SBI cuts term deposit rates
Sunday Business Standard, June 14, 2009, Page 1
BS Reporter / Mumbai
Lending rate review by month-end.
State Bank of India (SBI), the country’s largest bank, will reduce interest rates on term deposits across various maturities by 25 basis points from Monday to bring down its cost of funds. It is expected to review lending rates towards the end of the month.
This is the fourth cut in term deposit rates by SBI since April and has brought the cumulative reduction to 150 basis points. The new rates will be applicable to fresh deposits and those that come up for renewal.
Since December, deposit rates have come down by up to 300 basis points. In contrast, the benchmark prime lending rate has been cut by 150 basis points. SBI Chairman OP Bhatt had said last week that there was scope to cut lending and deposit by 25 basis points. Earlier this week, Finance Minister Pranab Mukherjee had prodded public sector banks to cut lending rates further.
While other public sector banks like Punjab National Bank have slashed their lending rates by up to 300 basis points, SBI has gone for a lower reduction as its net interest margin — the difference between the lending and the cost of funds — had dropped by 14 basis points to 2.93 per cent during the 12 months ended March 2009. The bank is trying to ensure that its NIM stays above 3 per cent but is grappling with high-cost funds mopped up in the third quarter of the last financial year when it was raising over Rs 1,000 crore a day by paying 10.5 per cent a year to retail depositors.
SBI’s cost of deposit for 2008-09 was 6.30 per cent, up from 5.59 per cent for 2007-08.
Following SBI’s latest move, which comes three days after the meeting with Mukherjee, other banks are also expected to lower rates. Bank of India Executive Director B A Prabhakar said there was room for a cut of 50 basis points in the deposit rates.
Asked about the benchmark prime lending rate, an SBI executive said that the bank’s first priority was to bring down the cost of funds and then pass on the benefit to customers.
Monday, June 15, 2009
SBI cuts term deposit rates
Developers seek sops for affordable homes
The Hindu Business Line, June 14, 2009, Page 3
S. Shanker, Mumbai
Incentives for affordable housing, higher income tax exemptions for home loans and infrastructure status for the realty segment rank high on the wish list of real estate developers.
The Confederation of Real Estate Developers Association of India (CREDAI), the apex body of developers in the country, is hoping that the Centre will accord infrastructure status to the industry, which is an off-take conduit for over 350 other small and medium industries, besides the cement and steel sector.
Mr Kumar Gera, Chairman of CREDAI, said developers were looking at incentives for units of 1,000 sq ft and below in the residential segment similar to Section 80 IB (10). Restoration of the exemptions under the Section, which has not been extended from 2007, is also high on his agenda.
Under Section 80 IB (10), in the case of construction of housing projects, hundred per cent of the profits derived in the previous year from a housing project can be deducted if the total commercial space in the project did not exceed five per cent of the total built-up area or 200 sq feet, whichever is less. CREDAI wants the Government to cap the unit price in the affordable segment at Rs 40 lakh and also classify townships of 20 acres with such homes as infrastructure development.
Industrial Parks
Another demand is for extension of the tax holiday under Section 80-IA (4) (iii), where developers enjoy tax benefits for developing and operating or maintaining and operating industrial parks. The benefits are for such parks notified up to March 31, 2009. It wants the Government to extend it to 2015. Mr Gera said some moves to extend the provision for a period of three years were on.
This apart, CREDAI looks forward to total removal of service tax for the construction industry. The association is hoping for a greater focus on rehabilitation and settlement of notified slums with provisions of tax breaks and special incentives for developers to take up projects.
FOR Buyers
For the home seeker, CREDAI wants removal of the time limit and ceilings on the deduction of interest paid on loans for acquisition/ construction of residential homes and the benefits raised to Rs 3 lakh. In the case of Tier-I cities it wants total benefit (interest and principal payment) hiked to Rs 5 lakh.
Incentives are required for rental housing, and developers want the income tax exemption on rental income raised from 30 per cent to 50 per cent.
Mr Gera said the realty sector was in dire straits and even if the Government looked for providing such incentives on a short term basis of about 12 months, it would stimulate demand and induce fence sitters to take a buy call.
Other pending issues, such as double stamp duty in sale of developed property, simplification of the Income Tax Act to reduce the assessee category to two – individual and corporate – among others appear to have been overshadowed by an unified call for infrastructure status.
Real estate stocks: A trader's delight
Business Standard, June 14, 2009, Page 6
Devangshu Datta / New Delhi
Investors cannot follow a buy-and-hold strategy, but there can be short-term gains.
In early 2008, at the height of the real estate boom and the bull market, it seemed to make more sense to buy real estate shares than land itself. Between January 2007 and January 2008, land prices appreciated by 150-200 per cent. However, share prices of stocks with real estate exposure did much better.
Housing finance major HDFC saw a price rise of 275 per cent between 2006 and 2008, and developers delivered even better capital gains. The 14-scrip BSE Realty index rose 700 percent between January 2006 and January 2008
Some of the excess returns were the result of creative financial restructuring by real estate developers. Unitech started the trend with a combination bonus-cum-split in 2006 that meant one Unitech share circa April 2006 turned into 65 shares by June 2006. DLF went through a similar, even more complex process that eventually generated a 440:1 split ratio.
By late 2007, Unitech was up around 4,000 per cent in terms of split-adjusted prices, while DLF re-listed at levels that yielded 8,000 per cent returns. By contrast, HDIL, Purvankara, Peninsula, IndiaBulls Real Estate etc “only” generated returns in the 500-1000 per cent range.
In the subsequent recession, land prices have fallen between 20 per cent to 50 per cent. But realty stocks corrected much more violently. By February 2009, the BSE Realty index was down 90 per cent from its highs and many real estate stocks traded lower than they had in January 2006. In the past four months, the realty index has made a spectacular recovery, gaining 170 per cent from its February lows. It is still 70 per cent down from the peak January 2008 levels.
The last two quarters have been terrible for developers. Some are cash-strapped to the point of near-bankruptcy. There has been a drastic drop in sales volumes. In Q3 and Q4 of 2008-09, net profits shrunk by over 90 per cent in some cases and revenues dropped by more than half. Margins – the difference between construction costs and sales prices – came down by anywhere between 30 per cent and 80 per cent.
There have been many stalled projects. SEZs in particular have been shelved for lack of takers. Massive discounts have been offered to get unsold inventory moving. Almost every real estate major has tried to raise cash. Many have sold equity stakes in private placements and qualified institutional placements (QIPs). Some have refinanced via long-tenure loans to settle short-term obligations. Commercial real estate developers have tried lease-discounting, trading future rental incomes for current cash advances.
There are some signs of hope. QIPs are still willing to buy into realty stocks, albeit at big discounts. Anecdotally, there has been some pick-up in residential bookings, especially at the lower end. But commercial and retail segments have been blitzed and supply far exceeds demand. Office rentals and retail (mall) rentals have seen continuous downwards renegotiation.
Real estate corporatised relatively recently with a spate of IPOs between 2004 and 2007. This was also when banks and other financial institutions started offering floating rate mortgages and the retail industry took off. So this is the first full cycle that the industry has ever experienced.
It has become obvious that the sector is very strongly correlated to the macro economy. It has high volatility and therefore, realty shares are high beta. Commercial and retail space sees more violent fluctuations than residential. Therefore, developers with higher residential exposures are slightly more stable.
Analysts have learnt to their cost that next year’s sales volumes and margins cannot be predicted by examining this year’s numbers because of the exaggerated nature of cycles. Nor can one use the popular NAV metric to value land banks because land prices are mutable. This is quite apart from the location-specific variations in prices.
All this makes the sector difficult to buy and hold for the long-term except for those who have very specialised knowledge. But it is always going to attract traders and speculators who are looking to make a quick buck. That makes real estate an ideal vehicle for traders.
If you’re looking to maximise returns during a bull run, buy real estate shares. If you want to short during a bear market, sell real estate stock futures. The exaggerated volatility could work wonders for your portfolio.
Friday, June 12, 2009
India poised for return to 8% GDP’
India poised for return to 8% GDP’
The Economic Times, June 12, 2009, Page 1 & 8
Capital Inflows Rising, Financial Sector Reform Definitely On Agenda
MONTEK Singh Ahluwalia, the deputy chairman of the Planning Commission, is backing Prime Minister Manmohan Singh’s view that India will return to 8-9% growth in the medium term, since the country is on a strong wicket on many fronts. Once the global economy starts to recover, the return on capital will also be higher in an economy like India, which is poised to grow faster than its Western counterparts. And the entry of $5 billion into the country in the last two months is a clear sign of easing capital flow, he says in an interview with ET’s MK Venu & Soma Banerjee. Excerpts:
The prime minister mentioned that India will bounce back to 8-9% growth in the medium term even if developed economies do not recover... What are the conditions necessary to achieve this?
It is important to remember the supply-side constraints. A lot of people are concerned about the global economy. The impact of the global economy on us, primarily on the demand side, is less than would otherwise be the case. But as long as on the supply side, we are in a situation where productivity and domestic savings and the growth of capital and the growth of investment leading to the growth of capacity take place the way we want it, we should be able to grow at 8-9% as mentioned by the prime minister. There the focus is on savings—whether we are investing enough, if there will be enough inflow of foreign investment and whether domestic capital will be able to achieve the productivity gains is what we have to look at. All known cases of high growth are not those where you just expand capital stock but also where you have high levels of productivity. On all these counts, India is in a very strong position. WHAT has happened, though, is that the global economy will grow slowly, but over a medium term, we can overcome that problem.
In the context of India needing more foreign savings, do you think capital flows have already begun to ease? For example, if you look at the latest figures, there is FII inflow of more than $5 billion in the past two months.
It is quite clear that it has begun to ease. Last year, after the collapse of Lehman Brothers, there was a huge amount of uncertainty and a huge premium on liquidity. Global financial institutions were pulling back capital to reconstitute their own balance sheet. Now, there is some restoration of confidence that the system is not going to collapse. The news coming from the West is that perhaps, by the second half of the calendar year, the global economy will bottom out and start a gentle upswing.
No robust growth but there will be growth in 2010-11. This puts an end to fear and uncertainty. Once confidence is restored, global investors look for returns. Frankly, since the West will grow slower, the return on capital will be higher in economies which will grow faster, like India.
What are the key reforms that you would put on priority to drive investment-led growth in the next six months or one year?
It’s not enough to talk about reforms that will have an impact in the next six months. Psychologically, you also have to look at the reform signal for the medium term; the actual impact of those decisions come only after two to three years. The signals you give today change investor expectations, and that’s not necessarily to do with foreign investor expectations. Foreign investment is important but domestic investment is much larger.
So what are those things?
Clear movement on infrastructure, which everyone regards as the major constraint in India’s performance. It’s a supply constraint in the two- or three-year horizon but it also addresses the demand constraint in the short term. Underlying that, there needs to be positive movement on social sector reforms because it is the progress on social sector and the promise it holds out for greater inclusion which create a social consensus for modernisation. For example, we talk about setting up 30 universities. They won’t start tomorrow and we will be lucky if they start operating in the next three years. So everyone in India who has a child aged 13 or 14 will know that the prospects for that child will be better when he is ready to go university. The expansion of private universities that we desire will signal optimism to many people.
There is also a view that we need to look at financial sector reforms because there is a need for Indian businesses to explore newer financial services and we need a lot more banking to have genuine financial inclusion in the domestic market...
Absolutely. I would put financial sector reforms very much on the agenda. There is a view that because there has been a global financial crisis, there should be rethinking on financial sector reforms. I think this is wrongly applied in India. What the world crisis shows is unthinking liberalisation of the capital account and an expansion of unregulated financial sector can be dangerous because it leads to a lot of leverage and it creates a lot of activity in areas where there isn’t enough regulation. But that was never our intention. We were always of the view that the financial sector must operate within regulations but within those regulations, they should have more freedom. For example, we have a well-regulated system and so we should allow private sector banks to expand more freely. Once you have the regulations, we should allow competition among banks. We have allowed capital inflows but have not suggested a balanced system with some restrictions, very few restrictions on FDI, some on short-term borrowings. It presents a mixed picture. It would be wrong to say that we should not go in for financial sector reforms. There are lessons to be learnt but too many people are learning the wrong thing which is to stop everything. The financially over-liberalised economies are moving towards the centre of the spectrum but we were over-controlled and have to move towards less control in the sense of letting more players participate. It would be a great mistake to think that we must rethink financial reforms because of what happened in the western world.
On infrastructure, what are the lessons to be learnt?
We have done well in some sectors like rural roads in the North-East. The President’s address mentioned Bharat Nirman-II and we will take up more of those over the next two or three years under public investments. The second mode is by promoting public private partnership (PPP) projects. It took some time but the good news is that most of it is resolved. The new minister for transport, Mr Kamal Nath, says he wants to see 7,000 km of road per year. This is feasible through budgetary means and PPP. Meetings have been held with stakeholders. There are problems related to credit and banking and some of them can be addressed. With the restoration of normalcy in the rest of the world and robust growth in India, there would be a significant flow of private investments in roads and power sectors. We expect 70,000 mw to be added by the end of the Eleventh Plan, three times what we did in the Tenth Plan period. Our savings rate is fine and over the last two or three years, we have not had current account deficit. I think we can boost investments in India’s infrastructure sector at a time when global economies are growing at a slower pace and demand will be low. So it will have a contra-cyclical impact. We may have to do some more public spending and that will increase fiscal deficit but that’s part of the contra-cyclical strategy.
Your take on fiscal expansion. How much of it is tolerable, going forward?
The increment mentioned in the interim budget of 0.5% to 1% is right. The interim budget already includes a significant increase in the pre-stimulus budget level compared to 2008-09. There is lot of confusion on India’s stimulus. It is said that China gave 3% of GDP as stimulus and we provided only 1% of GDP. This is wrong. One way to look at it is how much has your stimulus increased compared to what was originally budgeted for. It is true that some of it was because we did not pass on the increase in oil prices and we subsidised it. That is a stimulus as money remained in the hands of the consumer and the government took the hit. Against the originally anticipated fiscal deficit target of 3% of GDP, the actual fiscal deficit turned out to be 7.8%, including off balance-sheet items like oil bonds. The additional fiscal deficit is over 4%. This is a form of stimulus. You can call some of it an automatic stabiliser. You haven’t provided for it but it kicks in to compensate for the loss of demand. This is a big debate in Europe, too. So while US authorities have given big additional stimulus, the Europeans claim their automatic stabilisers are so strong that their fiscal deficit expands even if they do not do anything consciously. For example, the unemployment dole kicks in automatically in Europe as unemployment increases. This does not need a fresh spending programme. I have seen some IMF calculations and the stimulus provided in India is not very different from China—a little over 3 percentage points of GDP on an annual calendar year basis for 2009.
Is there a case for some more monetary easing? There is a talk of how fiscal and monetary policies should complement and not constrain each other...
In well-regulated economies, the fiscal and monetary policies are integrated. The one takes into account the consequences and constraints of what the other is doing. In a period of crisis, the notion of independence of monetary autonomy has to be kept aside. It is happening in the US and that’s the case in India. Over the past six months, in the response to the crisis, by and large, monetary policies have been supportive of the overall fiscal stance of the Centre. There has been healthy co-operation between the two.
At the moment, a shortage of liquidity is not what is preventing credit from coming out. My recollection is that most banks, even today, are parking funds with the RBI under the reverse repo of the order of over a Rs 100,000 crore. The situation is very different from what it was in September/October, when there was a liquidity crunch. Once we know what the budget numbers are, it is easy to give the right monetary signals. Besides, big capital flows last month have resulted in considerable liquidity infusion. Sebi has said $5 billion has come in the last two months. So whoever is conducting monetary policy will have to keep several balls in the air and make the right call at the right time in regard to liquidity management... There is no liquidity problem now. The real problem is that banks have an elevated risk perception and that is natural but as investors gain confidence and the government gives the right signals, and the so-called green shoots become evident, bankers will also begin to change perception.
What are the changes in ground realities—credit rating agencies have softened perception towards India...
That is because of a changed realisation that India continued to grow robustly compared to many economies even in the worst recession since the Great Depression. A greater appreciation of fiscal deficit what led to this. But there has to be a medium-term plan to return to fiscal sustainability.
What could be done to restore revenue growth to achieve medium-term sustainability? Is disinvestment one such way?
Growth by itself will self correct the fisc. It will generate revenue in the medium term which will make all our inclusive growth programmes feasible. So when the PM says that 8-9% growth in medium term is sustainable, a good tax system will generate buoyancy. There is a good case for increasing expenditure this year but once it gains momentum we have to stabilise.
The extension of GST is the second. A major reform in the indirect tax regime that will not yield immediate results but will show gains in the medium term. We must have cautious expectations in the short term once it is rolled out on April 1 2010 but in the medium term (two to three years), this will make the indirect tax collections robust.
With regard to subsidies, there is no doubt that there have to be subsidies for some sections of the society but a lot of our subsidies are wasted. Like kerosene leaks out to the black market. Expansion of rural electrification should bring down the need for kerosene subsidies. Disinvestments are a way of creating capacities in the sectors that you need. There are sensitivities in the political spectrum but that is why the prime minister referred to building a consensus. If we could embark upon disinvestment of some of these companies, keeping 51% government holding intact, you could generate sizeable revenue over the next two to three years.
PM’s advisory council projects 7% growth
PM’s advisory council projects 7% growth
The Economic Times, June 12, 2009, Page 9
NEW DELHI: Sharing the optimism of Prime Minister Manmohan Singh, his advisory council on Thursday projected a growth rate of 7% for the current fiscal, reports Our Bureau. “I think it should be around 7%,” Prime Minister’s Economic Advisory Council (PMEAC) chairman Suresh Tendulkar said. Although the Reserve Bank, in its annual monetary policy in April, forecast a growth rate of around 6% for the current fiscal, the prime minister felt otherwise, saying the growth rate would at least be 7%. “We will maintain at least 7% growth rate. In the short run, we can’t do better (because of the global economic crisis) but this is not good enough,” Mr Singh said in Parliament, adding that with efforts, the country can revert to 8-9% economic growth.
Assocham sees 7.2% growth
Assocham sees 7.2% growth
The Economic Times, June 12, 2009, Page 9
NEW DELHI: The Indian economy may grow at 7.2% this fiscal on the back of an improvement in consumer sentiment, policy reforms and projected growth in the agriculture and industrial sectors, an Assocham survey said. In a survey of 300 businessmen, about 42% of the respondents said policy reforms would cast large impact on the GDP growth. "The Indian economy is expected to register a GDP growth rate of 7.2% in 2009-10 on account of an improvement in consumer sentiment, rural India and policy reforms," the chamber said.
Global economy to shrink by 3% in 2009
Global economy to shrink by 3% in 2009
The Economic Times, June 12, 2009, Page 19
WASHINGTON: The global economy is set to contract by close to 3% this year, worse than the previous estimates for a 1.75% decline, World Bank President Robert Zoellick said on Thursday. In a statement ahead of the Group of Eight finance ministers meeting in Italy at the weekend, Zoellick said poor countries were the hardest hit by the global crisis. "Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks," Zoellick said. He said most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.
Inflation rate dips to 0.13%; food still dearer
The Hindu Business Line, June 12, 2009, Page 7
Wholesale Price Index of all commodities at 232.6.
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The sub-one per cent overall inflation numbers, however, hide the much higher price increases registered in foodstuffs.
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Our Bureau, New Delhi
The annual wholesale price index (WPI)-based inflation rate has further slipped from 0.48 to 0.13 per cent for the week ended May 30.
That makes it the thirteenth consecutive week where year-on-year inflation has ruled below the 1 per cent level. The all-commodities WPI (base 1993-94=100) was provisionally placed at 232.6 for the latest recorded week, as against 232.3 a year ago.
The coming week (i.e. ended June 6) could well see the headline inflation rate turning negative — the first time in over two decades. The reason for this is that the WPI last year, between May 31 and June 7, shot up from 232.3 to 236.5. The ‘base effect’ of this 1.8 per cent rise in a single week is likely to produce a negative inflation rate, when the June 6-ended WPI data is released.
The sub-one per cent overall inflation numbers, however, hide the much higher price increases registered in foodstuffs. Thus, while the all-commodities annual inflation for the latest recorded week was 0.13 per cent, the corresponding rate for the ‘primary articles’ group stood at 5.7 per cent. And within ‘primary articles’, the year-on-year price rise was 8.6 per cent for ‘food articles’ — which included foodgrains, fruits & vegetables and milk.
The significant reduction in headline inflation over recent weeks has been mainly brought about by the ‘fuel, power, light and lubricants’ and ‘manufactured products’ groups, which have respective weights of 14.23 per cent and 63.75 per cent in the all-commodities WPI, compared to 22.02 per cent for ‘primary articles’.
For the week ended May 30, the WPI for the fuel group actually fell 6.68 per cent year-on-year, while inching up by 0.39 per cent for manufactured products. But within manufactured products again, the inflation in ‘food products’ was 12.36 per cent. The latter included a disconcerting 31.27 per cent for sugar.
Inflation murmurs begin as oil closes in on $70
Business Standard, June 12, 2009, Page 6
Devika Banerji / New Delhi
Inflation in India has tumbled from a 16-year high of 12.91 per cent in August last year to below 1 per cent for the 12th straight week, raising hopes that a figure near zero would give the government the comfort to craft policies that would help boost the economy.
But the murmurs about a possible return of inflationary fears have already started doing the rounds. Reason: oil prices are close to breaking through the $70 per-barrel barrier and more forecasters are broadening expectations for a further upward swing.
In fact, it has taken just 75 trading days for international crude oil prices to double to $68 a barrel on June 8, 2009 — the fastest bull run over a 75-day time period in the last nine years. The price of the Indian crude basket has also increased to $68.66, giving rise to the feeling of ‘here we go again’ with what happened last year.
Listen to Goldman Sachs, the firm which predicted last week that economic recovery will push up oil prices to $85 per barrel by the end of this year and $90 by June next year.
In a report called ‘India Macro Stance’, Goldman said that inflationary pressures were sequentially building up. Recent data on both the Wholesale Price Index and the Consumer Price Index showed a sequential bottoming out between February and April. Latest readings of price indices were showing a bottoming out of inflation, it said.
With a recovery in domestic demand on the horizon, Goldman believed the output gap would continue to shrink, exerting upward pressures on prices. According to its estimates, a 10 per cent increase in the administered price of crude oil increases WPI inflation by 0.6 percentage points.
Goldman isn’t alone. Many economists and market players have started wondering whether the fast rising international crude prices coupled with food prices registering double-digit inflation rates will pose a threat to the Reserve Bank of India’s (RBI’s) benign prediction of 3-4 per cent in fiscal 2009-10. “The fundamentals are great, the only worry in the horizon is inflationary fears. It would be interesting to see how the central bank tackles the situation,” said Rashesh Shah, chairman of Edelweiss.
The prices of wheat, rice and sugar have constantly been on the rise for the last two months. The inflation rate for food items like cereals, pulses and wheat in the primary articles category has stayed near two-digit level since March, while sugar inflation touched 30 per cent last week.
Higher inflation not only affects the common man in terms of higher prices, but also will push up yield on government bonds and increase the cost of borrowing. This is because high inflation will erode real returns of government bondholders, who in turn would expect higher returns.
With a seven-year record high fiscal deficit, the government is planning to borrow in excess of Rs 3,20,000 crore in fiscal 2009-10. High government borrowing is one reason why yield on G-Secs have responded correspondingly to interest rate cuts announced by RBI.
Analysts have stated high Minimum Support Price (MSP) which has led to higher rural economy to be the major reason. Moreover, they also indicated at persisting irregularities in the supply chain leading to gaps in the demand-supply scenario resulting in high prices.
“It is important to beef up infrastructure at different levels to neutralise the demand and supply situation. Temporary ban on speculation in the oil market might also help,” added Abheek Barua, chief economist with HDFC Bank.
Commodity prices, particularly metals and intermediates, have also gone up sharply in the last three months. Copper, for example, is up 24.5 per cent to $4936 since April and the revival of the steel industry has put pressure on nickel prices. Prices are up nearly 50 per cent since April.
Globally, steel companies have started raising prices. Even plastic raw materials have also gone up by two-third from their lows last November following the sharp upturn in crude oil. Petrochemicals and chemicals in general have also shown a rising trend, resulting in a rise in India Inc’s input costs.
Tushar Poddar and Pranjul Bhandari of Goldman said broad money (M3) growth, at 20.5 per cent y-o-y at end-May remained higher than long-run averages and the central bank’s target of 17 per cent y-o-y. This has also been in part due to increased inflows and monetary accommodation of the fiscal deficit. The system is awash with liquidity, and they felt that the excess money growth would exert upward pressure on prices going forward.
There were some other early indications too of inflation hardening. According to a finance ministry statement on inflation issued in the last week of May, deseasonalised overall inflation, which had persistently remained negative since September 2008 and recorded a provisional rate of (-) 2.6 per cent in March 2009, firmed up at 3.2 per cent on the basis of the final WPI.
Some experts, however, have a more benign view and felt while higher food and oil prices were a cause of concern, the headline inflation would not be impacted much till oil crosses the three-digit mark.
Had it not for these two factors, inflation rate based on wholesale price index (WPI) would have gone into negative territory, described as “deflation”.
“We expect an inflation rate of 5 per cent till March next year with oil at $ 60 a barrel , but if it stays or rises from current levels, then inflation risks are bound to emerge,” said B Prasanna, an analyst with ICICI Securities.
“The current prices do not impose threat considering oil prices were at much higher levels last year. However if a steep rise in oil prices continue and cross $100 dollar per barrel, it will be a cause of worry,” said Jyontinder Kaur, an economist with HDFC bank.
The inflation rate for oil and fuel category has continued to register negative inflation since December last year, mainly due to the spurt in oil prices in the previous year when it went over $140 per barrel in July, 2008.
Therefore, due to high base effect, as inflation is calculated by comparing this year’s prices against last year’s, oil prices, as of now, are not significantly pushing the inflation rate up.
The category of fuel (which includes power) with 22 products occupies around 14 per cent weight in the inflation index. There are 10 products which are oil or its derivatives, out of which 4 products are under the administered pricing mechanism (APM) that is government determining the price. These four products are petrol, diesel, kerosene and LPG.
“These four products which have around 5 per cent weight of the index and are currently at lower levels will also cushion us against high inflation,” Kaur added.
Inflation at 0.13%
The inflation rate for the week ended May 30 came down to 0.13 per cent, the lowest since the new series started in 1993-94, primarily due to the decrease in prices of manufactured products on an annual basis.
The inflation rate stood at 0.48 per cent for the previous week ended May 23 and 9.32 per cent during the corresponding week in 2008.
Experts say that the decrease in inflation rate is the result of the base effect and expect negative inflation in the next two weeks. The low interest rates also create scope for the Reserve Bank of India (RBI) to cut key interest rates like repo and reverse repo.
“There is a scope for a last 25 basis points rate cut by RBI considering inflation is bound to go further down,” said Jyotinder Kaur, an economist with HDFC Bank. RBI has already cut repo rate — the rate at which lends to banks — by more than 4 percentage points since September 2008 to stimulate demand.
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