Read
Listen
Watch
Play
Find
Mail

  • Quotes

  • NAVs

  • News

  • Messages

  • Opinions

  • Notices

  • Videos
You are here : Moneycontrol » News » Economy

Inflation at 11.91%; Experts rule out major rate hike

Published on Thu, Jul 17, 2008 at 17:31 , Updated at Fri, Jul 18, 2008 at 13:36
Source : CNBC-TV18

Email    Print    Watch Video

ads by google

Inflation for the week ended July 5 is at 11.91% versus 11.89%. A CNBC-TV18 inflation poll conducted earlier, saw inflation for week the ended July 5 at 12.03%.

 

Inflation for the week-ended May 10 has been revised to 8.57% versus 7.82% (provisional).

 

The Finance Ministry said that inflation has stabilized. They added that inflation in primary articles declined to 9.92% from 10.84%.

 

The Ministry believes that inflation has stabilized. “Out of the 320 manufactured products, 281 items show price increases. Inflation in 30 essential commodities has declined from 5.98% to 5.74%. Inflation in primary articles has declined to 9.92% from 10.84%.”

 

So, what do experts read into this inflation number?

Sachidanand Shukla, Chief Economist, Enam, said inflation was expected at 11.96%. According to him, there are a lot of stress points and the inflationary trend may continue. "The moratorium on steel goes away in July. "Apart from that, there are pressures from the electricity side where coal price hikes may start reflecting now. Also, there is an issue about pulses."

 

He sees pressure from the oilseed front, which is a worrying factor because of the spatial distribution of the monsoon.  “Rainfall has not been even in Maharashtra, Andhra Pradesh, and Karnataka. August to October is the festive season. So, there will be greater demand and pressure on prices of oilseeds, which has about 2.6% weightage in WPI. “Although, we have agricultural output which is 230 million tonne and the commercial side, which is pulses and oilseeds, is growing by 14-20%, we are still having problems on the price side. So, this trend is likely to continue at least till the end of September.”

 

Arun Kaul of PNB said the market was expecting inflation at about 12.04-12.05%. “So, 11.91% is certainly a surprise for the market.”

 

Where is inflation headed?

Enam’s Sachidanand Shukla said the manufacturing sector grew by 0.4% last week, this week it is 0.3%. There are stress points in terms of sugar, which has about 2.5% weightage in the Wholesale Price Index, or WPI, he said. “Prices of steel, sugar, and electricity may rise. Pulses, and oil seeds can become a problem because the rupee has been depreciating. We are looking at inflation numbers peaking at around 13.5-14% by September-end or early October.”

 

PNB's Arun Kaul said inflation would remain in double-digits right up to the end of December. “Under these conditions, the possibility of money supply keeping tight is very great."

 

What will RBI do next?

Enam’s Sachidanand Shukla feels that a rate hike depends on the cost structure of a particular bank. But having reacted already, most banks have already raised their prime lending rates or adjusted their rates. So, an immediate realignment is not seen.

 

According to him, the banks will look at their own cost of funds and their balance sheets before reacting. “They would want to review their rates every 15 days or on a monthly basis. So, I do not see an immediate reaction from bank managements. But, it is case-to-case.”

 

Shukla said the actions of the RBI have intensified in the last 1-1.5 months or so, because the RBI raised repo rates by 75 bps. He believes there is a possibility of another 25-50 bps repo rates hike.

 

“RBI need not wait and watch because it’s essentially the question of credibility of Monetary Policy in India. They have stated 5.5% as their inflation band. The medium-term target is even lower, yet we have the inflation number at 12.5%, which may rise or peak out around 14%.  So, RBI cannot pause. It will not be a prudent policy especially at a time when the fiscal policy is still lose and credit growth is still at around 25%. It is moderating, but it’s not time for the RBI to let its guard down.”

 

According to PNB’s Arun Kaul, RBI will not hike repo or CRR substantially. “RBI would like liquidity to decrease further to check inflationary expectations. It may keep money supplies a bit tight for the next couple of months.”

 

Hitendra Dave of HSBC expects cyclical rallies in bond market and the yields will remain high at 9.5%. He does not see inflation easing off as yet. The Reserve Bank of India, or the RBI will not keep the status quo and will hike rates by 25 bps which is already factored in.


A Prasanna of ICICI Securities feels that the inflation is likely to rise & peak at 13%. The RBI has no choice but to hike rates, he added. He expects a 25-50 bps hike in rates.

 

On fiscal deficit:

Enam’s Sachidanand Shukla said the government has projected a number of 2.5%, whereas they have kept a headroom of about 50 bps, which is the Fiscal Responsibility and Budget Management, or FRBM, stipulation of 3%. There is also the Sixth Pay Commission report that has to be implemented around Diwali and the government has some headroom of accommodating that, he added.

 

How will bond markets react?

Bond markets, PNB’s Arun Kaul said, are reacting very positively. "The10-year bond came down from 9.38% to about 9.2324%. A quarter percent hike has already been factored by the bond market."

 

On oil bonds:

According to Enam’s Sachidanand Shukla, of the off-balance sheet items, oil bonds constitute about 3% of GDP, fertiliser bonds constitute 2%, while food bonds constitute another 1%. "So, essentially 6% of GDP is off-balance sheet. We must understand that this is an off-balance sheet item. But the interest cost will be reflected in the government’s balance sheet. This will not be as damaging. Technically, the Finance Minister can still show a fiscal deficit number of about 3.6%. However, if we were to combine these, the combined fiscal deficit would be close to 10%.”

 

He does not expect the yield curve to touch the 10% mark. “With respect to the yield curve, if you look at the trend for the last four-eight weeks, small items with very low weights, of 0.5% or 0.3%, is causing disproportionate rise in Wholesale Price Index. If the number were to surprise in a particular week, then we may see the bond yield react to that. It is unlikely to move beyond the 10% number barring these isolated instances.”

 

According to him, the yield curve is also a function of inflation numbers. “If it were to surprise us, like it did four weeks back, it did came in 1.7% higher. In that case, we may see bond yields react sharply and it may cross 10%. But otherwise the bond markets have not factored in the fact that the government will have to borrow more this fiscal.”

 

On borrowings: 

Shukla expects about Rs 30,000-40,000 crore borrowings more than the stipulation limit, whereas the government said it will borrow about 1.1 trillion. 

 

Impact on corporates:

Enam’s Sachidanand Shukla said repo rates work with a lag. "This lag is about 12 months from RBI’s own papers. So, the repo or interest rate hikes that RBI is doing now will not have a very major bearing in the immediate term capex plans of companies. A lot of these sectors or companies are operating at a very high capacity utilization. If some of these were to be postponed or put on hold, there will be no problem in terms of the gross capital formation getting affected. So, we have factored in this possibility of rate hikes and its impact on the corporate sector.”

 

How would banks’ react now?

PNB's Arun Kaul said a PLR hike would depend on money supply as well as liquidity in the system. "If banks are not forced to raise deposits at very high rates, they may not raise PLR. If banks are able to arrange cheaper funds, then there is no pressure on cost, so they in turn may not raise PLR. We will have to wait and see how the liquidity position shapes up in the next couple of days."

 

Inflation internals:

  •  Fuel, power, light up 0.5%
  • Primary articles down 0.1%
  • Manufacturing products up 0.3%
  • Primary articles: Food Articles down 0.2%, fruits and vegetables down 1%, tea up 2%, maize, masoor up 1%
  • Fuel, power: naphtha up 8%, light diesel oil up 7%, furnace oil up 6%, ATF up 5%, bitumen up 2%, LPG down 5%
  • Manufacturing product: Textile group up 0.1%, paper and products up 0.1%, chemical and chemical products up 0.5%, PTA up 13%, soda ash up 6%
  • Basic metal alloys up 0.7%, steel ingots up 21%,bright bars up 10%, steel sheets, plates and strips up 1%
  • Iron, steel down 8%
  • Machinery and machine tools up 0.3%
  • Transport equipment and parts up 0.1%
  • Pulses up 0.2%, fruits & vegetables down 0.9%, spices up 0.3%
  • Mineral oil up 0.8%, edible oil up 0.4%
  • Inorganic chemicals up 2.5%, organic chemicals up 4.1%
  • Iron and steel up 1.5%, pipes and wires down 0.6%
  • Non-ferrous metals down 0.1%
  • Heavy machinery and parts up 0.9%
  • Two-wheelers up 0.1%

Messages on Economy

Post a comment

Other comments

CRR cut by 50 bps; Bankers don't see cheap loans soon

The Reserve Bank of India, or RBI, has cut the cash reserve ratio, or CRR, by 50 bps to 8.5% with effect October 11...

in Economy - MMB Messenger at 06-Oct-08 10:39

RBI cuts cash reserve ratio by 50 bps

The Reserve Bank of India (RBI) on Monday said it was cutting the cash reserve ratio (CRR) for banks by half a perc...

in Economy - TrueCompanion at 06-Oct-08 08:16

More on Messageboard »

Rate this article

Feedback

CNBC TV18 CNN IBN CNBC Awaaz IBN 7 IBN LOKMAT