1. Indian Economy. 2. Global Central Bank Watch. A) Bank of Chile raises rates B) Bank of Thailand raises rates. 3. Politics

Transcription

1 July 19, 010

2 Contents Page No 1. Indian Economy A) WPI monthly inflation lower than expected, but stays elevated B) Sector-wise analysis C) Core inflation D) Monetary aggregates E) Agriculture: Kharif crop update 1. Global Central Bank Watch A) Bank of Chile raises rates B) Bank of Thailand raises rates. Politics A) Bellary, Belgaum and BJP: Karnataka s big bother

3 1 Indian Economy WPI Monthly Inflation Lower Than Expected, But Stays Elevated Note: Before we look at the WPI inflation trends, let us look at how WPI inflation is computed. Year on Year (YoY): It means growth rate is calculated between the same period for different years. For instance, growth between October 008 and October 009. So if WPI was 100 in October 008 and 110 in October 009, YoY inflation for October 009 is 10%. It is calculated to compare inflation in similar time periods and avoid seasonality issues. Like in India, the festival season is mostly in September and October. So, if we calculate inflation for October 009, we calculate it based on October 008. When media reports say inflation is 10%, it is mostly a Y-o-Y number. We also get WPI-inflation for two sub-sectors (i.e. primary articles and fuel group) on a weekly basis (with a delay of a fortnight). In this case, we can also calculate Y-o-Y inflation for weekly numbers. So if the WPI index is 100 in the week ended December 6, 008 and 110 in the week ended December 5, 009, YoY inflation for the week ended December 5, 009 is 10%. Again, this is the preferred approach for reporting weekly inflation. Month on Month (MoM): It means growth rate is calculated between sequential months in the same year, like for instance September 009 and October 009. It is used to understand the trends in a given year. YoY growth rates may not show correct trends because of the base effect. Last year the WPI index increased sharply because of a rise in oil and commodity prices. Hence, MoM analysis is also important. Week on Week (WoW): In this growth is calculated between sequential weeks in the same year, like primary articles inflation between week ended December 5, 009 and November 8, 009. Just like we use MoM to understand monthly trends, we calculate WoW inflation to understand weekly inflation trends in the same year. Hence, while measuring inflation we usually use YoY changes for simplicity. However, as inflation percentage may be high or low because of the base effect we also see the week on week changes in WPI index WPI Monthly Sub-Sector Inflation (YoY, %) Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 WPI Primary Articles Fuel Group Mfd. Products Source: Commerce Ministry WPI Jun-10 Inflation Index Inflation (YoY, %) May 10 Jun 10 May 10 Jun 10 Primary articles Food articles Non-food articles Fuel products Manufacturing products WPI inflation (headline) Core inflation Source: Commerce ministry The wholesale price (WPI) index increased from 58.1 in May to 59.8 in June 010. This implied inflation for June 010 at 10.55% (YoY) -- lower than market expectations of 10.8% (as per several polls conducted by various newswire agencies). Again, we get a lower-than-expected inflation number like IIP numbers for May. Inflation was lower as market participants expected a higher figure for the manufactured products sub-sector (explained below). For April 010, inflation was revised upwards from 9.59% to 11.%. Again, inflation has been revised upwards significantly. The March 010 numbers were also revised upwards from 9.9% to 11.0%.

4 Sector-wise Analysis Primary articles: The index for primary articles increased from 99.9 in May 010 to 0.1 in June 010. This puts the primary articles inflation at 16.8% (YoY) during June 010. The index has been higher but inflation is lower on account of the base-effect. We usually analyse primary articles by looking at two sub-groups: Food and non-food articles. Actually there is a third sub-group as well -- minerals. It is not included as it does not move for many months and then suddenly changes sharply. In June it changed sharply. Food: The food articles index increased from 9.6 in May 010 to 95.. This implies food articles inflation at 1.6% (YoY). Again, inflation is lower on account of base-effect. This has led to similar movement in the overall primary articles index. The index increased due to higher prices of meat items such as beef, buffalo meat, fish and poultry chicken among others. Prices of urad, condiments and spices, maize, tea, barley and jowar too rose. However, prices of coffee and bajra declined. Non-food: The non-food articles index also increased from 8.1 in May 010 to 86. in June 010. This implies non-food articles inflation at 18.6%. The index for non-food articles increased due to higher prices of raw items like fodder, cotton, silk and rubber. Prices of oilseeds like castor and groundnut too rose. However, prices of sunflower and niger declined. Fuel group: The index for fuel group articles increased from 68. in May 010 to 7. in June 010, implying fuel group inflation at 1.%. The index increased because of the government decision to deregulate prices of petrol and diesel (more gradually) and increase prices of kerosene and LPG cylinders. Apart from these items, electricity charges increased too. However, prices of aviation turbine fuel, naphtha, furnace oil, bitumen and light diesel oil declined. Manufactured Products: The index for manufactured products increased from 19.1 in May 010 to 19.5 in June 010, implying the sectoral inflation at 6.66%. Prices of manufactured food products again declined in June 010. The food products index declined from 6. in May 010 to. in June 010. It has declined each month since reaching the high of 60.8 in January 010. The index declined on account of lower prices of sooji, sugar, coffee powder, oil cakes, gingelly oil and maida. The food products index has declined because certain products like sugar have declined by a higher percentage. It is not a uniform decline across all products. For example, prices of groundnut oil, rice bran oil, cakes & sweet roles and gur and salt, bran (all kinds), biscuits and soyabean oil have all moved up. The manufactured products index rose sharply because of a rise in prices of non-food manufactured items. Prices of textiles, paper, plastics, chemicals and metals also rose. Out of the 11 non-food manufactured sub-sectors, price rose in nine. Only non-metallic mineral products declined due to lower prices of cement. Core Inflation The Reserve Bank of India (RBI) has been focusing on this measure of inflation for its monetary policy actions. In core inflation, we exclude food items from the manufactured products sub-sector. The core inflation index has risen from 111. in May 010 to in June 010. This implies core inflation for May 010 at 7.9% -- higher than the 6.58% for May 010, signifying that core inflation has gone up again. In the manufactured products analysis, we saw that except for food products, prices in all other sub-sectors had increased, which has resulted in the core inflation rising further in June 010. Summing Up Inflation may be lower than projections, yet is very high. Moreover, the inflation figure is invariably revised upwards significantly after a lag. So, the final revised numbers may actually be in line with market projections. Core inflation continues to rise as well with increase in prices of non-food manufactured products, indicating a build-up of demand pressures. Core inflation alone is higher than RBI s headline inflation projection for March-011 at 5.5%. Therefore, both inflation and the index of industrial production (recent analysis for May 010 here: are likely to force RBI to raise rates again in the monetary policy on July 7, 010. However, with global risks again rising, high vigilance needs to be maintained.

5 5 Monetary Aggregates RBI Projection for March 011 end (YoY, in %) Growth as on Jul 010 (YoY, in %) Money supply Non-food credit 0.1 Deposits Source: RBI Data for the fortnight ended July, 010, show growth rates for money supply, non-food credit and bank deposits at 15%,.1% and 15% (all YoY) respectively. Growth in deposits has increased from 1.9% on June 18, 010, to 15% on July, 010. Growth in deposits has been declining since reaching a high of 18% on March 1, 010. Within deposits, growth in demand deposits has jumped from 16% on June 18, 010 to 0.1% on July, 010. Growth in time deposits has increased from 1.6% on June 18, 010 to 1.% on July, 010. Agriculture: Kharif Crop Update We have been covering the developments in kharif 010 regularly in our editions. It is important to keep track of this data as it helps gauge future outlook on inflation and rural incomes. Sowing continues to pick up in different parts of the country. Till June, sowing was lower in 010 compared to the same period in 009. But as of July 9, 010, sowing is higher in 010 compared to 009 for most crops, except pulses. Area sown (in lakh hectares) As per data received from states, rice has been sown in 7. lakh hectare as compared to lakh hectares on this date last year, showing an increase of Crop Rice On July 9, On July 9, lakh hectares. Coarse cereals have been sown in 58.7 lakh hectare, about five lakh hectare more. Coarse cereals Oilseeds Pulses Sugarcane Jute Cotton Source: Ministry of agriculture Bank Of Chile Raises Rates Global Central Bank Watch At its meeting held on July 15, 010, Central Bank of Chile decided to raise its policy rate by 50 bps to 1.5%. Bank Of Thailand Raises Rates Bank of Thailand raised its policy rate by 5 bps to 1.75%.

6 6 Politics Bellary, Belgaum And BJP: Karnataka s Big Bother It was party patriarch L K Advani who used the metaphor of the lotus blooming in the south, when a BJP-led combine took reins in Karnataka. He was overjoyed as the Hindu nationalist party had, for the first time in its nearly 0-year existence, managed to grab power south of the Vindhyas. But the BJP chief minister of Karnataka, B S Yeddyurappa, has had a tough time ever since he too charge in May 008. The first two major problems he faced emanated from the coastal town of Mangalore and were identified with the kind of politics practised by BJP. In September 008, this old trading settlement saw self-righteous activists attacking several churches. Sometime last year, vigilantes of a little-known outfit, Sri Ram Sene, ruthlessly assaulted young pub-goers, particularly women, in broad daylight and in full view of television cameras. While these incidents evoked angry and shocked reactions throughout the country, critics laid the blame on the emergence of the BJP as a major power in the state. They felt that the BJP s ascendancy to power in Karnataka had emboldened cultural hawks and hooligans. Of course, the BJP itself had clearly distanced itself from such organisations and their vandalism. Even as Yeddyurappa sought to erase these sour memories and tried to focus on development and international investment in Karnataka, the Bellary mining controversy, a far more serious and explosive one, erupted. The issue started with accusations of massive illegal mining of iron ore from Bellary by the Reddy brothers, G Janardhana and G Karunakara (the state revenue minister) over many years. It was said that iron ore worth anywhere between Rs 00 crore and an eye-popping Rs Picture source: NDTV 60,000 crore has been allegedly quarried by the brothers without government licence. Media exposes have alleged illegal exploitation of natural resources and tax evasion that have been continuing for years under the Reddy brothers aegis. A huge blow was dealt by the Karnataka Lokayukta, Santosh Hegde, who resigned last month citing deliberate indifference shown by the Karnataka government towards his office. Hegde has become a household name in the state by now for going after the Bellary brothers illegal activities. To top it all, state governor, H R Bharadwaj, former Union law minister in UPA-1, refused to accept Hegde s resignation, but openly sought the Reddy brothers removal from the state cabinet. As expected, the BJP slammed Bharadwaj, calling him a Congress stooge, Interestingly, even as the Left parties criticised the BJP government in the mining controversy, they also took the stand that Bharadwaj had overstepped his brief. As if all this was not enough, the UPA government at the Centre took a dramatic stand in the long-standing border dispute between Karnataka and Maharashtra. While on the face of it, the Centre s take that Maharashtra had no claim over the 865 villages on the Karnataka-Maharashtra border seems to come as relief for Karnataka, the move is expected to worsen the already fraying BJP-Shiv Sena ties in Maharashtra. It is indeed intriguing to see the UPA embarrass a Congress-led state government. But with the Democratic Front government firmly perched in Maharashtra, particularly with its junior partner NCP not in the pink of health, the move will not seriously hurt. But it will test the BJP s nerves as it seeks to balance its ties with the Sena and ensure that the Lotus does not wilt prematurely in the south.

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