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Is the local inflation topping out?

Is the local inflation topping out? Well… looks very much likely given the recent moderation in world commodity prices and a slowdown in domestic economic activity would go a long way in ensuring that the horrors caused by the stubbornly high prices could be a thing of the past…at least on the official front.

A latest PIB release states that government is aware that inflation hurts the lower income group of society. Measures taken to contain prices of essential commodities include -- import prices reduced to zero on rice, wheat pulses, edible oils (crude) and onions...,”

In its annual report released on Thursday, the RBI said inflation is likely to stay elevated at least till the third quarter of the current fiscal, before falling to 7% by March 2012.

The minister of state for finance Namo Narain Meena said in a written reply to a question in the Lok Sabha that the impact of inflation is different in urban areas vis-a-vis rural areas. “The impact of inflation on rural and urban areas differs because of the diverse consumption pattern and income distribution,” the minister said further.

He said that inflation, as measured by the consumer price index (CPI) for both rural labourers and industrial workers, has fallen substantially during the last few months.

While the CPI-rural labourers slipped from 17.35% in January 2010, to 9.03% in July this year, the CPI-industrial workers came down from 16.22% in January 2010, to 8.62% in June 2011.

“In response to the anti-inflationary policies of the government, CPI-RL based inflation has eased to 9.03% in July 2011, from its peak of 17.35% in January 2010,” Meena said.

The headline inflation, as measured by wholesale price index (WPI), has been above the 9% mark since December 2010, and stood at 9.22% in July this year. However, Food inflation stood at 9.80% in mid-August, coming down drastically after hitting highs of around 20% in first half of 2010. The monsson has been good for a second year running and given the slowdown in the latest quarterly GDP numbers, the RBI has much more leeway in coming out of its tight money stance.

Data out yesterday indicated that India’s GDP rose 7.7% in the three months to June compared with 8.8% in the year-ago quarter – its slowest pace in 18 months.

Media reports noted that the government remained cautious about its economic assessment after the data came out. Finance Minister Pranab Mukherjee termed the GDP number "disappointing", his Chief Economic Advisor Kaushik Basu advised against reading too much in the positive entries of the data. "You should not set your hopes too high for the immediate next quarter," he said, adding, "But I do expect growth in third and fourth quarters to show quite a substantial pick-up."

The spate of interest rate hikes by the RBI over the past few months ate into consumption growth, which fell to 6.3% from 8% in the previous quarter and 9.5% in the year-ago quarter.

Have the latest official talks queered up the pitch for a change in RBI’s stance?  We will need to keep our figures crossed on that though the inflationary trends would be expected to offer solace for the central bank and local markets in the coming months.


Why the Yuan has been soaring post US debt downgrade?

Would like to share a fantastic post on MW which explains why the Yuan has been soaring right after the S&P's  US debt downgrade. In toto, there are three factors which are influencing the Chinese exchange rate policy.

Over the course of less than two weeks, the Chinese currency’s value rose a significant 0.63% against the dollar. The yuan-dollar exchange rate slipped below 6.4 yuan for the first time Aug. 17, closing at 6.3996.

Continued inflationay pressures- Since monetary authorities are keen about inflation concerns, as well as constraints on using interest-rate adjustment as a policy instrument, they found ample reason for letting the yuan appreciate. (Please note that the nation's CPI has struck 6.5% in July and the price pressures are expected to ebb somewhat in the coming months...but the overall scenario reamins worrisome)

Possible Quantitative Easing In the US...brace up for a QE Ben Bernanke cautioned the markets in his latest speech at Wyoming....China’s inflation problems could deepen if, in hopes of strengthening the U.S. economy, the Federal Reserve extends its accommodative monetary policy or even launches a QE3. Analysts say accelerating the yuan’s appreciation was considered a reasonable countermeasure to this kind of future inflationary threat. 

Chinese government seems to be keen in maintaining high gross domestic product growth rates through trade surpluses. China’s exports in July broke monthly records again, rising more than 20% from the same month last year to more than $175 billion. The trade surplus for the month topped $31.4 billion, the highest since February 2009.

Read the whole report here