RBI Raises Rates to Fight Inflation

Reserve Bank of India (RBI) raised interest rates for the 10th time since the start of 2010, extending the longest streak of monetary tightening in a decade after inflation accelerated. It raised the key lending rate by a quarter-percentage point and said its stance remains "firmly anti-inflationary," hinting at more raises to come.

The Reserve Bank of India upped its lending rate, or repo rate, by 0.25 percentage point to 7.50.

The borrowing rate, or reverse repo rate, will also rise 0.25 percentage point so it remains one percentage point below the repo rate, at 6.50%. The marginal standing facility, the upper end of the RBI's rates corridor, will be at 8.50%.

"The monetary policy stance remains firmly anti-inflationary, recognizing that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control," the central bank said in its mid-quarter monetary policy review.

“The pattern in non-food manufactured products inflation is a matter of particular concern. Besides reflecting high commodity prices, it also suggests more generalized inflationary pressures (and that) rising wages and costs of service inputs are apparently being passed on by producers along the entire supply chain," the RBI said.

The central bank kept banks' cash reserve ratio and minimum bond holding ratio unchanged.

This move of RBI could make auto and home loans expensive, with having a successive impact on EMIs too.

Thursday's (16^th June, 2011) move follows May inflation data Tuesday (14^th June, 2011) that showed a sharp 9.06% on-year rise in the wholesale price index, up from April's 8.66% rise.

The RBI has been one of the most aggressive central banks in Asia , raising rates 10 times since March 2010. The repo rate has been raised a total of 2.75 percentage points and the reverse repo rate by 3.25 percentage points in all.

But Asian and emerging market central banks increasingly face tough choices between managing inflation and encouraging growth.

For example, Chinese authorities have demonstrated a willingness to sacrifice some growth to restrain prices, as inflation accelerated to its fastest pace in nearly three years in May. Economies around the globe are under strain as the eurozone debt crisis and recent economic data in the United States weigh on growth.

India's economic expansion slowed to its lowest pace in five quarters in January-March at 7.8%, versus 8.3% in the previous quarter. Recent data on factory output for April also confirmed the slowdown.

But the RBI said Thursday that loan growth and January-March corporate profit numbers don't suggest a sharp or broad-based slowdown.

The reason for RISING INFLATION is stated as rising Crude Prices, but ECONOMICS say that PRICES can RISE only if DEMAND is rising or if SUPPLY is tightened. But unfortunately, this time the SPIKE in CRUDE OIL PRICES was witnessed due to RISING TENSIONS in Gulf Countries and then the SPECULATION.

The resultant effect is seen on ASIAN Countries, which are dependent much on CRUDE IMPORTS, resulting in increase in prices of PETROL/DIESEL/ATF/ NATURAL GAS/LPG Prices. These raising of PRICES led to the increment in other goods and decrease in Operating Income of the Corporate India.

RBI has promised to have a grip on RISING INFLATION, that too on the Cost of Growth, which may result in positive outcomes in near future.

Hence, RISING INFLATION and DECLINING GDP are co-related and are also part and parcel of an ECONOMY CYCLE. Investors should not avoid these factors but at the same time should not panic due to these factors, as every thing in ECONOMY has a Cycle and also a maturation Stage, so Investors are advised to wait for the cooling off of all these HEAT UP Prices and then GO FOR Value Buying in the Markets.

India's Inflation surges to 9.06% in May vs 8.66% in April

Inflation for the month of May rose a higher-than-expected 9.06% as against 8.66% on a month on month basis (MoM). 

 

Primary articles inflation rose 11.3% as against 12.05%. Meanwhile, manufacturing products inflation came in at 7.27% versus 6.18% and the index was up 1% (MoM). The food articles index was up 1.6% (MoM) and the all-commodities index grew 0.7% (MoM).

 

WPI fuel group inflation grew 12.32% in May as compared to April’s 13.32%, while the index was up 0.3% (MoM).

March WPI inflation rate has been revised to 9.68% as against the provisional figure of 9.02%.

This is a Good Trigger for the Central Bank (RBI) to raise the interest rates and tighten the money flow more in the economy. It will be the 10th such move form RBI since mid-March 2010.

This time the HAWKISH move of RBI will hurt the REALTY & INFRA, BANKING & FINANCE, AUTO, METAL, CONSUMER GOODS and CAPITAL GOODS Sectors the most.

RBI is going to announce its policy on 16th of June, so Markets are also waiting eagerly for the Policy with its FINGERS CROSSED.

Indian Industrial Production (IIP) growth slows for April; pressure for higher rates stays

India's industrial production grew at 4.4% in April Vs 7.3% in March as per old series. As per the new series, the IIP grew at 6.3% in April. 

The poor performance of the manufacturing and mining sectors pulled down the overall growth of industry as per the old series with a base year of 1993-94 from 16.6% in April last year.

Meanwhile, factory output in March was revised upward to 7.8% from the provisional estimate of 7.3% released last month.

As per the old series, growth in manufacturing, which constitutes about 80% of the index weight, nosedived to 4.4% in April from a high of 18% in the same month last year.

Mining also grew by a meager 2.1% during the month under review as against 12% in April, 2010.

Growth in electricity production also dipped to 6.4% in the month under review from 6.9% in the same period of the previous year.

Another area of concern was the low offtake of capital goods, whose production growth was just 2.5% in April, 2011, compared to 64.1% in April last year.

Overall, consumer goods also saw the growth rate slow to 5.9% in April from 11.9% in the same month last year, as per old series.

Meanwhile, as per the new series, manufacturing growth in April stood at 6.9 %, while mining and electricity production was up 2.2% and 6.4%, respectively.

Capital goods registered a growth of 14.5% and overall consumer goods were up by 2.9% in April as per the series with a base year of 2004-05.

The new series has 45% more items and has 2004-05 as its base year. The old series had 1993-94 as the base year.

Production trends for 100 new items, including ice cream, fruit juice and mobile phones, has been included for measuring the pace of industrial production in the new index series, which was recently approved by the government.

The new items in the IIP would also include computer stationary, newspapers, chemicals like ammonia, ammonia sulphate, electrical products like solder power systems, gems and jewellery and molasses.

On the other hand, obsolete articles like typewriters, loud speakers and VCRs have been taken off to make the series representative of the present-day industrial production and demand scenario.

India's Economic Growth Slowest Since 2009

India’s economy grew at the slowest pace in five quarters as manufacturing and services cooled.

Gross domestic product rose 7.8% in the three months ended March 31 from a year earlier, after a revised 8.3% gain in the previous quarter. That’s the slowest pace in five quarters. 

India’s inflation rate is the fastest after Russia among major emerging economies, and the Reserve Bank of India this month signaled further tightening as it raised rates for the ninth time since March 2010. 

During the quarter ending March 31 this year, growth in the manufacturing sector slowed down to 5.5 % from 15.2 % in the same quarter of 2009-10.

In addition, the mining and quarrying sector grew by only 1.7% during the quarter under review, as against 8.9 % in the fourth quarter of the previous fiscal.

Furthermore, the trade, hotels, transport and communications segment grew by 9.3% in the March quarter this year, as against 13.7% expansion in the same the period of 2010.

However, services including banking and insurance grew by 9% in the March quarter this year, compared to 6.3% in the corresponding period last year.

Farm output showed tremendous improvement, growing at 7.5 % during the quarter under review, compared to a meager 1.1% in the same three-month period last year.

Though economic expansion slowed down in the fourth quarter, overall GDP growth touched the 8.5 % mark in 2010-11, as against 8 % in 2009-10, due the smart recovery in farm output.

The agriculture and allied sectors grew by 6.6% during the fiscal, as against a meager 0.4% in the previous year.

The growth of services, including banking and insurance, improved to 9.9% in 2010-11 from 9.2% in the previous fiscal.

The trade, hotels, transport and communication segment grew by 10.3% in FY'11, as against 9.7% last fiscal, while growth of the construction sector stood at 8.1%, as against 7% in the previous financial year.

Growth of the mining and quarrying sector also slowed to 5.8% in 2010-11 from 6.9% in 2009-10.

The electricity, gas and water supply segment grew by 5.7% last fiscal, compared to 6.4% in 2009-10.

In China, the central bank has increased rates four times since mid-October. The Bank of Korea held off from boosting borrowing costs for two months after increases of a quarter point each in January and March.

India’s economic expansion is still the quickest after China among major economies, bolstered by higher earnings among the nation’s 1.2 billion people.

Consumer demand in India may wane under the impact of higher rates.

Sales at Maruti Suzuki rose 4.4% in April, the least in 28 months. Home-sale registrations in Mumbai fell 30 % in April from a year earlier, dropping to a 23-month low.

High prices are pinching consumers, who are increasingly complaining of raging inflation, which has forced them to put off non-essential purchases.

Asia’s third-largest economy may grow 8.2% in 2011 from 10.4% in the prior 12 months, the IMF said. Goldman Sachs cut its estimate for gross domestic product expansion in India to 7.8% from 8.7% for the fiscal year ending March 31, 2012, while Credit Suisse lowered it to 7.5% from 7.7%.

Growth is expected to moderate further because of rising crude oil prices as well as a sustained increase in interest rates that has forced companies to delay their expansion plans. An uncertain growth outlook in advanced economies, especially in Europe, is also clouding growth prospects in Asia's third-largest economy.

New investor category to encourage fund flow to MFs

The government plans to set up a new class of investor, Qualified Foreign Investors (QFIs), to encourage the flow of foreign capital into the mutual fund segment.

Under the proposed norms, overseas individual investors that are registered with depositories either in India or abroad can take the mutual fund route to invest in the Indian stock market.

The government is exploring the idea of allowing QFIs registered with depository participants to invest in mutual funds directly and also through a mechanism -- Unit Confirmation Receipt (UCR) system.

Under the proposed UCR approach, a foreign investor can go to depositories in his home country and place orders on custodian banks in India. The custodian banks will look into the MFs and issue UCRs against the underlying MFs. 

The proposal follows the Budget 2011-12 announcement with regard to allowing foreign individuals to invest directly in mutual funds. 

Under the proposal, the fund houses will have to ensure know-your-customer (KYC) norms before seeking investment from overseas investors. 

To liberalise the portfolio investment route, it has been decided to permit SEBI-registered mutual funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. 

The move would enable the sector to have direct access to foreign investors and widen the class of foreign investors in the Indian equity market. 

It would help increase foreign investment in stock market through the indirect route. Also the average assets of fund houses are likely to see some upswing.