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.
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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