Freshly printed rupees cause unease<\/p>\n
By Simon Cameron-Moore<\/p>\n
BOMBAY (Reuters): Inflation in India, where poor voters get
\ntouchy about the price of onions, is edging toward the high end
\nof its comfort zone.<\/p>\n
Consumer prices for industrial workers rose 10.5 percent in
\nthe year to May, after an 8.2 percent rise in the year to April
\nand 7.3 percent in the year to May 1997, data released on Monday
\nshowed.<\/p>\n
The wholesale price index (WPI), the inflation measure most
\ncommonly used, showed a year-on-year rise of 6.86 percent in the
\nweek ending June 20 against 5.64 percent a year ago.<\/p>\n
Fruit and vegetables shot up a whacking 36 percent within the
\nWPI basket.<\/p>\n
If inflation goes above 8 percent, warning lights start
\nblinking for both politicians and economists.<\/p>\n
Prime Minister Atal Behari Vajpayee's Hindu revivalist-led
\ngovernment has just emerged intact from a week of uncertain
\nsupport from a southern ally.<\/p>\n
If fickle coalition partners, like the Tamil Nadu based All
\nIndia Anna Dravida Munnetra Kazhagham (AIADMK), eventually do
\nunseat the minority government, Vajpayee can expect to lose votes
\nshould inflation reach 10 percent, analysts say.<\/p>\n
\"I see WPI inflation at 8.5-9.0 percent in a few months'
\ntime,\" Aashish Pitale, head of markets research at JP Morgan in
\nBombay, told Reuters.<\/p>\n
The Reserve Bank of India's (RBI) job is to keep inflation
\ndown, but analysts are worried about the smell of freshly printed
\nmoney at the central bank.<\/p>\n
\"Reserve money has been rising for the wrong reason. Over the
\nlast few months there has been higher monetization and it will
\nstoke inflation,\" Pitale said.<\/p>\n
There has been a 150 billion rupee increase in reserve money
\nin the first three months of the fiscal year (April-June), and a
\n180 billion rupee rise in net RBI credit to the government.<\/p>\n
The root cause is a 1998\/99 fiscal deficit which Finance
\nMinister Yashwant Sinha's critics say will overshoot a targeted
\n5.6 percent of gross domestic product.<\/p>\n
\"The RBI does not have a choice. It will have to monetize some
\nof the deficit and that will lead to a bit of inflation,\" said
\nSanjeev Mohta, head of research at HSBC B&K brokerage.<\/p>\n
Sinha could ease the pressure on the RBI by raising money
\nthrough sales of government stakes in public sector companies.
\nOtherwise the best bet is that the government fails to meet its
\nexpenditure targets -- which would handicap any upturn in
\neconomic growth.<\/p>\n
Mohta forecast WPI inflation at 8-9 percent by the end of
\nMarch, resulting in an average 7.5 percent for 1998\/99 -- which
\nwould be politically acceptable.<\/p>\n
But GDP growth will struggle to match government hopes of 6.5-
\n7.0 percent, after last year's drop to 5.0 percent from 7.5
\npercent the year earlier.<\/p>\n
A favorable start to the four-month monsoon season in May
\nshould help keep food prices down.<\/p>\n
India is also getting some relief from world oil markets.
\nNorth Sea Brent ended last week at $13.55 a barrel, nearly $6
\nbelow 1987's average and just $1.50 off 10-year lows.<\/p>\n
But a weaker rupee and increased import tariffs on petroleum
\nprices will offset the benefits for inflation.<\/p>\n
The RBI may be blessed by the weather and oil prices this
\nyear, but it is cursed by several years of fiscal indiscipline by
\nsuccessive governments.<\/p>\n
Net government borrowing has risen by 30-35 percent annually
\nover the last three years, while the nominal growth in revenue
\nwas around 15-17 percent and nominal GDP growth even slower.<\/p>\n
Pitale said trouble was in store. Investors' portfolios are
\nloaded with government paper of maturities of up to 10 years.
\nIndia will be hoping that by the time it needs to seek external
\nfinancing the international rating agencies will promote its
\nsovereign debt credit rating above current junk bond status.
\nBut financing the government's borrowing domestically this year
\nis the problem at hand.<\/p>\n
The RBI is trying to push through a borrowing program on a low
\ninterest rate ticket that the market does not want to buy.<\/p>\n
The market believes higher interest rates are inevitable, both
\nbecause of inflation and expectations that any pick-up in
\nindustrial credit will add to upward pressure on rates in a
\nmarket already struggling to digest the government's borrowing.
\nThe RBI has completed around half of 1998\/99's 840 billion rupee
\nborrowing program in the first three months of the financial
\nyear.<\/p>\n
But a good chunk has ended up on the RBI's books, either
\nthrough placements or through devolvements on the central bank
\nafter the market refused to buy.<\/p>\n
So effectively the RBI still has to sell around 70 percent of
\nthe program to the market through auctions, sales or open market
\noperations, or end up covering the unwanted government debt by
\nprinting banknotes.<\/p>",
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