Markets down on high inflation rate report

Markets down on high inflation rate report

Indian inflation soars to 3-1/2-year high

Indian inflation spiked to a 3-1/2-year high last month, partly on rising minerals prices, leading to more worries in the debt and equity markets on Friday about a near-term interest rate hike.

Government data showed inflation, as measured by the wholesale price index, was 7.51 percent in the year to July 24, up from 6.52 percent a week before and way above the median in a recent Reuters poll of 6.70 percent.

Indian inflation has not been this high since February 2001.

"More than 7 percent is really something to be worried about," said T.K. Bhaumik, senior adviser on policy at the Confederation of Indian Industry.

"The government will have to rethink the small savings interest rate as high inflation is increasing the economic insecurity of people -- particularly pensioners and those dependent on fixed-income securities for their livelihood."

The data showed the minerals index rose by 107 percent to 304.2 from 146.9 in the previous week due to higher iron ore prices, which rose 189 percent.

But India's chief economic adviser, Ashok Lahiri, remained optimistic that inflationary pressures would recede in the next few weeks due to a pick-up in monsoon rains.

"We expect inflation to come down by the middle of August. The arrival of monsoon will also help," he told reporters.

In farm-dependant India, a good monsoon helps to boost agricultural output and contain food prices.

A government statement said inflation would be under pressure in the short-term, but was expected to decline due to the arrival of monsoon rains and an "appropriate mix of government policies", though it did not elaborate on the policies.

Lahiri said higher inflation for the week ended July 24 was due to a rise in world commodity prices and a statistical effect.

He explained that last year, the index was stable until August 21, when it started rising. So from mid-August, the higher comparable figure would put downward pressure on this year's inflation, he added.


Federal bonds fell on worries that the central bank may be forced to tighten monetary policy to curb inflationary pressures in Asia's fourth-largest economy, while shares declined on worries that a possible rise in rates could choke off demand.

The benchmark 10-year bond yield jumped to close at 6.2750 percent, up from 6.1169 percent before the inflation data was released. The Bombay Stock Exchange top-30 share index shed 1.06 percent to close at 5,196.99 points.

Inflation has been steadily picking up pace in recent months because of rising fuel and commodity prices, which have tracked global trends and raised input costs for manufacturers. Analysts say those rising costs could soon be passed on to consumers.

"What this suggests is that inflationary pressures in the economy cannot be taken lightly and further reinforces the view that there will be a 50-basis-point repo rate hike by February," said Sanjeet Singh, economist at ICICI Securities.

"The inflation reading is likely to touch 8 percent in the near term as higher oil and petrochemical prices get factored."

India's bank rate, used to price loans, is at a three-decade low of 6 percent, while the short-term repo rate is 4.5 percent.

Economists in India track the wholesale price inflation data because it has a large basket of goods and information is readily available. The government uses the WPI data for adjustments to salaries and allowances.
Shares end down on inflation, oil worries

Indian shares fell more than 1 percent on Friday as traders dumped oil and technology issues amid worries over rising inflation and global crude oil prices, brokers said.

The 30-issue Bombay share index shed 1.06 percent to close at 5,196.99 points, moving away from a 12-week closing high on Thursday.

The index is down 11 percent in 2004, but it gained 0.5 percent on the week -- logging its sixth straight weekly rise.

The broader National exchange index dropped 1.3 percent to 1,633.40 points.

Trading on the Bombay exchange was heavy at 182 million shares, compared with Thursday's 175 million, while the market breadth was negative as losers outpaced gainers 985 to 738.

Clearly if inflation spins out of control, there are a lot of downstream issues that would bother markets, one of worries is that a sustained rise in inflation would lead to a hardening of interest rates. And that will eat into corporate profits.

Government data out on Friday showed India's wholesale price inflation jumped to 7.51 percent in the year to July 24 -- a level not seen since February 2001 -- from 6.52 percent a week before and 4.32 percent in late April.

Traders booked profits in technology issues, which have outperformed the broad market in the past month, with sentiment spooked by an overnight fall in the Nasdaq.

Bellwether Infosys Technologies Ltd, the nation's top listed software services exporter, shed 2 percent to 1,526.30 rupees and Wipro Ltd., the second-biggest listed exporter, fell 2.4 percent to 550.80 rupees.

Refinery stocks were pulled down by a record-breaking rally in global crude oil prices. The largely government-owned sector still lacks total freedom to raise products prices, so its margins are exposed to sharp rises in crude prices.

State-run refiner Hindustan Petroleum Corporation Ltd. dropped 2.4 percent to 320.75 rupees and Indian Oil Corporation Ltd. lost 4.5 percent to 406.65 rupees.

But cement stocks extended gains, buoyed by strong shipments reported by leading companies earlier this week. Traders said the outlook for the sector remained firm due to the improving outlook for monsoon rains over the past few days.

Grasim Industries Ltd., the nation's top cement producer by capacity, gained 1.6 percent to 1,039.90 rupees and Associated Cement Companies Ltd., the second-largest producer, climbed 1.7 percent to 257.45 rupees.

Automobile stocks were also driven up on expectations of strong demand after positive news on monsoons, which lead to higher incomes and therefore better demand among agriculture-dependent rural consumers.

Hero Honda Motors Ltd., the nation's top motorcycle maker, gained 1 percent to 452.25 rupees and Bajaj Auto Ltd., the No. 2 maker, 1.5 percent to 854.55 rupees.
How inflation effects us?

The thief called inflation
By Yassir A Pitalwalla

Every time inflation has risen in the recent past, the central government has been quick to retort that it does not expect a further rise and, in fact, expects a fall.

Yet, over the recent past, inflation has risen rather than fallen, and now at over 7.5 per cent per annum the value of the rupee
you are holding in your hand is depreciating faster than you think.

What does 7.5% inflation mean?

Simply put, it means that the Rs 100 you have today would be worth only Rs 92.5 a year hence. Therefore, if you are a saver you now need to look at investment avenues that yield at least 7.5 per cent, to ensure that the real worth of your money (what you can purchase with your money) is preserved if not enhanced.

How it affects your savings

As per the Reserve Bank of India, fixed deposit interest rates (for more than one year tenure) are currently between 5 and 5.5 per cent per annum. That means you would lose a cool 2 to 2.5 per cent per annum if you opt for this.

Fixed deposits with the post office that have become quite popular too need a closer look. The post office offers an interest rate ranging between 6.25 and 7.25 per cent per annum for deposits between one to three years respectively.

Only if you invest in a five-year fixed deposit do you earn the 7.5 per cent that ensures your Rs 100 retains its value.

Of course, that assumes that inflation wont rise anymore. As we have seen in the recent past, inflation has defied all predictions to surge ahead. Any further rise could mean even the five-year post office fixed deposit gives you negative real rates of return.

How it affects your investments

Company fixed deposits, another old investors favourite, it turns out, are not much better. If you choose a well known and highly rated company like Bajaj Auto Finance for instance, you could earn 6.5 per cent per annum, while a company fixed deposit with Mahindra and Mahindra will earn you 5.5 per cent per annum. HDFC pays individuals 6.25 per cent per annum for a five-year cumulative deposit.

Clearly, company fixed deposits are unlikely to yield you positive inflation-adjusted returns unless you are willing to take risks that you may not even get your principal back.

Investment avenues to beat inflation

Other fixed income avenues that yield a higher return include public provident fund which nets you an eight per cent per annum return tax free, or National Savings Certificate (NSC) that pays a taxable eight per cent per annum. Unfortunately, both of these involve a minimum investment period ranging from three to six years.

The six-year post office monthly income scheme too is quite attractive yielding eight per cent per annum and a 10 per cent bonus payable on maturity for those who can afford to invest for a longer duration.

Mutual fund mart

If you want liquidity and higher returns, then it appears you might have to sacrifice safety.

Most debt-oriented mutual fund schemes that you can exit and enter on any business day have posted one-year returns that range from a category average of 2.82 to 4.99 per cent per annum according to research house Value Research.

However, if you are willing to take some equity risk, then an average monthly income scheme yielded a return of 8.82 per cent for the last one year, while asset allocation funds, which try to time which asset class to invest in, earned 26.59 per cent in the last one year, according to Value Research data.

According to Value Research, diversified equity funds posted a one-year return of 55.09 per cent, while if you were willing to take sector bets then tech sector funds yielded an average one-year return of 62.58 per cent.

Of course, there is no guarantee that the past performance of any of these schemes can be repeated in the future.

Rising interest rates will continue to hit debt schemes returns, while a cut in GDP growth or the absence of amelioration in the farm sectors problems could weigh down on the Sensex.

Clearly, saving more is bad for your financial health under the new consumerist UPA government that wants you, the consumer, to spend and drive Indias economic growth forward.
We will take steps to curb inflation - Chidambaram

We will take steps to curb inflation - Chidambaram

NEW DELHI (Reuters) - Finance Minister Palaniappan Chidambaram said on Tuesday the government would take action to control inflation, which rose to a three-and-half-year high of 7.51 percent in the year to July 24.

"After extensive discussions we have agreed action can be taken in a measured manner both on the monetary side as well as on the fiscal side," Chidambaram told reporters after a cabinet meeting.

"The RBI will take action according to its own judgment on the monetary side and the ministry of finance will look at some options on the fiscal side," he said, but did not elaborate.
Inflation inches up to 7.61%

The inflation rate inched up to 7.61% for the week ended July 31 on top of the previous weeks sudden spurt in inflation to 7.51%. Since petrol and diesel prices were hiked from the midnight of July 31, the inflation rate for the week does not show the effect. Analysts expect a further increase in the inflation rate for the August 1-7 week when the wholesale price index reflects an increase in the prices of fuel and lubricants.

Finance minister P Chidambaram promised on Tuesday (both fiscal and monetary steps) to fight inflation, but these measures have not yet been initiated. The Reserve Bank of India (RBI) announced on Friday its decision to resume oneday repos (repurchase options) at a fixed rate of 4.5%. But money market operators view this essentially as a measure aimed at meeting temporary liquidity mismatch in the market rather than a step meant to soak up excess money supply in the system as a whole.

The government remains optimistic about the inflation rate declining from the middle of August, primarily as a result of a statistical effect. The sudden spurt in inflation to a three-and-a-half-year high of 7.51% for the week ended July 24 has been attributed to the fact that around the same time last year, there was a sudden dip in the inflation rate. Even the rate for the week ended July 31 at 7.61% could be partly explained by the low base phenomenon. In the comparable week last year ended August 2, 2003the inflation rate was less than 4% at 3.96%.

The inflation rate moved up from mid-August last year, and this factor is expected to bring down the rate from mid-August this year.
Inflation hits new three-and-a-half year high at 7.96 pct

India's annual wholesale price inflation surged to a new 3-½ year high of 7.96 percent in the week ended August 7 due to higher energy and manufactured product prices.

Data released by the Commerce and Industry Ministry on Friday said inflation had risen from 7.61 percent in the previous week and the rate stood at 3.89 percent in the week ended August 9, 2003.

The latest rate is the highest since it touched 8.49 percent in the year to February 17, 2001.

The government also revised the wholesale price inflation figure for the week ended June 12 to 6.58 percent from the earlier 5.89 percent.

The rise was mainly due to a 1.5 percent increase in the energy index to 278.5 due to higher prices of aviation turbine fuel, diesel and petrol following a surge in global crude prices.

Manufactured products, accounting for nearly 64 percent of the inflation index, rose 0.1 percent in the week to August 7, led by higher food prices. The primary articles index rose 0.1 percent due to increased prices of fruit, vegetables and poultry.

Stock markets, which fell by more than 1 percent on Friday, as soaring global oil prices and surging inflation in Asia's fourth-biggest economy raised fears of an increase in domestic interest rates, brokers said.

The 30-issue Bombay share index closed down 1.15 percent at 5,064.66 points, falling 0.75 percent on the week and taking losses over the past two weeks to 2.5 percent.

The marker is down 13.2 percent this year, making it Asia's worst performer.

Debt and currency markets were shut on Friday for a local holiday.

Analysts fear inflation will cross 8 percent in the coming weeks on the back of rising global oil prices, which are nearing $49 per barrel, and an expected dip in farm output due to delayed rains.

But India's chief economic adviser said he expects a government decision to cut duties on petrol and diesel and a revival in monsoon rains to help rein in inflation. The government has said it could take more fiscal measures if necessary to control prices.

"We are keeping a close watch. There is no reason for any wild expectations on inflation," Ashok Lahiri told reporters.

In farm-dependent India, a good monsoon helps to boost agricultural output and contain food prices.

India imports 70 percent of its crude oil requirement and any rise in global oil prices hurts Asia's fourth-largest economy.

India's bank rate, used to price loans, is at a three-decade low of 6 percent, while the short-term repo rate is 4.5 percent.

Inflation has been steadily picking up pace in recent months because of rising fuel and commodity prices, which have tracked global trends and raised input costs for manufacturers. Analysts say those rising costs could soon be passed on to consumers.

Economists track wholesale price inflation data because it has a large basket of goods and readily available information. The government uses the WPI data for adjusting salaries and allowances.

The government expects gross domestic product growth of close to 7 percent this year, but analysts expect the economy to expand at a slower pace due to the delayed monsoon.

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