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Inflation at 7.

82%: RBI seen under pressure to hike CRR again New Delhi: Indias inflation held above the central banks target for a third straight month, raising concerns that commercial lenders may be ordered to increase reserves for the third time this year. Wholesale prices rose 7. !" in the week ended on #$ %ay from a year earlier, after gaining 7. &" in the previo's week, the government said in a statement here on (riday. Indias c'rrent inflation rate is )totally 'nacceptable* and the central bank is ready to respond )swiftly and appropriately,* +eserve ,ank of India -+,I. governor /.0. +eddy said on !$ %ay. 1i2'idity management will be the foc's of efforts to contain demand press'res, he said after raising the reserve re2'irement for lenders, called cash reserve ratio or 3++, twice last month. )Inflation may hit do'ble digits in the ne4t few months if the oil prices and other commodity prices remain at c'rrent levels,* said +obert 5rior6Wandesforde, a senior economist at 78,3 7oldings 5lc. )9he press're will intensify to raise the cash reserve ratio and rep'rchase rate.* Inflation may accelerate f'rther as the government is likely to revise (ridays preliminary wholesale6price estimate in two months after receiving additional data. 9he commerce ministry raised its inflation estimate for the week ended on #: %arch to .$!", the highest since 8eptember !$$;, from the early fig're of <.< ". 9he +,I is targeting inflation at :.:" for the year that started on # =pril. >conomists had e4pected (ridays report to show a 7. " increase in prices in the week to #$ %ay. Inflation in =sian nations incl'ding India and 3hina is accelerating d'e to rising cons'mer demand and record commodity and energy prices, said N.+. ,han'm'rthy, an economist at the Instit'te of >conomic ?rowth in New Delhi. 3ons'mer prices in 3hina rose #$.&" in =pril from a year earlier, the fastest pace since at least #@@@. 3r'de oil prices have do'bled from a year ago and to'ched an all6time high of more than A#&: a barrel on !! %ay, raising concern Indias import costs will rise. ,onds fall declined for an eighth day on (riday on concern that rising oil prices will sp'r inflation. 9he yield on the .!;" note d'e =pril !$# this week rose #! basis points, or $.#! percentage point, to .$:" at close. 9he benchmark 8ense4 inde4 of the ,ombay 8tock >4change fell #.:7" to #<,<;@. 9he inde4 of f'el prod'cts, with #;" weight in the inflation basket, rose 7.&@" in the week ended on #$ %ay from a year earlier. 5rices of aviation t'rbine f'el rose #$". 9he man'fact'red price inflation rose 7.7&". Inflation in India is 'nderestimated as it doesnt reflect the complete pass6thro'gh of increases in petrol and diesel prices, governor +eddy said on !$ %ay. India, which s'bsidises petrol and f'el sold thro'gh state6owned retailers, raised the f'el prices for the first time in !$ months in (ebr'ary. 9he government has pers'aded cement and steel prod'cers to c't prices to help fight inflation. Bver the past two months, it scrapped import d'ties on edible oils, steel prod'cts and banned the e4port of cement, p'lses, rice, wheat and edible oil to contain prices. 9he steps will help moderate inflation in eight to #$ weeks, 5rime %inister %anmohan 8ingh said on 9h'rsday. 9he +,I on its part last month twice raised 3++, to .!:", the highest since %arch !$$#, from

7.:". 9he central bank may increase the cash reserve ratio by a f'rther :$ basis points and raise its rep'rchase rate by !: basis points before the end of the year, 78,3s 5rior6Wandesforde said. New Delhi: Describing inflation at .#" as worrisome, (inance %inister 5 3hidambaram has said that steps will be taken to moderate and reverse headline inflation. )Nobody has drawn any great satisfaction with inflation at .#". ,'t the meas'res, we have taken, have contained inflation. We are confident that we will gain mastery over this inflation and inflation will be contained over time,* 3hidambaram told reporters. )7owever, moderation depends on global cr'de oil and commodity prices. 8'rely, we are still in f'll control over the sit'ation,* he added. 3r'de oil prices, which to'ched a high of A#&: per barrel, were trading at A#!< per barrel on &$ %ay. 9he government is c'rrently m'lling how to address the iss'e. 3hidambaram said any increase in administered prices of petrol wo'ld have moderate inflationary impact in the short6term, b't its effect on prices in the long6term co'ld not be predicted as there wo'ld be c't in e4pendit're 'nder some heads as well. 7e said the C5= ?overnment 'nder %anmohan 8ingh will do its best to moderate, contain and reverse headline inflation.

Fiscal measures 3hidambaram said fiscal, monetary and administrative steps taken by the +,I and the government have contained inflation. )9here are many other co'ntries, which are not able to contain inflation at this level d'e to one or the other reason,* he added. 9he (inance %inister once again said that the cement man'fact'rers have a scope to c't prices.$$!$ )I maintain that there is scope for cement man'fact'rers to c't prices, new capacities have been added, there is no reason why they cannot afford to c't prices,* he noted. (ollowing government intervention, companies have already anno'nced +s& to +s7.: red'ction in a cement bag of :$ kg.
Prices of food articles like fruits and vegetables, spices, coffee, masoor rose, compounding worries of the government and RBI amid a slowdown in industrial growth Ne !elhi: In an indication that the price sit'ation is going to get worse, inflation for the week ended on & %ay moved to 7. &", to'ching a ;;6month high, lending increased volatility to the r'pee and bringing do'ble6digit inflation within the realm of possibility. 9his is the highest level since < November !$$; when the fig're to'ched 7.@&". Inflation based on the Wholesale 5rice

Inde4 -W5I. was 7.<#" in the week that ended on !< =pril. =s the news came in, over and above %ondays release of a si46year6low ind'strial growth of &" in %arch, the r'pee weakened to as low as ;!.@& to a dollar and ended at ;!.<<. 9he local c'rrency had its worst week since #@@7 over inflation worries and the widening trade deficit, incl'ding an oil import bill that almost do'bled year6on6year to over A .< billion in %arch. "#$R%&""'IN( -?raphic. =fter rising more than #!" in !$$7, the r'pee has fallen by some 7" this year. =nalysts e4pect inflation to not only remain high b't also to have already moved to .:" or higher, based on the fact that previo's weeks fig'res have been revised sharply 'pwards since Dan'ary. 9he gap between the provisional and final n'mbers has also been growing, with inflation for the week that ended on %arch now revised to 7.7 ", almost two percentage points more than :.@&", the provisional fig're. 9he spike in inflation, analysts say, will only make the Eob of the +eserve ,ank of India -+,I. diffic'lt, as ind'strial growth has already slowed considerably and f'rther tightening co'ld h'rt overall economic growth. In its monetary policy for !$$ 6$@, +,I raised the cash reserve ratio, the amo'nt of money banks need to keep with the central bank, to .!:" and indicated an e4pected growth of 6 .:" and an inflation target of :.:". (inance minister 5. 3hidambaram, however, told reporters on (riday that inflation wo'ld moderate once the impact of lower steel and cement prices comes thro'gh. 8a'mitra 3ha'dh'ri, economic adviser at domestic rating agency Icra 1td and a member of the 5rime %inisters economic advisory co'ncil, said the latest movement in W5I reflects a slower rise in inflation in many commodities, s'ch as edible oils and other food items. ,'t the dereg'lated part of the mineral oils basket, which incl'des aviation t'rbine f'el, has gone 'p. )3ore inflation, which is inflation e4cl'sive of food and oil, is higher in India at .7" beca'se of lack of oil price pass6thro'ghs and a slightly better food sit'ation,* 3ha'dh'ri said. =lso, he e4plained, the sharply higher revised n'mber in %arch reflected the rise in the iron and steel basket. =fter moving from !7@.< on : Dan'ary to ! 7.; on # %arch, the component for iron and steel shot 'p to &;;.# on %arch, as the price data from the prod'cers came in. It has risen slower over =pril, even falling in the latest week.8till, he said, inflation was 'nlikely to come below 7" 'ntil 8eptember. )Depending on whether we get a reasonably good monsoon, it may go down to <" in the third 2'arter b't the ann'al average wo'ld not be less than <.:".* =lleging that the policies to control inflation has failed, 5rakash Davadekar of the ,haratiya Danata 5arty, the main opposition party, said: )1ast year the government tried to control demand thro'gh fiscal meas'res b't never considered s'pply6side problems. Now the sit'ation has become 'ncontrollable.* >ven D.F. Doshi, principal economist at domestic ratings agency 3risil 1td, felt inflation wo'ld prevail above 7" )for the ne4t three to fo'r months. Its a to'gh task for +,I as it has to manage both slowing growth and rising inflation*. While Icras 3ha'dh'ri felt W5I inflation will come off its peak after the third week of %arch, as the steel price rise effect wears o't, +obert 5rior6Wandesforde, India economist at 78,3, warned of even higher inflation. )If oil contin'es to rise, there is a significant risk that inflation will hit do'ble6digits in the not too distant f't're. =nd in the short6term, the r'pee will not show the large imbalance it has seen in the past several years, while +,Is foreign e4change policy will give it a weak bias.*

=ltho'gh India has been able to keep food prices somewhat 'nder check, it has been hit by sharply rising commodity prices aro'nd the world, as investors moved from a weakening dollar to oil, metals and agri commodities. ?lobal inflation is e4pected to rise to &.7" in !$$ , posing a challenge for policy makers, as nations face one of the to'ghest years in recent history, said the mid6year 'pdate of the CNs World >conomic 8it'ation and 5rospects for !$$ . )9he food crisis is not only of great h'manitarian concern, b't is also posing a threat to social and political stability,* it said. Doachim von ,ra'n, director general of the International (ood 5olicy +esearch Instit'te, had asked governments to adopt emergency meas'res s'ch as higher food aid to the poorest, abolition of biof'el s'bsidies and e4port bans as well as help to small6scale farmers to tide over the crisis. >choing the need for immediate relief, ,rinda Farat, a member of 5arliament representing the 3omm'nist 5arty of India -%ar4ist., the biggest o'tside s'pporter for the Cnited 5rogressive =lliance government, said, )8trengthening and 'niversaliGing the p'blic distrib'tion system -5D8. will help control the sit'ation immediately. We have constantly been p'shing for e4panding the n'mber of commodities 'nder the 5D8 b't the government has not taken a single step in this direction.* inflation up at 8.2)% from 8.*2% RBI e+pected to take further action to tighten mone, suppl, ith inflation e+pected to cross -% New Delhi: Indias inflation rose .!;" in the #! months to !; %ay, above the previo's weeks ann'al rise of .#", government data showed. 9he rate was slightly below a median forecast of .!@" in a +e'ters poll of analysts. Inflation for the week ended !@ %arch was revised 'pwards to 7.7:" from 7.;". India raised domestic prices of petrol and diesel by abo't #$" on : D'ne, its biggest hike in #! years, and c't import d'ties on cr'de oil and petrole'm prod'cts to c'rb losses at its state6owned refiners and f'el retailers. >conomists polled by +e'ters e4pect the price increases to drive inflation to a #&6year high of @.!" in the week leading to 7 D'ne. +eserve ,ank of India ?overnor /.0. +eddy said on : D'ne that the central bank was ready to take reco'rse to the f'll range of instr'ments to anchor inflationary e4pectations. 9he government has c't import d'ties on a range of commodities and enforced some e4port bans to boost s'pplies and lower prices, while the central bank has sharply raised banks reserve re2'irements to drain inflation6f'elling cash from the system. 5olicymakers say they e4pect inflation to moderate in the months to come as the f'll impact of the meas'res is felt. #ie s %onal #erma. economist. /ehman Brothers. 0um1ai )Inflation this week has been boosted largely by higher edible oil prices. 9he key is to watch o't for how inflation will pan o't in the coming weeks, given the increase in petrol, diesel, 15? and =9( prices recently. We e4pect W5I to rise to aro'nd @.:" on a yearly basis for the week ending 7 D'ne.

B'r view remains that the +,I will tighten monetary policy 'sing cash reserve ratio hikes H we e4pect another #$$ basis points worth of 3++ hikes this year Hb't we e4pect the repo and reverse repo rates to be kept on hold beca'se of growth concerns.* %huchita 0ehta. economist. %tandard Chartered Bank )9he rise is pretty m'ch in line with e4pectations, b't given the recent hike in f'el prices we can see inflation going higher beyond @". Inflation still remains high and needs to be tackled, we believe the +,I may hike the reverse repo and the repo rate by !: basis points by D'ly.* Rupa Rege Nitsure. chief economist. 1ank of Baroda )9here is some moderation, b't this inflation rate has not factored in the f'el price hikes and once that happens in three weeks time inflation will cross @". %onetary tightening will contin'e f'll force. In view of growth moderation, the +,I will not to'ch the policy rates, b't 3++ will remain the preferred tool.* !2 3oshi. principal economist. Crisil. 0um1ai )9he inflation n'mbers are along e4pected lines and the press'res will start showing 'p in a co'ple of weeks when they will reflect the f'el price hike. We may start seeing inflation hitting @".* Inflation scares and emerging markets With the government using strong-arm tactics to keep inflation down, its the next government, after the elections next ear, which will bear the brunt of these measures ?oldman 8achs analyst =rE'n %'rti started the ball rolling by predicting oil prices at more than A!$$ -+s ,<;$ today. a barrel and other analysts are now falling over their feet trying to play catch 'p with him. 1egendary %I= -mergers and ac2'isitions. predator and billionaire hedge f'nd manager 9. ,oone 5ickens says that oil prices will go to A#:$ a barrel this year. Is it spec'lationJ Is it the res'lt of strong growth in co'ntries s'ch as 3hina and IndiaJ Br is the spike in oil prices the res'lt of tight inventories and a fall in s'pply relative to demand, as a recent report from the International >nergy =gency s'ggestsJ Its probably a combination of all three factors. 9hose who say that oil prices are in b'bble territory, p'shed 'p by li2'idity 'nleashed by the C8 (ederal +eserve, arg'e that 3hinas appetite for energy is well6known and sho'ld have been factored into oil prices a long time ago and mere )f'ndamentals* cannot e4plain the sp'rt from A#$$ a barrel on ! Dan'ary to the c'rrent price of aro'nd A#&$ a barrel. Bn the other hand, those who arg'e that this is a s'pply problem, point o't that s'rely the 8a'dis wo'ld have been only too keen to p'mp more oil at c'rrent prices and the fact that they havent done so is an indication of s'pply problems. ,'t the speed of the rise certainly s'ggests that spec'lative f'nds have flowed into oil. Whatever be the reason, theres little do'bt that these high prices will have an impact on both growth and inflation. 9hat concern with growth and inflation also comes thro'gh clearly in the min'tes of the last meeting of the C8 (ed. )%embers were... concerned abo't the 'pside risks to the inflation o'tlook, given the contin'ed increases in oil and commodity prices and the fact that some

indicators s'ggested that inflation e4pectations had risen in recent months,* the C8 central bank said. 9he (ed also red'ced its proEection for !$$ growth to $.&6#.!", down from the #.&6!" growth it forecast three months back. 9hat revelation took its toll on the C8 e2'ity markets and p'shed the dollar down, as the (ed ('nd f't'res signalled little or no chance of a f'rther c't in interest rates at the (eds ne4t meeting sched'led for !: D'ne. 9heres a con'ndr'm here. =ll these years weve been hearing of how the developed co'ntries have proved to be imm'ne to a rise in oil prices and several reasons have been trotted o't to E'stify why. 9he theory was that oil cons'mption as a percentage of gross domestic prod'ct has fallen, which is tr'e. ,'t another reason why high oil prices didnt matter so m'ch was beca'se growth was so strong in the economy. Now that growth is faltering, rising oil prices are a danger. >conomists who have st'died the oil shocks of the #@7$s and early #@ $s also point o't that one reason why the C8 may not face stagflation now is beca'se wages are no longer )sticky*H 'nlike d'ring the #@7$s, when heavily 'nioniGed workers were able to hike wages in tandem with inflation and th's p'shing 'p costs f'rther, they cant do that now. ,'t the problem is that inflation is being imported to the C8 on acco'nt of a weak dollar and beca'se costs are also rising rapidly in e4porting co'ntries s'ch as 3hina. =nd finally, monetary policy has been very loose to combat the credit crisis, which again can f'el inflation. 9o c't a long story short, if inflation persists -and its 2'ite possible that, if spec'lation is driving oil prices 'p, the b'bble may b'rst s'ddenly., then the C8 may not c't rates any more and the ne4t move may even be some tightening. 9hats not good news for the markets. 9he bo'nce in the markets that weve been seeing in the last co'ple of months, despite weak economic data, is almost entirely the res'lt of the (ed increasing li2'idity. D'ring the b'll r'n of !$$&6$7, there were several occasions when even a hint of higher interest rates was eno'gh to scare the markets. 9he first time it happened was in %ay !$$;, when r'mo'rs first started floating that the C8 (ed was abo't to start tightening. 3oincidentally, it was also a time of great political 'ncertainty in IndiaHwith a comm'nist6backed government coming to power and the combination of economic and political risk sent the 8ense4 reeling. 9he ne4t big fall occ'rred in %ay !$$<, when central bankers were spooked by a res'rgence of inflation on the back of rising cr'de and commodity prices. Nor was market aversion to inflation and higher interest rates a feat're of the last b'll r'n alone. %ore than a decade earlier, in #@@;, emerging markets fell sharply as the (ed tightened monetary policy and f'nds flowed back to the C8. 1ast 9h'rsday, the (ed f'nd f't'res market was pricing in a 7$" chance of the C8 central bank tightening rates by !: basis points by Bctober and a !:" chance that the rate wo'ld go 'p another !: basis points to !.:$" by the end of the year. 9he problem this time is that policy may have to be tightened even tho'gh growth is nowhere as rob'st. (or India, with a weaker c'rrency, a high fiscal deficit, rising interest rates, slowing growth, relatively high val'ations and political 'ncertainty, theres not m'ch reason for a revival of investor interest. Worse, with the government 'sing strong6arm tactics to keep inflation down, its the ne4t government, after the elections ne4t year, which will bear the br'nt of these meas'res, and inflation co'ld move 'p sharply ne4t year. 9he bears are set to be in the driving seat for 2'ite some time.

!hidambaram expects inflation to moderate "e hoped that inflation will moderate once the impact of lower steel and cement prices is felt New Delhi: Indias ann'al inflation rate, which neared " in early %ay, is e4pected to moderate once the impact of lower steel and cement prices is felt, (inance %inister 5alaniappan 3hidambaram said on #< %ay. 9he wholesale price inflation rate, Indias most widely watched meas're, rose 7. &" in the #! months to & %ay, its highest since November !$$; and above a median forecast of 7.:" in a +e'ters poll. )B'r e4pectation is that inflation will moderate. We are waiting for steel and cement price c'ts to come into force. /o' have to be patient,* 3hidambaram told reporters. )We reserve the right to take more administrative meas'res,* he said witho't elaborating. 3hidambaram also said 'nless global cr'de oil prices decline, India wo'ld contin'e to witness )pretty high inflation* in the f'el gro'p.

Inflation. go4ernment and the people

9he c'rrent phase of inflation seems to have 'ndone m'ch of the good that the C5= government created for itself thro'gh a )revol'tionary b'dget* as 8onia ?andhi p't it. 9he K9imes of India describes this whole process as Kpollonomics. 9he government obvio'sly wanted to showcase itself as a magnanimo's organiGing body which was compassionate eno'gh to call of all the money which was d'e from the farmers, which was act'ally anyway lost, b't calling it of at the most propitio's time when elections are d'e wo'ld have res'lted in electoral and political gain for the government. ,'t now all that Kgood work -of a few weeksLL. may not 'ltimately give the government the edge that it needed for the ne4t election. 9he ,D5 and 35I -%. are already threatening a nation wide agitation in second week of =pril if prices are not 'nder control by then. Whether the government will still win the election or not is a different matter, let 's look at the phenomena of inflation that we are facing at the moment. (irst of all it is a global phenomenonM there is a E'mp in the food prices in the world market. 1et 's compare o'r inflation rate with the co'ntry we always like getting compared with for every reason, 3hina. 3'rrently 3hina is growing at ##.;" and the inflation has hit a #! year high of .7", now thats something to scream abo't, )inflation nearing @"* almost so'nds like )I have p't on !$ kgs in one month and I have to lose the same in #: daysL* 9here is no do'bt that bringing down the inflation rate from s'ch a high rate not only takes a little time b't it also affects the growth rate. We have already seen a drop in o'r economic growth rate to .7" from the high of @.;" in !$$7. ,asically there is a clash between these two obEectives of growth and maintaining price stability, b't with both these fig'res going to their worse end we might have to face stagflation. 8tagflation was a term employed by the s'pply side economists in the 7$s, to describe the then e4isting economic crisis, and moreover they-s'pply side economists. held that these crisis had res'lted beca'se of neglecting aggregate s'pply in the economy and only foc'sing and framing demand managed polices which were advocated by Feynes. 7owever, stagflation is not a properly defined term in economics, we know that when there is negative growth in two 2'arters contin'o'sly it is called recession, b't there is no so s'ch barometer which yo' plan pl'g in an economy and determine whether stagflation e4ists or not. Now lets look at the meas'res taken by the government to tackle the problem of inflation. (irst and foremost it m'st be mentioned that this problem will not be short6lived, as the latest report of the =sian Development ,ank says that inflation will be a reg'lar problem with the =sian co'ntries. ,'t the government 'ndo'btedly has to do something for two reasons: a. 9o ens're the welfare of the people b. 9o win the ne4t election -I cant stop talking abo't itL.

8o lets see what the government has done, first it has banned the e4ports of vario's commodities incl'ding rice, ne4t it has abolished import d'ties to increase imports and increase s'pply of goods in the domestic market, then it has banned forward trading and recently it was reported that it is also taking meas'res to control prices of cement along with food articles by importing cement from 5akistan at +s#:$6#7: for a bag of :$ kg -it is sold at !!:6!;$ in the northern states.. Now all of these meas'res consist the s'pply side polices, along with that there are some monetary and fiscal polices also that he government might 'ndertake, like increasing interest rates -its act'ally done by the +,I. tight money s'pply to prevent demand p'll inflation and appropriate fiscal management. =part from this the government also considers increasing food s'bsidies to bring abo't temporary stability in prices. 7owever, while all these policies are being implement it is interesting to note that c'rrently many co'ntries are facing the problem of inflation, therefore they are also implementing similar s'ch policies if not identical, what happens thenJJ If o'r government decides to ban e4ports and abolish import d'ties to increase s'pply, it can happen that other co'ntries are doing a similar thingM 8a'di =rabia is already implementing these policies. 8o how then does the government proceed with this problemJ Im not saying this is happening per se at the moment, b't c'rrently with many co'ntries facing a similar problem this is a theoretical possibility. It is needless to say that the above policies will affect growth and in t'rn the stock market b't this is inevitable, controlling inflation at the moment is of 'tmost importance, all the national newspapers can wait for a few months to write their favorite headline )?rowth back on track* and )8ense4 like never before*. 5ossi1l, related posts: 6automaticall, generated7 N N N N Inflation >conomic growth and 5rice stabilityHbasic information 9he 3hallenges for the New 5resident 9he 3entral ,anks War on 9he %iddle 3lass

=pril &, !$$ 6 5osted by =seem Naphade O =dam 8mith, ,ombay, ,'dget, ,'siness, 3orporate, Democrats, >conomic growth, >conomics, >conomist, >conomy, (inance, (inancial markets, ?overnment, 7ealth, Ideas, India, Indian >conomy, Indian ?overnment, D'stice, Feynes, 1aw, %edia, %onetary policy, %'mbai, Bpinion, 5olitics, 8ocial iss'es, 8ocial problems, 8ociety, 8tock market, C5=, capital, college, common man, debate, hyperinflation, Eo'rnalism, stagflation O O ; 3omments

) Comments 8
=ssem, /o' are mi4ing the two 6 Feynes and (riedman. Feynes emphasised on fiscal policies and (riedman on monetary policies. (riedman wo'ld have never been happy abo't the s'pply side interventions by government. 7e was anti government and advocated free markets in a big way. 7e always said inflation is always and everywhere a monetary phenomenon and wo'ld have been happy with the 3entral ,ank intervention. Feynes time was different and inflation was never a concern b't growth was. 8o he relied on fiscal policies for p'shing growth. =nd Feynes has been misinterpreted many a times.

(or fi4ing inflation we need n'mber of reforms in the r'ral economy. Btherwise all these meas'res are short term and inflation wo'ld keep revisiting.

Comment by Meenu | April 4, 2008

Inflation hits record high in India

India -I,9imes.6 9he wholesale price inde4 -W5I.6based inflation rate has hit a three6year high of seven percent for the week ended %arch !! as against <.< percent in the week before and <.:; percent a year ago, raising fears that India might be heading for an economic slowdown 'nless the government takes immediate steps to c'rb the rise in prices. =ccording to the latest government data, prices of fr'its and vegetable, p'lses, cereals, eggs, meat and fish have gone 'p, while condiments and spices were cheaper. 9he inde4 for minerals gro'p E'mped & .! percent on week, p'lled 'p by a ;< percent increase in iron ore and a :7 percent rise in steel ingot prices, the government data said. =mong ('el, 5ower, 1ight and 1'bricants category, prices of f'rnace oil increased by two percent. In the man'fact'red items category, s'nflower oil shot 'p by nine percent, vanaspati by fo'r percent while b'tter, m'stard oil, s'gar and gro'ndn't oil became e4pensive by one percent each. =t the same time, prices of ghee and cocon't oil decreased by # percent each. >lsewhere, electrode prices E'mped 'p by #; percent, steel ingots -plain carbon. by :7 percent, forging by !! percent, cast iron casting by fo'r percent and Ginc by three percent. 3ar chassis -assembled. moved down by one percent while lead and Ginc ingots were down by three percent. (or the Indian cons'mer, inflation spells bad news as not only the prices of vegetables, cereals and vario's man'fact'red goods wo'ld contin'e to rise b't also getting loans wo'ld become to'gher if IndiaPs central bank, the +eserve ,ank of India -+,I. decides to tighten monetary policy to rein in inflation. =ccording to market analysts, the markets were gripped with concerns on (riday that following

the rise in inflation, f'rther stringent monetary meas'res, incl'ding a hike in 3ash +eserve +atio -3++., co'ld be on anvil. = hike in 3++, which is the rate of amo'nt all the commercial banks need to maintain with the central bank, will affect the market as it s'cks o't li2'idity in banking system, the analysts said. 7igh inflation co'ld prompt the +,I to take tight monetary meas'res, like raising short6term lending and borrowing rates and s2'eeGing money s'pply in its ann'al credit policy sched'led to be anno'nced on =pril !@, the analysts said. =ccording to D.F. Doshi, chief economist, 3risil, while monetary policy takes time, fiscal meas'res wo'ld have a 2'ick impact in taming inflation tho'gh price press're is likely to contin'e in the short term. Q5rice controls are not a good idea. It clearly shows the governmentPs desperation in c'rbing inflation,Q Doshi said, noting media reports which stated that the government is also contemplating imposing price controls on vario's essential cons'mer and ind'strial commodities if the slew of meas'res taken to contain inflation do not yield the desired res'lts. QIt looks like there has been some 'pdation of the past prices and that is why we are seeing this kind of E'mp in the price inde4,Q said =. 5rasanna, chief economist, I3I3I 8ec'rities. QI wo'ldnPt be s'rprised if we see a 3++ hike today itself,Q said 5rasanna. Q,'t the flows have to s'pport the action by +,I and with 'ncertainty in e2'ity markets right now, the flows are not as strong and that is probably why +,I may not immediately go for that kind of an action.Q Q5robably once the capital flows pick 'p, maybe that will be a more s'stainable kind of strategy. 8o immediately for signaling effect, some kind of monetary action is needed,Q he said. 7owever, Indranil 5an, chief economist at Fotak %ahindra ,ank feels that d'e to the non6 transparent way in which the re6pricing and the sort of lag effect which is seen in certain items that have been incorporated into the inflation n'mbers, the broad range comes to <.:$6<.@: percent. QI think inflation has been a concern and the concern is global, the inflation is more of imported rather than the Indian one. ?lobally soft commodity prices have shot 'p by something like 7$6 #$$ percent in the last two6three months which is ca'sing lot of disr'ptions all over the world and India is in fact, a part of that problem,Q said Fetan Farani, vice president -research., Fotak 8ec'rities. Q=t 7 percent it doesnPt a'g'r well for the co'ntry as it wo'ld eat into growth. ,'t, the concern lies in whether growth will be sacrificed for inflation control. Whatever monetary meas'res we take for inflation control, they will not have m'ch of an impact beca'se the s'pplies are constrained,Q Farani said. =ccording to Farani, inflation is a s'pply side problem that cannot be solved in months. QIt will take years for this kind of problem to be solved. 9he rate of change of inflation can be higher or

can be lower, b't the real increase in s'pply wo'ld take years to come. If one looks at the world food stock, itPs almost at a 7$6year low and prices are at an all time high. 8o itPs something which is scary all over the world, itPs not only in India,Q he said. QIndia is still having relatively moderately low inflation than the global inflation. If one looks at 3hina, 9aiwan or anywhere in the C8, inflation is m'ch higher than what it is in India. /es, 7 percent is a scary one beca'se of base effect and also d'e to some increases in iron ore and other prices, b't what we believe is that the worst is behind 's. 9hings can only get better and improve from here on,Q he added. 5hilippine inflation accelerated at <.; percent from a year earlier, the fastest pace in !$ months in %arch, a report showed. 3hina, Indonesia and 5akistan all have inflation rates of more than percent. 8ri 1ankaPs was !&. percent in %arch. Q9here is 'nlikely to be any tightening on the monetary side. 9here maybe a tightening thro'gh the fore4 side where the central bank allows the r'pee to appreciate and therefore that tightens domestic money s'pply to some e4tent. ,'t we really do not e4pect a 3++ hike or an interest rate hike at this stage. =nd that is beca'se while inflation is scary and inflation is likely to get scarier if yo' look at last yearPs trends and the base effect, we do not see any respite for high inflation for the ne4t three months or so,Q said 8eshadri 8en, strategist, %ac2'arie 8ec'rities. Q9his is s'pply side6led inflation, interest rates have already gone 'p, we are in a sit'ation where the economy is slowing and the 'ncertainty over capital flows is very high. We think that the +,I will wait and watch in this sit'ation and not raise 3++ or raise domestic interest rates, b't prefer to act thro'gh the c'rrency side and see what happens. If it still does not come down, maybe later in the year they may look at tightening if at all,Q he said. +obert 5rior6Wandesforde, senior =sian economist, 78,3 7oldings, said there is a chance that W5I6based inflation o'ght to be at least percent over the ne4t few months, even if oil and other commodity prices do not contin'e to rise. QIf they do peak, it will be somewhat higher than that. 8o, it is going to get worse before it gets better,Q he said. Q= lot of these commodity prices are driven by normal f'ndamental factors. 8pec'lative activity by its very nat're is e4tremely hard to predict. I have come 'p with an percent W5I forecast as commodity prices remain at the c'rrent levels. If they go higher then clearly W5I inflation is going to go higher and if they come lower then the reverse will be tr'e,Q he added. QWe e4pect that the +,I will hike rates in =pril, instead of leaving them 'nchanged, following the r'n6'p in inflation. 9he central bank will have no option,Q said 9'shar 5oddar, an economist at ?oldman 8achs ?ro'p Inc. in %'mbai, in a research note. QWe also e4pect the central bank to enco'rage the r'pee to gain to c'rtail prices.Q =ccording to 5oddar, Q9he c'rrent spike in inflation is being ca'sed primarily by higher global commodity prices in agric'lt're, f'el and metals feeding thro'gh to domestic inflation.Q 7owever, there are many who feel that raising interest rates is not the sol'tion beca'se of

concerns abo't slowing growth. QI wo'ld e4pect interest rates not to be raised at this time,Q said 8hashanka ,hide, chief economist at the National 3o'ncil of =pplied >conomic +esearch in New Delhi. Q8imply beca'se there is also concern with respect to growth. 9here may be other meas'res so that there is no e4cessive growth in li2'idity and money s'pply.Q =ccording to 1.0. 5rasad, chief c'rrency trader at Ind'sInd ,ank in %'mbai, the central bank might not raise interest rates beca'se that co'ld h'rt companies. Q+aising interest rates is a sol'tion, b't it might hit companies hard,Q 5rasad said. QI think it will wait and watch to see what happens to inflation after the government took the fiscal meas'res recently.Q

Inflation ill take time to soften. sa,s go4ernment

New Delhi, =pril ; 6 =s inflation s'rged to a three6year high of seven percent for the week ended %arch !!, the government (riday said meas'res taken to c'rb the price6rise will take some time to take f'll effect. (rom the office of 5rime %inister %anmohan 8ingh to =gric'lt're %inister 8harad 5awar and (inance %inister 5. 3hidambaram to 3ommerce %inister Famal Nath, there was optimism that inflation will be contained, albeit with a time lag. P9he government will take more fiscal meas'res, if needed, to check inflation. It will take some time for government meas'res to have positive impact on the price rise,P an official in 5rime %inisterPs Bffice said. P=ll o'r efforts are being coordinated with vario's ministries, the central bank and the 5lanning 3ommission to ens're that the hardship faced by the common man is moderated. It is the governmentPs top priority now,P the official added. 5lanning 3ommission Dep'ty 3hairman %ontek 8ingh =hl'walia echoed a similar view and said that the meas'res taken by the government, like d'ty c'ts essential commodities and ban on e4port of rice, wo'ld have an impact on inflation. P9he government will contin'e to keep vigil on the price rise. It will take some time 6 a month or so 6 for the meas'res to show res'lts in terms of moderating inflationary press'res,P =hl'walia told reporters here. 9he co'ntryPs ann'al rate of inflation shot 'p to a three6year high of seven percent for the week ended %arch !!, from <.< percent for the week before, d'e to higher prices of essential items s'ch as vegetables. 9he inflation rate based on wholesale price inde4 was r'ling at a #&6month high d'ring the previo's week, as per data released by the commerce and ind'stry ministry here (riday. 9he statistics f'rther showed that prices of minerals shot 'p & percent in E'st a week between

%arch #: and %arch !!, while vegetables were costlier by as m'ch as ;.@ percent. P9he overall softening of prices will take some time,P said =gric'lt're %inister 8harad 5awar, even as Ind'stry hoped the corrective meas'res wo'ld yield res'lts soon and bring down prices of essential commodities to manageable limits. P= few more steps sho'ld also be taken by the +eserve ,ank of India to c'rtail interest rates, as also ens're s'fficient li2'idity to India Inc,P 0en'gopal N. Dhoot, president of the =ssociated 3hambers of 3ommerce and Ind'stry -=ssocham., said. 9he government also iss'ed a fresh warning (riday to those who have been stoking inflationary press'res and said containing price rise was the top priority for the r'ling Cnited 5rogressive =lliance -C5=.. PWe will not hesitate to take the strongest possible meas'res, incl'ding 'sing some of the legal provisions we have against hoarding,P 3ommerce %inister Famal Nath said on the margins of a to'rism event in 8ingapore (riday. 9he cabinet committee on prices %onday decided to impose a complete ban on the e4port of non6basmati rice. It also allowed all edible oils to be imported at Gero c'stoms d'ty. 9he government also decided to contin'e the ban of the e4port of lentils for one more year from 9'esday, while c'stoms d'ty on b'tter and clarified b'tter was red'ced from ;$ percent to &$ percent.

Inflation to ease in four months: 0ontek

9h', D'n : $&:!& 5% New Delhi, D'ne : -59I. 5lanning 3ommission Dep'ty 3hairman %ontek 8ingh =hl'walia today said inflation wo'ld ease in ne4t fo'r months d'e to vario's meas'res taken by the government, even as petrole'm price hike wo'ld add $.: per cent to the rate of price rise. =hl'walia also said that economy is on the way to achieve per cent target, and this wo'ld not be affected by increase in prices of petrol, diesel and 15? from today. QIt -inflation. wo'ld depend on the world prices, b't it wo'ld be lower than the c'rrent level fo'r months down. 9he direct effect of what has E'st been done -petrole'm price hike. will probably be abo't $.: per cent. ,'t if the other meas'res we have taken, that start bringing down inflation, I hope it will not go to do'ble digit,Q he told reporters here. 7e said the anti6inflationary meas'res that the government has taken will certainly bring inflation 'nder control. QI believe it -inflation. wo'ld be lower than the c'rrent level. It certainly wo'ld be lower than what it co'ld have been otherwise. Bnly thing is we will have to be patient.Q =hl'walia said he does not agree with the view that by not increasing the f'el prices, inflation co'ld be controlled. Q/o' might have kept f'el prices a little lower, b't by financing this thro'gh oil bonds, other

li2'idity inEections wo'ld have created a bigger inflation fo'r months down.Q 7e said the move to increase petrole'm prices wo'ld not derail the ?D5 growth. Q>ight per cent growth is on the target so far. 9ho'gh it is lower than last year, it is a fantastic growth rate. >ight per cent will not be affected,Q he said. (arm sector growth rate, which stood at ;. : per cent d'ring !$$76$ , will not be affected by these meas'res, =hl'walia added. 59I.

&o India %hould Com1at Inflation 5osted 1, B # 2rishnamurth, on 9pril **. 2::8 ;:** 90
Indian inflation has E'st hit a &6year high of 7.;#". We can take comfort from the fact that many of o'r neighbors are faced with !$"M even 3hina has reported an ##6year high of .7". ?lobal trends are cited as the primary reason for the present sit'ation. 9he I%( has reported that food prices in (ebr'ary were <:" more than in !$$:M metal prices were 'p by 7$" since !$$: and petrole'm prod'cts have shot 'p by over #7:". = b'oyant economy, shortfall in prod'ction of several goods, sky6rocketing cr'de prices, and the diversion of food crops for bio6f'el have all contrib'ted to rising prices. =lready the attention6grabbing ta4 c'ts and the massive C8A#: billion write6off of farm loans anno'nced in the b'dget have paled into insignificance. 8everal states have elections sched'led for this year and election to the Indian 5arliament is E'st a year away. Bne political party has already la'nched an agitation against rising prices while the left parties, who s'pport the government from o'tside -a'thority witho't responsibility., have threatened to la'nch an agitation on =pril #:. =s a knee6Eerk reaction, the government has anno'nced that )all fiscal, reg'latory and s'ppl6 side meas'res to rein6in inflation wo'ld be taken.* In other words, too m'ch rhetoric, too little s'bstance. It is well known that any monetary meas're wo'ld take at least 6#$ months to show res'lts. Import d'ties have been c't on a few prod'cts. 8imilarly, e4ports of certain commodities have been banned. 9hese are 'nlikely to have m'ch impact R when import d'ties are c't, e4porters in other co'ntries invariably increase prices, th's ne'traliGing the effect of lower d'ties. 9he government finds itself in a 3atch6!! sit'ation. =cc'stomed as we are to reasonably high growth rates, any effort to red'ce cons'mptionSdemand 66 s'ch as by increasing interest rates or the cash reserve ratio 66 may have an adverse effect on growth, alienating significant sections of society, something that co'ld be fatal in an election year. 9he 5'blic Distrib'tion 8ystem has virt'ally collapsed and the aven'e that was available at least in theory to protect v'lnerable sections of society has been lost. 5oliticians contin'e to make tall and 'nrealistic promises. =s an e4ample, the 8o'th Indian state of Farnataka, d'e to go to the polls ne4t month, is witnessing a spate of pop'list anno'ncements. Bne political party has promised rice at ! r'pees per kilogram -abo't !.& cents per po'nd. and free 90 sets to <.: million people of the state. Where will the money come for s'ch ill6conceived and p'rely vote6gathering meas'resJ Bne can be certain that other political parties will make even more e4otic promises. What sho'ld the government doJ We need less government and more governance, partic'larly e6governance. 5'blic e4pendit're

has gone 'p from #$ billion r'pees in #@:$ to &;$$ billion r'pees in !$$7. 9he 8i4th 5ay 3ommission s'bmitted its report very recently. It has recommended a ;$" increase in the salaries of &.: million federal government employees that will also benefit ;: million state6level employees, while conveniently ignoring &7: million people who work o'tside the government. While no one wo'ld begr'dge government officials a fair salary, the related recommendations like downsiGing and fi4ing acco'ntability have been ignored time and again. It is therefore not s'rprising that one economist has called this )9he 5rey 3ommission.* 9he 3entral ,ank sho'ld stop artificially maintaining the r'pee at a certain level. 1et the r'pee have a free float. It is likely to appreciate -by as m'ch as #$". in a few months. = stronger r'pee wo'ld mean cheaper imports. Cnfort'nately, it wo'ld also mean fewer earnings for e4ports. 9he e4port lobby has enEoyed the benefits of a weak r'pee long eno'gh. 5erhaps it is time for some payback. 1et Indian b'siness find other dimensions of competitiveness. 9he most v'lnerable sections of society who are mostly in the 'norganiGed sectors need some form of protection. 5'blicSprivate partnerships that do away with opport'nistic intermediaries seem to be the only way to reach o't to these sections of the pop'lation. T 9here is an 'rgent and crying need to improve agric'lt'ral prod'ctivity and ens're a fair price to the farmer thro'gh disintermediation. B'r agric'lt'ral prod'ctivity is E'st abo't :$" of 3hinas. 9he architect of the co'ntrys green revol'tion, Dr % 8 8waminathan, has made several pragmatic recommendations. 8ince he is no longer in a position of a'thority, he has few listeners. T = significant factor in the spiraling of prices in sectors like real estate, and the hoarding of commodities for spec'lative gain, can be attrib'ted to the parallel economy that is estimated to be at least as large as the economy itself. <$ years of platit'des have failed to prod'ce any res'lts. 9he time for drastic action is now. DemonetiGation co'ld be one sol'tion. 7ow abo't a new Indian r'pee with effect from Dan'ary # !$$@J If the initial val'ation is kept at :$ e4isting r'pees to # new Indian r'pee, we wo'ld start with a strong c'rrency, while red'cing the physical 2'antity in circ'lation by a factor of :$. ,ank acco'nts wo'ld be a'tomatically converted. = certain amo'nt of cash co'ld also be allowed to be converted. =ny 'nacco'nted money co'ld be bro'ght into the mainstream, as a one6time meas're, by levying a s'itable ta4 -say :$".. 9his re2'ires political co'rage b't has the potential to do wonders for the economy. (inally, tho'gh not related to rising prices, the civil n'clear cooperation deal between the India and the C8 is as good as dead. 9he government dare not risk the prospect of having to face an early election by p'shing the deal thro'gh. 5ostponing it by a year a'tomatically means having to deal with a new C8 administration that may not be as enth'siastic as the present one to see the deal becoming operational.

India: <Inflation ma, come do n in ; months<

57D 3hamber of 3ommerce and Ind'stry 657D33IPs s'rvey on Indian ind'stries is of the view that it will take at least < months for inflation to come down to the comfort level of ;6 ;.: per cent in spite of monetary, fiscal and other s'pply side meas'res taken by the government. 9hese are the findings of a 2'ick s'rvey carried o't by the 57D 3hamber for 'nits located in

7aryana, 5'nEab, +aEasthan, %adhya 5radesh, Cttar 5radesh and Delhi. 9he s'rvey revealed that inflationary e4pectations in the economy are high, not only on acco'nt of global economic imbalances b't also beca'se of systematic dist'rbances in the domestic economy. Indeed, with the world cr'de oil prices soaring to a high of A#&: per barrel, almost all the respondents e4pect a f'rther rise in petrole'm prices. 9he present policy of cross s'bsidisation, as per the s'rvey, is 'ns'stainable and petrol prices wo'ld have to rise in response to the mismatch in demand. ,esides, with the election season E'st ro'nd the corner, a maEority of the corporate -aro'nd @$ per cent. felt that the government wo'ld 'ndertake people centric programs which wo'ld lead to an increase in p'blic e4pendit're. 9his wo'ld adversely affect the government finances, enhance government borrowing and conse2'ently impact prices. 9he possibility of a f'rther rise in international commodity prices cannot be r'led o't, according to ind'stry. Bpinion is, however, divided abo't the impact of the implementation of the 8i4th 5ay 3ommission on prices. =ro'nd :$ per cent felt that the implementation will entail a s'bstantial cost to the e4che2'er and f'rther f'el inflation in the co'ntry. Ind'stry also cites past e4perience to show that there wo'ld be some impact on prices, tho'gh with a lag effect, once the commission report is implemented. 7owever some 'nits feel that there are other pressing factors which wo'ld rigger inflation in the short r'n. 9hese incl'de increased inflow of (DI, portfolio investment and remittances. 9his wo'ld necessitate +,I to sterilise the infl'4 of foreign e4change with matching ind'ction of r'pees in the market thereby e4erting inflationary press'res on the economy, 'nits feel. Despite this, ind'stry is hopef'l that the steps taken by the government wo'ld s'cceed in bringing down inflation from the c'rrent level. In fact, <& per cent of the respondents felt that monetary and fiscal meas'res initiated by the government wo'ld event'ally help to bring down the inflation.


ill 1enchmark 1ond ,ields react to inflation=

,anks have been the big 'nderperforming space over the last many weeks on several fears, interest rate fears. Inflation contin'es to be high and bond yields are heartening. Anand&datesel=2

Investments, ID(3 %( said that the c'rrent negatives are priced in at the e4isting market levels. 7e e4pects inflation to to'ch @"6@.:" levels in the near6term. 7e sees more supply of oil and
fertilizer bonds via auctions and issuances. He anticipates yields to inch upwards.

%eanwhile %,N +ao, 3%D of 3anara ,ank said that the =vailable (or 8ale -=(8 sec'rities. is seen at #.:". 7e said that the hardening yields may not affect the bond portfolio significantly. 7e feels that there is ample li2'idity in the system. Inflation however, remains a concerns he said. +ao believes that the inflation wo'ld come down in the medi'm term. 7e e4pects a minim'm growth rate of .:" for c'rrent year for India. $+cerpts from CNBC>'#*8<s e+clusi4e inter4ie ith 0BN Rao and Ra?u4 9nand: U: What is yo'r estimate of where the benchmark bond yield can go to in this c'rrent environmentJ 9nand: 9he moment'm clearly is to the 'pside. We are at abo't .!!" or thereabo'ts on the ten6year. 9he markets have pretty m'ch priced in the inflation going to abo't somewhere between @ and @.:$. 9he c'rrent negative seems to be priced in at the e4isting levels. ,'t the other problem really is the fact that one is going to see increased s'pply either thro'gh straight forward government bond a'ctions or thro'gh the iss'ance of fertiliGer and oil bonds. I think it is clearly the s'pply concern, which is a bigger problem. Inflation will probably go to @6 @.:$ going forward. Bne can also see the base effect that will kick in from early %arch of ne4t year. 8o I think one co'ld path inflation ass'ming that commodities behave themselves over the ne4t three6si4 months. 9he concern really is what is happening on the fiscal and that will contin'e to keep the markets a little nervo's. U: If bond yields contin'e to inch 'p, what does it do to yo'r treas'ry portfolio specificallyJ Rao: Bver the last few years 3anara ,ank and all the banks did anticipate the inching of the bond yields. %'ch of the portfolio has been held to mat'rity. 3anara ,anks d'ration with respect to the =vailable (or 8ell is at aro'nd #.:". I am s're that other banks are in a similar sit'ation. 9hat being the case, it is not likely to significantly impact the val'ation of the bond portfolio. ('t're investment, no do'bt is a good opport'nity. ,ank will increase yields deals b't with respect to depreciation I do not see too m'ch of an impact. U: (or the rest of this year do yo' think this will more or less remain the trend where yields keep hardening, and what are yo'r e4pectations abo't what the +,I might do in the ne4t policy meetJ 9nand: We anticipate yields to contin'e to inch 'pwards on the back of increased s'pply from the government of India. 9he +,I is e4pected to act in the ne4t few weeks or probably in the ne4t credit policy to manage inflationary e4pectations. It has got vario's tools in its ambit, a 3ash +eserve +atio -3++. hike or a +epo rate hike, increased iss'ances of %arket 8tabilisation 8cheme -%88., appreciating r'pee and so on so forth. I think it is going to be a combination of all fo'r and the markets have already priced that in. 9he markets also recogniGe the fact that growth is clearly a concern. 9he II5 n'mbers the last three6fo'r months have clearly seen signs of weakness. 9he weakness within the cons'mption space is d'e to higher interest rates. 9he +,I is clearly playing a balancing act between growth and inflation. 8o yes, one will see some sort of meas'res

b't it is going to be a sledgehammer sort of event, which will try and p'sh yields 'p significantly. U: 9here have been m'ltiple concerns for the banking ind'stry and not E'st whats happening with bonds yield, b't the li2'idity environment right now, the impact on margins and of co'rse whats happening on the Non65erforming =sset -N5=. front. 9o yo'r mind what is the big challenge this year for the banking 'niverseJ Rao: 9here is ab'ndant li2'idity. 9his year saw the highest li2'idity in the economy as compared to the previo's years. %ore than &#" of the deposits were invested by the banking ind'stry as on %ay &$. D'ring the past few weeks +,I has been absorbing li2'idity from the system to an e4tent of abo't !@,$$$6&$,$$$ crore. Deposits on /ear on /ear -/o/. basis are still increasing at aro'nd !;". 8o I dont see m'ch of a problem coming on the li2'idity side especially on the domestic front. Inflation definitely is a matter of concern for all of 's, it had started picking 'p from December. ,'t with all the meas'res taken by the ?overnment of India and the +,I inflation will come 'nder check. 9here no do'bt wo'ld be an immediate sp'rt in inflation with the f'el price hike, b't thats going to be temporary. Bnce that is absorbed and the d'st settles down, inflation sho'ld also come down. N5=s also have been very low. Inflation is not a reflection of the economy. Infact, its more of e4ternal factors like the cr'de prices and the international food prices. 9he domestic economy has been doing e4tremely well and will contin'e to do well. 9his year we wo'ld see a minim'm growth rate of abo't .:". 8o I dont see any s'bstantial sp'rt in the N5=s also. U: Whats yo'r rate o'tlook in this c'rrent environment, given what the +,I is doing with monetary policy and is likely to do going forward, is it conceivable that in the ne4t &6< months interest rates head higher for p'blic sector banks like yo'rsJ Rao: If yo' look from the demand6s'pply position, the deposit growth had been very rob'st last year. ,anks had been able to meet their credit re2'irements. 9his year also the deposit growth has been rob'st. 8o if yo' look at the s'pply6demand sit'ation there wont be press're on deposits as of now. 9he only factor that may have an impact on the interest rate is inflation. ,'t with all the steps taken by the government and the +,I, inflation is likely to be moderated despite the sp'rt d'ring the first 2'arter and within the ne4t few months it sho'ld come down. While the short6term interest rate may be slightly alleviated, the medi'm6term interest rates sho'ld no go 'p m'ch higher. U: 7ow yo' see this entire rate environment and bond environment affecting e2'ity market performanceJ 9nand: I think the headwinds from higher inflation, higher interest rate e4pectations are clearly weighing on market at this point in time. 9he depreciating r'pee is also not sort of helping at this point. 9he global environment is s'ch that on does not really see a great deal of this being p't on at this point in time. 8o these headwinds will contin'e for sometime and it wo'ld be a little naive to believe that these will go away in the ne4t fifteen days or ne4t month or thereabo'ts. 8o on has to E'st bear it for sometime

(o4ernment has taken 4arious measures to control inflation:

5'd'cherry, D'ne # -=NI.: (inance %inister 5 3hidambaram said on 8'nday that liberalisation of imports, banning e4ports and a c't in e4cise and c'stoms d'ties are among the steps taken by the Cnited 5rogressive =lliance -C5=. ?overnment to control inflation in the co'ntry. 7e said rising inflation d'e to the high global price of cr'de oil, was a ca'se of concern. Q=n 'nprecedented sit'ation is now being witnessed on the price front,Q he said. 9he government is f'lly committed to control price rise and s'ggestions were welcome to inEect more meas'res to keep prices on hold, he said, addressing 3ongress party workers at the 5radesh 3ongress 3ommittee -533. office on his one6day visit to 5'd'cherry. 7e said the economy has grown by nine per cent, which had been Qo't of bo'ndsQ for the erstwhile ,D56led ND= government, and added that the r'ral poor have gained from several anti6 poverty meas'res initiated by the ?overnment. 7e said that initiating the National +'ral >mployees ?'arantee =ct -N+>?=. was a Qsacrosanct stepQ which co'ld never be dist'rbed for ne4t two decades or so. 3hidambaram said that the ?overnmentPs target to sanction +s !. $ lakh crore 'nder farm loans this year wo'ld be increased to aro'nd +s three lakh crore. Waiver of farm loans to benefit 7#,< $ farmers wo'ld be done by this month end. =s far as 5'd'cherry is concerned, aro'nd &$, $$ farmers wo'ld benefit from the loan waiver scheme, he added.-=NI. Prime Minister Dr. Manmohan Singh on Saturday accepted that inflation in the country was a matter of concern, and reiterated that his government was taking all possible steps to reduce it. ,agdogra -West ,engal., %ay #7 : 5rime %inister Dr. %anmohan 8ingh on 8at'rday accepted that inflation in the co'ntry was a matter of concern, and reiterated that his government was taking all possible steps to red'ce it. Interacting with the media here after ending his two6day visit to ,h'tan, Dr. 8ingh said that when the C5= ?overnment had come to power in %ay !$$;, inflation was si4 percent, and his government had managed to bring it down to between five and five6and6a6half percent. QInflation is a problem, o'r obEective was to keep inflation between : and :#S! percent. When we came to office inflation rate was < percent. We s'cceeded in bringing it down. ,'t in the last one year, there have been events over which we have no control b't which have infl'enced the sentiments of prices in o'r co'ntry. 9here has been an investment boom all over the world and the prices of metal, steel, and cement have all shot 'p and as a res'lt the whole sale price inde4 in o'r co'ntry is now verging close to eight percent per ann'm,Q he said. In the last year, however, he said, that there has been an investment boom all over the world, and as a res'lt the prices of s'ch commodities as steel, cement and oil had spiralled o't of control, p'shing domestic inflation 'p to nearly eight percent -7. & percent.. We have taken effective steps 6 I have met the steel man'fact'rers and asked them, the commerce and ind'stries minister to pers'ade the cement ind'stry to moderate their price behavio'r. I have been ass'red that action will be taken so I am hopef'l that in the ne4t few

weeks there will be a moderation in the inflation, b't I think we m'st not forget that what we are trying to do is in some ways 'n's'al,Q he said. QIf inflation is the only problem, we co'ld have a drastic monetary policy, sharply red'cing the money s'pply by raising interest rates, b't that will land 's in a serio's ind'strial recession and 'nemployment. We want to control inflation witho't h'rting the rhythm of the growth process, which is moving forward at 6 #S! to @ percent in the last fo'r years. 9here is no magic sol'tion to the problem. 5rices do rise in the period between %ay and 8eptember,Q 8ingh added. ('rthermore, he emphatically said that the press're of inflation had not be allowed to percolate down to the poorest of the poor or the 'nderprivileged sections of society. 9hey had been spared. Bil prices may have gone 'p, b't the government had ens'red that the prices of kerosene oil had remained at the same level, as it was a prod'ct 'sed in a maEority of ho'seholds across the co'ntry. QI wo'ld like to say that the government has adopted significant meas'res to ins'late the poor and the 'nderprivileged sections of society from the effects of inflation. In the last fo'r years, prices of food grain thro'gh the p'blic distrib'tion system to both the above poverty line and below poverty line have not been increased at all. 9his has happened at a time when we have to give o'r farmers hefty increases by way of proc'rement prices to give them an added incentive to prod'ce more wheat and rice,Q he said. QNow it is beca'se of this delicate balance, it is not easy and it takes time that transition problems arise 6 my re2'est to every one concerned is to have patience. I am confident that with the e4cellent proc'rement of food grains 6 both wheat and rice, if we have a normal monsoon, we will see a moderation in the price behavio'r, b't one has to be patient,Q the 5rime %inister said. QBne cannot say each week that the government m'st take some meas'res to bring down the prices or have some sol'tions, beca'se yo' m'st recogniGe that even in a normal year, prices do rise seasonally between %ay and 8eptember. 9he real test will be the meas'res that we have taken, the +,I meas'res to raise the cash reserve ratio and other meas'res taken by the government to liberalise the import regime and restrict the e4ports I re2'est the p'blic at large and political parties to give these meas'res a chance to s'cceed. %y feeling is that if the monsoons are normal in the ne4t few weeks yo' will see a moderation in inflation after 8eptember #:th,Q 8ingh said. Q9here has been a sea change in the international environment for energy. When we came to office the price of a barrel of oil was &:6&< dollars, today it is #!! dollars per barrel. We have to ens're that there will no adverse effects on the poorest sections. QB'r government has a two6fold strategy to increase prod'ction, 'ltimately that is the only way to bring abo't a balance between s'pply and demand witho't h'rting the growth process. QImports need to be liberalised so that any attempt to carteliGation by domestic prod'cers can be disco'raged. 9o disco'rage e4ports where necessary so that more s'pplies are available for the poorest sections of o'r society and sim'ltaneo'sly to see that o'r 5D8 is so operated that the poor are protected to a ma4im'm e4tent possible against rising prices,Q the 5rime %inister concl'ded. ,y =shok Di4it

'he effects of inflation

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Inflation is viewed as being undesira1le beca'se of some serio's economic and social effects. Inflation impacts on income distrib'tion making an random redistrib'tion of real income. 9hose receiving fi4ed money incomes -e.g., pensioners, beneficiaries etc.. are 's'ally disadvantaged beca'se often their incomes are not adE'sted 'pwards fast eno'gh to compensate for the effects of contin'ally rising prices. 9heir real incomes -i.e., the goods and services their incomes will b'y. will fall. Individ'als whose incomes rise more rapidly than the inflation rate will e4perience increasing real incomes. ?enerally, the pattern of income distrib'tion tends to become more 'ne2'al than it was before inflation. If the rate of inflation is high, individ'als with money tend to b'y real assets s'ch as property, gold and anti2'es, which often increase in val'e faster than the rate of inflation. 9his gro'p will gain by increasing the siGe of their share of the nationPs wealth. Inflation tends to increase spending and enco'rage borrowing at the e4pense of savings. If prices are rising 2'icker than incomes, individ'als will tend to b'y at c'rrent prices before goods and services become more e4pensive and less affordable. 8ome cons'mers may b'y 'sing higher levels of debt -i.e., borrowing. than otherwise might the case. 8avings may be disco'raged beca'se with high inflation when the money saved is repaid, it can be worth m'ch less than when it was lent and the real rate of interest may be low. 9he real rate of interest rates fail to keep pace with inflation the saver loses p'rchasing power, i.e., their ability to b'y things falls. +ising prices are a boon to borrowers beca'se the repayment of interest and the s'm borrowed -i.e., the principal. is with lower val'ed money. Inflation red'ces the real val'e of the amo'nt they owe, as the s'm repaid has less p'rchasing power. Bf co'rse, any gain by borrowers m'st be weighed against the interest they m'st pay. Investment, in economics, means the creation of new capital goods. Investment can only take place if there is saving. Inflation enco'rages spending and disco'rages saving, so f'nds that might otherwise have been available for investment tend to dry 'p. With lower levels of investment there is likely to be a slowing of the rate of growth of national o'tp't -?D5.. 9his in t'rn leads to a red'ction in new Eobs and so can increase the level of 'nemployment. Inflation can distort market price signals and the market may fail to allocate reso'rces efficiently. 5lanning and investment decisions become more diffic'lt to predict as firms are 'ns're what will happen to prices and costs d'ring times of inflation. If firms are 'nable to pass on the increase in costs to cons'mers this will impact on profits possibly ca'sing some firms to close or c't back prod'ction and s'bse2'ent employment. Inflation in New Vealand at a faster rate relative to o'r trading partners can harm e4porters and benefit importers. New Vealand firms e4porting their prod'cts overseas will find it more diffic'lt to sell their prod'cts beca'se they are less competitive price wise. 1ocal prod'cers may find it diffic'lt to complete in domestic markets beca'se of relatively cheaper foreign imports. Declining e4ports and increasing imports can lead to deterioration in the balance of

payments. 7igh inflation in New Vealand may see nations trading elsewhere while a lack of b'siness confidence beca'se of the perceived higher risks may see firms investing elsewhere. 9his high inflation will slow growth and employment thro'gh the dampening effects on investment and declining e4ports. 9he effects of inflation 6 Cnderstanding >conomic Iss'es by Dan +ennie was 'sed as my g'ide 6 this material is original.

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9he primary benefit of inflation is the manner in which it holds down 'nemployment. 8ince it is diffic'lt to red'ce wages in nominal terms, positive inflation gives firms an alternative means of c'tting costs instead of laying of workers. %ost economists believe any given economy at a given time has a N=I+C, or Non6 =ccelerating Inflationary +ate of Cnemployment, a Qnat'ralQ rate of 'nemployment for which inflation is stable and positive. Inflation lowers the real interest rates in an economy. 1ow real interest rates enco'rage investment, as they red'ce the cost of capital. 1evels of saving tend to be 2'ite 'nresponsive to interest rates. 9he last time real interest rates were negative in the CF, in the early #@ $s, savings rose, as people had to t'ck more money away to have the same amo'nt 3ontrary to pop'lar belief, savings DB NB9 e2'al investment in an economy. =s any first year econ 'ndergrad will yearn, IW?X8W9, investment e2'als savings pl's the governments b'dget s'rpl's -or min's its deficit., and that doesnPt even incl'de overseas investment. Inflation does not ca'se 'ncompetativeness in international trade if e4change rates are floating, as the c'rrency will depreciate in line with the change in prices. 8ome economists believe that contin'o'sly low inflation and positive real interest rates have been responsible for the dramatic ho'se price inflation m'st of the western world has faced in the last #$ years, and the rise in cons'mer credit and 'ns'stainable levels of borrowing by firms and individ'als which have p't the world economy into the mess it is in today. Inflation redistrib'tes wealth from those with high bank balances to those who try not to think abo't their bank balance, from the old to the yo'ng. It makes government debt smaller so in the long r'n we can all pay less ta4. 8o please think twice before moaning abo't it.