Indian Prices Fall as Subbarao Looks Beyond Inflation

Aug. 20 (Bloomberg) -- India’s benchmark wholesale price index extended its longest decline in three decades as central bank Governor Duvvuri Subbarao says an inflation-targeting policy isn’t enough to maintain financial and economic stability.

Wholesale prices fell 1.53 percent in the week to Aug. 8 from a year earlier, the commerce ministry said in New Delhi today. That was more than the median forecast of a 1.49 percent decline in a Bloomberg News survey of 18 economists.

Subbarao is concerned that inflation may gather speed, as evidenced by upward revisions the commerce ministry has been making to the wholesale price index in recent months. The governor told a forum in the southern Indian city of Hyderabad last week that the global financial crisis has shown an exclusive focus by central banks on inflation targeting “doesn’t work.”

“The central bank can’t detach itself from its stated objective of maintaining price stability and at the same time will have to address concerns over growth and orderly financial markets,” said D. H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi.

Subbarao slashed the Reserve Bank of India’s key interest rates six times between October 2008 and April 2009 to an unprecedented low. On July 28, he left the reverse repurchase rate unchanged at 3.25 percent and kept the repurchase rate at 4.75 percent and said the central bank may have to “reverse” its expansionary measures to subdue inflation.

Weak Monsoon

Bonds were little changed. The yield on the 7.02 percent note due August 2016 was unchanged at 7.10 percent as of 12:04 p.m. in Mumbai, according to the central bank’s trading system.

Gains in wholesale prices may exceed the central bank’s forecast of 5 percent by March next year as a weak monsoon threatens to reduce harvests and push up food prices. Inflation has slowed from a 16-year high of 12.91 percent in August 2008.

The India Meteorological Department on Aug. 10 lowered its monsoon forecast for a second time this season, saying showers between June and September will be 13 percent below average, compared with a 7 percent shortfall estimated in June.

Food costs, as reflected in the consumer-price indexes, are already high. India has four consumer-price gauges and uses the wholesale-price index as the benchmark because the other inflation measures don’t capture the aggregate price picture.

‘Complicates’ Policy

Consumer prices paid by farm workers jumped 11.52 percent in June from a year earlier after gaining 10.21 percent in May. Prices paid by rural workers rose 11.26 percent in June and those paid by industrial workers climbed 9.26 percent.

Subbarao says the discrepancies between these inflation measures “complicates” monetary policy. The governor claims borrowing by Prime Minister Manmohan Singh’s government to fund the widest budget deficit in 16 years also “impedes” the transmission of central bank policy.

Finance Minister Pranab Mukherjee on July 6 unveiled plans to borrow a record 4.51 trillion rupees ($93.3 billion) to fund a budget gap estimated at 6.8 percent of gross domestic product.

The central bank is worried that high government borrowings are “literally negating the interest-rate cuts of the past months,” said the RPG Foundation’s Panandiker.

In its most recent monetary policy statement released July 28, the central bank said its medium-term objective is an inflation rate of 3 percent.

Asset-Price Bubbles

Subbarao last week said inflation targeting can’t do much to provide protection against asset-price bubbles and doesn’t necessarily deliver financial or macroeconomic stability.

“The challenge thrown up by the crisis is what should be the mandate of the central bank,” he said. “If an exclusive focus on targeting of inflation has failed, how do we rejig that mandate?”

The Reserve Bank has done a “fairly decent job” in recent years to tailor its strategy according to an evolving economic environment, said Dharmakirti Joshi, an economist at Mumbai- based Crisil Ltd., the local unit of Standard & Poor’s.

“Though the central bank will have to remain focused on inflation, strict mechanical targeting is not feasible in a country like India,” Joshi said. “One reason for that is that the RBI is juggling a lot responsibilities, including managing government debt and ensuring financial markets stability.”

Dangerous Hurricane Bill could threaten east Canada

MIAMI (Reuters) - Powerful Hurricane Bill, a dangerous Category 4 storm with 135 mph winds, raged across the open Atlantic on Wednesday, days from land but on a path that could menace Canada's eastern provinces next week.

Sweeping past the Caribbean islands and posing no threat to U.S. oil and gas installations in the Gulf of Mexico, the first hurricane of the 2009 Atlantic season was expected to charge between the U.S. East Coast and Bermuda, well offshore.

Residents of Bermuda, a mid-Atlantic British territory and reinsurance capital, were warned to prepare for the storm. The latest forecast track issued by the U.S. National Hurricane Center would take Bill more than 100 miles to the west.

But Bill's massive size -- tropical storm force winds of 39 to 73 mph extend up to 230 miles from its center -- meant Bermuda would get a good dose of heavy weather, forecasters said.

"All (computer) models keep the storm between the United States and Bermuda. Exactly how close it comes to either of those is up for debate," said National Hurricane Center forecaster Eric Blake. "The average error (in the forecast track) is 200 miles at about 3 days."

"Bermuda is expected to see large swells and areas of heavy rain and high winds. Hopefully the core of the hurricane will stay offshore," he said.

The Bermuda Sun newspaper reported that U.S. Secretary of State Hillary Clinton and her husband, former President Bill Clinton, planned to fly to Bermuda on Wednesday for a private vacation of three to four days at a beach resort. The State Department declined to officially confirm where Clinton was.

HEAVY SURF EXPECTED ON U.S. EAST COAST

Forecasters said Bill might get stronger. Its top winds were expected to peak at about 145 mph on Thursday.

Hurricanes of Category 3 or higher on the five-step Saffir-Simpson intensity scale are considered "major" storms and are the most destructive type.

The well-defined eye of Bill was located about 970 miles south-southeast of Bermuda at 5 p.m. EDT (2100 GMT) on Wednesday and the system was moving toward the northwest at 20 mph, the hurricane center said.

Its curving forecast track would take it to a position hundreds of miles (km) east of Miami by early Friday, and well off New York by Sunday.

"How close it gets to the New England coast, there's still the usual uncertainty in that long time period," former NHC director Max Mayfield said. "But the core of the hurricane, most of the models indicate it's going to remain off the coast."

Forecasters said dangerous swells and life-threatening rip currents could affect the northern Caribbean islands, the Bahamas, Bermuda and the U.S. East Coast in the next few days.

The latest forecast track from the hurricane center would take Bill slightly closer to the U.S. East. It shows the storm just south of Nova Scotia by Sunday afternoon as a Category 2 hurricane and moving directly over Newfoundland after that. But five days in advance, the forecast has an average error of several hundred miles.

Asian Stocks Advance on Crude Oil, QBE Earnings; CSL Declines

Aug. 20 (Bloomberg) -- Asian stocks gained, led by energy and finance companies, as oil prices rallied and QBE Insurance Group Ltd. reported higher first-half profit.

Woodside Petroleum Ltd., Australia’s No. 2 oil producer, climbed 4.3 percent in Sydney. QBE, Australia’s largest property and casualty insurer, advanced 7 percent. Isuzu Motors Ltd., Japan’s third-biggest maker of commercial vehicles, rallied 5.4 percent as brokerages recommended buying Japanese automakers. CSL Ltd., the world’s second-largest maker of blood plasma products, slumped 3.4 percent after Citigroup Inc. cut its recommendation on the stock.

“The consensus remains among investors that the global economy is on course for a recovery, but we have to see further improvement in the economy and company earnings for markets to go up higher,” said Kiyoshi Ishigane, a strategist at Mitsubishi UFJ Asset Management Co., which oversees about $53 billion.

The MSCI Asia Pacific Index added 0.6 percent to 110.99 as of 11:14 a.m. in Tokyo. The gauge has rallied 57 percent from a more than five-year low on March 9 amid speculation the global economy is recovering.

Japan’s Nikkei 225 Stock Average advanced 0.7 percent to 10,279.19. Australia’s S&P/ASX 200 Index gained 0.4 percent, while South Korea’s Kospi Index added 0.7 percent.

Futures on the Standard & Poor’s 500 Index rose 0.1 percent. The U.S. gauge advanced 0.7 percent yesterday as energy stocks gained, while Merck & Co. led drugmakers higher after a judge upheld a patent.

Rising Valuations

The MSCI Asia Pacific Index rally since March has lifted the average valuation of shares in the gauge to 24 times estimated earnings, compared with 17 times for the S&P 500 and 14 times for the Dow Jones Stoxx 600 Index in Europe.

Woodside Petroleum advanced 5.6 percent to A$46.75 in Sydney. Inpex Corp., Japan’s largest oil explorer, gained 2.3 percent to 717,000 yen in Tokyo.

Crude oil for September delivery rallied 4.7 percent to $72.42 a barrel in New York. U.S. oil stockpiles dropped 8.4 million barrels last week, the most since the week ended May 23, 2008, a report from the Energy Department showed.

QBE Insurance surged 7 percent to A$22.20 in Sydney. The company said first-half profit climbed 19 percent on premium growth and foreign exchange gains.

Isuzu rallied 5.4 percent to 197 yen after Nikko Citigroup raised its recommendation to “hold” from “sell.” Hino Motors Ltd. advanced 2.7 percent to 382 yen after upgrades at Nikko Citigroup and Daiwa Securities.

CSL slumped 3.3 percent to A$32.02. The stock was cut to “hold” from “buy” at Citigroup.