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