High Oil and food prices continue to be a major driver behind high inflation in US and Eurozone. Oil Prices breached the $120 mark for the first time ever today up from nearly $21 in 2002. The causes behind the recent surge in oil prices could result from Chinese refineries stocking up in view of the Beijing Olympics and greater upcoming demand just ahead of the summer driving season in the US from late May to early September. Historically, August has witnessed an annual peaking of consumer oil demand in 5 out of the last 6 years. The Goldman report about oil prices bound in the region of $150-200 per barrel in 2009-10 could also have had an impact on the market apart from supply slumps in Mexico, Venezuela and Nigeria. There might be no respite till September when OPEC proposes to raise production.
In US, headline inflation rose by 0.3% from Feb to March 2008 while Europe saw an even more rapid rise by 1% in the same period. Wage increases in Germany in the Chemicals sector was an area of concern. If replicated in other Euro countries, this might contribute to further inflation.
India
Domestic food prices are more or less insulated in India because of a high degree of self-sufficiency. India however is the second largest importer of vegetable oils. Prices of soyabean, palm oils and groundnuts peaked by close to 3% from February to March 2008. The Indian Govt’s move to remove import duties and a record production of palm oil in Malaysia reduced prices in April. However, rising demand in India could lead to higher prices in September when the peak production season in South-east Asia draws to a close.
RJ/CRB Index
The commodity currencies were supported as the Reuters/Jefferies CRB Index of 19 raw materials climbed the most in three weeks on May 2 after a better-than-forecast jobs report raised optimism the U.S. economic slowdown won't worsen.
Metals
Copper for delivery prices in three months gained as much as $170, or 2 percent, to $8,580 a ton on the London Metal Exchange. This increase however was capped by the conclusion of a 3 week strike by copper contract workers in Codelco, the world's largest copper producer. However, political problems between Copper manufacturers and workers in Chile continue to persist. Also, copper inventories at LME are at a 9 month low. Copper prices could continue to gain in view of a weak dollar. Copper constitutes 12.1% of the World Bank CPI.
Monday, May 12, 2008
RBI policy ahead
GDP forecast
Economic activity in India continues to be demand driven. A 0.3% decline in Private Final Consumption Expenditure and a 0.2% Govt Final Consumption Expenditure was offset by an increase in Gross Fixed Capital Expenditure by 2.1%. Increase in investment demand was also witnessed in the increased import of capital goods as well as a doubling of public issues of capital this fiscal. This is indicative of a continued buildup of capacity and is likely to continue this fiscal buoyed by strong corporate savings and improved public finances.
Consumption expenditure is also likely to pickup in view of increased personal disposable income and reduced excise duties. In addition, the Sixth Pay Commission will herald higher revenue expenditure. Apart from this, the report dwells upon improved tax to GDP ratios and forecasts of normal monsoons as favourable factors in the India growth story. Playing the part of the cheer-leader of the economy to the hilt, the RBI forecasts a real GDP growth rate of 8.0-8.5% for 2008-09.
Inflation fears
However, this forecast is subject to a lot of uncertainty fueled by fears of a global recession, higher food and commodity inflation and a financial meltdown with contagion risks. Supply-side inflation fears stem from a continuous hardening of global crude oil prices as well as more expensive steel, wheat and oilseeds. The RBI expresses confidence about their ability to bring down headline inflation from its’ current level of 7.57% to a more comfortable 5.5% in 2008-09 by actively managing capital flows and using all policy instruments. However, the RBI’s confidence could be misplaced due to two reasons. Firstly, the current inflation is primarily structural and fueled by global factors and with demand pressures likely to continue, it would only intensify in the coming months. Second, the RBI over-relies on the normal monsoons forecast.
Global Financial Crisis
RBI expresses major concern about the state of global credit markets in the aftermath of the sub-prime mortgage crisis. While Indian markets continue to be largely insulated from the immediate effects, our external financing conditions could suffer. The RBI also concludes that domestic sentiment has never been more linked to global factors and as such the uncertainty could spill over to domestic liquidity, equity and foreign currency markets. The RBI continues to actively absorb liquidity through CRR hikes, LAF absorptions and MSS auctions. LAF injections in late February were only inspired by local tightening rather than any signs of global capital outflows. Though liquidity continues to be comfortable, the possibility of a full-blown capital pullout from India and a weak rupee cannot be completely ruled out.
Economic activity in India continues to be demand driven. A 0.3% decline in Private Final Consumption Expenditure and a 0.2% Govt Final Consumption Expenditure was offset by an increase in Gross Fixed Capital Expenditure by 2.1%. Increase in investment demand was also witnessed in the increased import of capital goods as well as a doubling of public issues of capital this fiscal. This is indicative of a continued buildup of capacity and is likely to continue this fiscal buoyed by strong corporate savings and improved public finances.
Consumption expenditure is also likely to pickup in view of increased personal disposable income and reduced excise duties. In addition, the Sixth Pay Commission will herald higher revenue expenditure. Apart from this, the report dwells upon improved tax to GDP ratios and forecasts of normal monsoons as favourable factors in the India growth story. Playing the part of the cheer-leader of the economy to the hilt, the RBI forecasts a real GDP growth rate of 8.0-8.5% for 2008-09.
Inflation fears
However, this forecast is subject to a lot of uncertainty fueled by fears of a global recession, higher food and commodity inflation and a financial meltdown with contagion risks. Supply-side inflation fears stem from a continuous hardening of global crude oil prices as well as more expensive steel, wheat and oilseeds. The RBI expresses confidence about their ability to bring down headline inflation from its’ current level of 7.57% to a more comfortable 5.5% in 2008-09 by actively managing capital flows and using all policy instruments. However, the RBI’s confidence could be misplaced due to two reasons. Firstly, the current inflation is primarily structural and fueled by global factors and with demand pressures likely to continue, it would only intensify in the coming months. Second, the RBI over-relies on the normal monsoons forecast.
Global Financial Crisis
RBI expresses major concern about the state of global credit markets in the aftermath of the sub-prime mortgage crisis. While Indian markets continue to be largely insulated from the immediate effects, our external financing conditions could suffer. The RBI also concludes that domestic sentiment has never been more linked to global factors and as such the uncertainty could spill over to domestic liquidity, equity and foreign currency markets. The RBI continues to actively absorb liquidity through CRR hikes, LAF absorptions and MSS auctions. LAF injections in late February were only inspired by local tightening rather than any signs of global capital outflows. Though liquidity continues to be comfortable, the possibility of a full-blown capital pullout from India and a weak rupee cannot be completely ruled out.
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