5 percent on May 8 as policy makers weigh the threats of slower growth and faster inflation, according to the median forecast of 30 economists surveyed by Bloomberg News.
Governor Mervyn King said this week the central bank faces a ``difficult balancing act'' and inflation may exceed the government's upper 3 percent limit later this year.
The National Institute of Economic and Social Research today cut its growth forecast and now expects the economy to expand 1.8 percent this year, down from the 2 percent it predicted in January.
The Bank of England on April 21 offered to help financial institutions by offering to swap government bonds for mortgage securities to boost banks' liquidity. King pledged to meet demand even if it exceeds an estimate of 50 billion pounds.
The average cost of a home declined 0.9 percent to 189,027 pounds ($373,082) in the three months through April from a year earlier, HBOS Plc, the U.K.'s biggest mortgage lender, said today. That was the first annual drop in HBOS's index since February 1996. An index of building activity fell to 46.1 from 47.2 in March, the Chartered Institute of Purchasing and Supply said.
The reports show Britain's worst property slump since the end of the last recession is deepening as lenders tighten credit standards. Mortgage approvals fell to the lowest level since at least 1999 in March and Persimmon Plc, the U.K.'s largest homebuilder, said April 24 it's postponed construction on new sites after an increase in cancellations.
```There's no doubt that the housing market continues to weaken and construction is having a hard time with lower business investment,'' said Philip Shaw, an economist at Investec Securities in London. ``Given where we are with the credit crunch, we wouldn't be surprised to see another rate cut in June.''
`Aggressive Action'
Bank of England policy maker David Blanchflower, the only Monetary Policy Committee member to vote for a half-point cut last month, said April 29 house prices may fall 33 percent in the next three years and the central bank may have to take ``aggressive action'' on rates to stave off a recession.
While the central bank has cut its benchmark rate three times since December, higher interbank lending costs have prompted HBOS and other mortgage lenders to withdraw their best offers.
The property slump comes just as the popularity of Prime Minister Gordon Brown's Labour Party sinks. The party is headed for its worst performance for more than three decades in local council elections, with a British Broadcasting Corp. projection putting it in third place with less than a quarter of the vote.
``People want to be assured that the government will steer them through these difficult economic times,'' Brown, who took over from Tony Blair in June after 10 years as finance minister, said today in London.
There are few signs that house prices will turn around anytime soon. The HBOS report comes two days after Nationwide Building Society said its index showed the first annual drop in house prices in 12 years. The Bank of England uses both reports when assessing the state of the housing market.
`Gaining Momentum'
``There is no evidence at all that the decline in prices is tempting any potential buyers back into the market and the fall in house prices is gaining momentum,'' said Malcolm Barr, economist at JPMorgan Chase & Co. The bank plans to publish revised house- price forecasts next week after today's figures.
The credit squeeze is also threatening commercial property. Banks and securities firms may cut as many as 40,000 jobs in London in the coming months, according to forecasts by analysts at JPMorgan Chase & Co, which will reduce demand for office space.
The pound rose 0.7 percent to 77.79 pence per euro today and climbed to $1.9870 against the dollar. U.K. stocks rose today and the Bank of England yesterday said yesterday the credit crisis has left investors too pessimistic about asset prices, raising the prospect of a respite for Britain's financial system.
HBOS said today house prices fell 1.3 percent from March, when they declined 2.5 percent. It expects a ``mid-single-digit percentage'' drop in values this year.
Property Stocks
Property-related stocks have plunged since credit markets seized up in August. Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, has dropped 60 percent; shares of HBOS and Persimmon have both dropped around 50 percent in the period.
``People should prepare themselves for the commercial and residential markets undershooting what people would see as a fair price in a good economic environment,'' said Ed Stansfield, property economist at Capital Economics in London.
The Bank of England will probably keep its benchmark rate unchanged at 5 percent on May 8 as policy makers weigh the threats of slower growth and faster inflation, according to the median forecast of 30 economists surveyed by Bloomberg News.
Governor Mervyn King said this week the central bank faces a ``difficult balancing act'' and inflation may exceed the government's upper 3 percent limit later this year.
The National Institute of Economic and Social Research today cut its growth forecast and now expects the economy to expand 1.8 percent this year, down from the 2 percent it predicted in January.
The Bank of England on April 21 offered to help financial institutions by offering to swap government bonds for mortgage securities to boost banks' liquidity. King pledged to meet demand even if it exceeds an estimate of 50 billion pounds.
Moves by US Fed expected
In line with market expectations, the US Federal Reserve (Fed) lowered the benchmark Fed funds rate by a quarter point to 2% with an accompanying statement that it is ready to pause after seven cuts since September.
Singular Asset Management Sdn Bhd chief investment officer Teoh Kok Lin said in a way the cut was good for the domestic market, easing investors' concerns especially among those worried about the subprime issues in the US market.
“The Fed has signalled that this is the last cut, at least for the short term. This suggests that the Fed is quite confident of the impact of its other stimulus action,” he told StarBiz.
Also important was the US' first quarter gross domestic product growth of 0.6%, out on Tuesday, that was significant because it was not negative, as some people had feared, Teoh said.
“This shows that while the US economy is not doing so well, it is nowhere near a contraction. Together with the fact that Asia also has its own internal growth engine, it is not possible for Asia to go into recession,” he added.
Aseambankers Equity Research head Vincent Khoo said the rate cut as well as accompanying statement had already been widely expected by the market.
He pointed to the US dollar that had been strengthening in advance of the announcement anticipating comment on the pause in rate cuts.
“The markets are already pricing for future expectations,” he said.
The most significant part of the Fed announcement was the comment that the Fed would pause, but was looking to the fiscal stimulus tax rebate that Americans would be receiving in early May to early July as a more important catalyst, Khoo said.
“Beyond that, I don't see any catalyst for the market. We could be at the tail end of a relief rally in a bear market,” he added.
Meanwhile, from a economic viewpoint, CIMB Investment Bank Bhd head of economic research Lee Heng Guie told StarBiz the rate cut was in line with market expectations but smaller than recent ones.
While the Fed had left out certain words in its announcement, it had kept the statement much the same.
Lee did not think there was a firm commitment to pause on rate cuts but rather the Fed could be adopting a “data-dependent stance.”
“It (the Fed) would likely be monitoring the economy and take action if the situation were to deteriorate. Most likely in the second half (of the year) and with smaller increments,” he said.
Meanwhile, Bloomberg reported the Fed's Federal Open Market Committee after meeting overnight yesterday in Washington as saying in a statement: “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.''
Fed chairman Ben S. Bernanke and his colleagues dropped a reference to “downside risks'' to the economy, while acknowledging the damage that the housing slump had wrought on the six-year expansion, said Bloomberg's report,
The central bank also warned that “some indicators of inflation expectations have risen in recent months,” it added.
Meanwhile, Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissented with the decision, preferring no change. They also objected to last month's reduction.
Reuters reported Plosser writing in the Philadelphia Fed's annual report released on Wednesday that the costs to a central bank of losing inflation fighting credibility were high.
“Such a loss of credibility would pose grave problems for monetary policy makers because it puts the achievement of their dual mandate (of maximum employment and price stability) at risk and must be avoided,” Plosser was quoted as saying.
Singular Asset Management Sdn Bhd chief investment officer Teoh Kok Lin said in a way the cut was good for the domestic market, easing investors' concerns especially among those worried about the subprime issues in the US market.
“The Fed has signalled that this is the last cut, at least for the short term. This suggests that the Fed is quite confident of the impact of its other stimulus action,” he told StarBiz.
Also important was the US' first quarter gross domestic product growth of 0.6%, out on Tuesday, that was significant because it was not negative, as some people had feared, Teoh said.
“This shows that while the US economy is not doing so well, it is nowhere near a contraction. Together with the fact that Asia also has its own internal growth engine, it is not possible for Asia to go into recession,” he added.
Aseambankers Equity Research head Vincent Khoo said the rate cut as well as accompanying statement had already been widely expected by the market.
He pointed to the US dollar that had been strengthening in advance of the announcement anticipating comment on the pause in rate cuts.
“The markets are already pricing for future expectations,” he said.
The most significant part of the Fed announcement was the comment that the Fed would pause, but was looking to the fiscal stimulus tax rebate that Americans would be receiving in early May to early July as a more important catalyst, Khoo said.
“Beyond that, I don't see any catalyst for the market. We could be at the tail end of a relief rally in a bear market,” he added.
Meanwhile, from a economic viewpoint, CIMB Investment Bank Bhd head of economic research Lee Heng Guie told StarBiz the rate cut was in line with market expectations but smaller than recent ones.
While the Fed had left out certain words in its announcement, it had kept the statement much the same.
Lee did not think there was a firm commitment to pause on rate cuts but rather the Fed could be adopting a “data-dependent stance.”
“It (the Fed) would likely be monitoring the economy and take action if the situation were to deteriorate. Most likely in the second half (of the year) and with smaller increments,” he said.
Meanwhile, Bloomberg reported the Fed's Federal Open Market Committee after meeting overnight yesterday in Washington as saying in a statement: “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.''
Fed chairman Ben S. Bernanke and his colleagues dropped a reference to “downside risks'' to the economy, while acknowledging the damage that the housing slump had wrought on the six-year expansion, said Bloomberg's report,
The central bank also warned that “some indicators of inflation expectations have risen in recent months,” it added.
Meanwhile, Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissented with the decision, preferring no change. They also objected to last month's reduction.
Reuters reported Plosser writing in the Philadelphia Fed's annual report released on Wednesday that the costs to a central bank of losing inflation fighting credibility were high.
“Such a loss of credibility would pose grave problems for monetary policy makers because it puts the achievement of their dual mandate (of maximum employment and price stability) at risk and must be avoided,” Plosser was quoted as saying.
Inflation at 7.57%; likely to go up to 8%: Experts
Inflation for week-ended April is at 7.57% versus 7.33%. It is at a 42-month high. CNBC-TV18 poll estimated 7.27%.
The Wholesale Price Index (WPI) is up on rise in primary articles and manufactured goods.
Gilts have gone up despite rise in inflation as higher headline WPI has been priced in.
Reacting to inflation numbers, Finance Minister P Chidambaram provided hope by saying current inflation is likely to be contained. He said food prices will come down sooner than other prices. As a contingency, 154 lakh tonnes of wheat and 250 lakh tonnes of rice have been acquired.
But economists are not that hopeful. Sucheta Mehta of Standard Chartered Bank believes inflation won't come down below 5% until Q1 of 2009. "The recent number of course is a surprise. But there were some revisions in commodity prices that were waiting in the wings. For example, cement prices and tyre prices et cetera. These might have contributed to higher manufacturing sector inflation. I think in the coming few weeks to months, we could also see inflation hit 8%, stay above 7% for at least 3-6 months before it begins to taper off," she said.
Indranil Pan of Kotak Mahindra Bank agrees. He explains, "It was a low base effect of the last year, which would be driving inflation. Since we have repriced our indices to such a high level, I think 8-8.25% is likely to be seen in the next 3-6 months. I would also agree with Sucheta that given the high base that we are seeing now, inflation is expected to fall very dramatically in about March and April of 2009."
He also said the RBI is not really interested in interest rate hikes at the moment, unless there is some odd surprise out of the global scenario. "They have made their stance quite clear. Overall, the way they want to move forward is to moderate and manage liquidity and manage inflation in that way. Plus they are also looking at the fiscal measures to actually kick-in significantly and therefore provide a cap on inflation."
Growth is decelerating in India, interest rates are high and CRR is an effective tool. Based on these three factors, CRR would be used more often.
Mehta believes if liquidity turns abundant in the coming few weeks, there will be further CRR hikes. The hike would be used both to manage liquidity and keep inflationary expectations under check. She is expecting about 75 bps hike in CRR from here.
The Wholesale Price Index (WPI) is up on rise in primary articles and manufactured goods.
Gilts have gone up despite rise in inflation as higher headline WPI has been priced in.
Reacting to inflation numbers, Finance Minister P Chidambaram provided hope by saying current inflation is likely to be contained. He said food prices will come down sooner than other prices. As a contingency, 154 lakh tonnes of wheat and 250 lakh tonnes of rice have been acquired.
But economists are not that hopeful. Sucheta Mehta of Standard Chartered Bank believes inflation won't come down below 5% until Q1 of 2009. "The recent number of course is a surprise. But there were some revisions in commodity prices that were waiting in the wings. For example, cement prices and tyre prices et cetera. These might have contributed to higher manufacturing sector inflation. I think in the coming few weeks to months, we could also see inflation hit 8%, stay above 7% for at least 3-6 months before it begins to taper off," she said.
Indranil Pan of Kotak Mahindra Bank agrees. He explains, "It was a low base effect of the last year, which would be driving inflation. Since we have repriced our indices to such a high level, I think 8-8.25% is likely to be seen in the next 3-6 months. I would also agree with Sucheta that given the high base that we are seeing now, inflation is expected to fall very dramatically in about March and April of 2009."
He also said the RBI is not really interested in interest rate hikes at the moment, unless there is some odd surprise out of the global scenario. "They have made their stance quite clear. Overall, the way they want to move forward is to moderate and manage liquidity and manage inflation in that way. Plus they are also looking at the fiscal measures to actually kick-in significantly and therefore provide a cap on inflation."
Growth is decelerating in India, interest rates are high and CRR is an effective tool. Based on these three factors, CRR would be used more often.
Mehta believes if liquidity turns abundant in the coming few weeks, there will be further CRR hikes. The hike would be used both to manage liquidity and keep inflationary expectations under check. She is expecting about 75 bps hike in CRR from here.
The lipstick as an economic indicator
Last month, Betsy Stein made a beeline for Bloomingdale’s to buy a shirt, but the Nanette Lepore top she found was $280. Stein, 33, a business manager for a classical music composer in Manhattan, told herself that in the current economic climate, she shouldn’t charge it. “With the scare of the downturn ,” she said, “I decided to cut back on my shopaholic problem and exercise some restraint.” But the next day, she made a substitute purchase. “I could buy one or two lipsticks for about $40,” she said. “That’s far less than $280.” Stein’s rationale for buying lipstick echoes a theory once proposed by Leonard Lauder, the chairman of Estee Lauder Cos. After 9/11 deflated the economy, Lauder noticed that his company was selling more lipstick than usual. He hypothesized that lipstick purchases are a way to gauge the economy. When it’s shaky, he said, sales increase as women boost their mood with inexpensive lipstick purchases instead of $500 slingbacks. Beauty brands remain true believers in the theory, even though in the last few years the lipstick market has fallen on hard times as its glistening cousin, lip gloss, has had robust sales.
But do economists, and not just companies that need to move a lot of lip colour, believe that lipstick sales could skyrocket as the economy tanks? And what’s the draw of lipstick in particular for women worried about having to pay as much for gas as they would a handbag? Not only is the lipstick theory plausible , “it’s perfectly consistent with all kinds of economic theory,” said Richard DeKaser , the chief economist with National City Corp, a financial holding company and bank in Cleveland. Three sorts of products sell robustly during tough times, said Lou Crandall, the chief economist at Wrightson ICAP, an independent research firm. The first is what economists call traditional inferior goods, what people have to buy when they can no longer afford their favourites. If you’re a salmon lover eating tuna casserole , you’re chewing on inferior goods. Lipsticks aren’t inferior goods, economists say, but they could be small indulgences , an inexpensive treat meant to substitute for a bigger-ticket item. Or lipsticks could also be morale boosters, like Charlie Chaplin films were during the Depression. A warm shade that perfectly matches your skin tone might make you forget how far your 401(k) has tanked. Although this relationship exists, Lauder was wrong about one thing: Counting lipstick purchases won’t confirm whether we’re in a recession. “It doesn’t surprise me that lipstick sales go up,” Crandall said, “but if I had to choose my top economic indicators to take to a desert island with me, I’m not sure it would make my top 20.”
But do economists, and not just companies that need to move a lot of lip colour, believe that lipstick sales could skyrocket as the economy tanks? And what’s the draw of lipstick in particular for women worried about having to pay as much for gas as they would a handbag? Not only is the lipstick theory plausible , “it’s perfectly consistent with all kinds of economic theory,” said Richard DeKaser , the chief economist with National City Corp, a financial holding company and bank in Cleveland. Three sorts of products sell robustly during tough times, said Lou Crandall, the chief economist at Wrightson ICAP, an independent research firm. The first is what economists call traditional inferior goods, what people have to buy when they can no longer afford their favourites. If you’re a salmon lover eating tuna casserole , you’re chewing on inferior goods. Lipsticks aren’t inferior goods, economists say, but they could be small indulgences , an inexpensive treat meant to substitute for a bigger-ticket item. Or lipsticks could also be morale boosters, like Charlie Chaplin films were during the Depression. A warm shade that perfectly matches your skin tone might make you forget how far your 401(k) has tanked. Although this relationship exists, Lauder was wrong about one thing: Counting lipstick purchases won’t confirm whether we’re in a recession. “It doesn’t surprise me that lipstick sales go up,” Crandall said, “but if I had to choose my top economic indicators to take to a desert island with me, I’m not sure it would make my top 20.”
MARKET PREDICTION
GLOBAL MARKETS SMOOTHERING FASTLY AFTER FED CUT 25 BPS RATE CUT.
US CONSUMER DATA SHOWN POSITIVE TREND DUE TO DEMAND SHOOT UP..
INDIA WILL FOLLOW THE TREND BECAUSE IT CROSSED IT'S PSYCHOLOGICAL BARRIER 5200 MARK.....LEVELS OF NIFTY WOULD BE 5200-5250-5320.
KEEP SL FOR ALL OF YOUR LONG IS 5200.
AUTO, BANKING AND CONSTRUCTION LOOKS GOOD FOR THE DAY.
HAVE A NICE TRADING DAY.......
-MR SAM
US CONSUMER DATA SHOWN POSITIVE TREND DUE TO DEMAND SHOOT UP..
INDIA WILL FOLLOW THE TREND BECAUSE IT CROSSED IT'S PSYCHOLOGICAL BARRIER 5200 MARK.....LEVELS OF NIFTY WOULD BE 5200-5250-5320.
KEEP SL FOR ALL OF YOUR LONG IS 5200.
AUTO, BANKING AND CONSTRUCTION LOOKS GOOD FOR THE DAY.
HAVE A NICE TRADING DAY.......
-MR SAM
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