Intelligentguess

The Reserve Bank of India has just released a press note stating that

1. The statutory minimum and maximum cash reserve ratio (3% and 20% respectively) stipulations still exist, since the Government is yet to notify the relevant amendment to the RBI Act;
2. Graded interest payments will be made to banks on CRR balances above the statutory minimum of 3%.
3. The interest payments would be at
   • 3.5% p.a. for the period June 24, 2006 to December 8, 2006;
   • 2.0% p.a. for the period December 9, 2006 to February 16, 2007;
   • 1.0% p.a. for February 17, 2007 and beyond.

This comes as a bit of a surprise as the market had all along been given to believe that the statutory limits on the compulsory impounding of cash pre-emption of funds through CRR had been removed.

The interest being paid by RBI to banks on eligible CRR balances is negligible, to be of much importance.

Update : I have been asked by a few to clarify what exactly is the surprise. It was announced in June 2006 that the minimum (3%) and maximum (20%) limits placed on CRR had been withdrawn. Consequent to the above decision RBI had stopped paying interest on CRR balances. The markets had all along been led to beleive that the limits no longer exist. The press release by RBI explicitly refutes this and clarifies that the statutory minimum and maximum limits continue to exist since their removal has not been notified by the Government.  Consequently, interest payments (though at modest rates) on CRR balances are also being reinstated. Strange are the ways of our system.

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India released its weekly inflation numbers today.

Provisional headline inflation based on a year on year change in the Wholesale Price Index (WPI) came in at 6.63% for the week ended February 10.

The WPI itself remained unchanged at 209.2.

Retail fuel prices (which are controlled by the government) were cut last week. The impact of this cut should be reflected in the index numbers for the next week. Further, with elections in a key state due in April, the Government is expected to go all out and manage price levels. This should help to keep any growth in the “provisional” WPI at modest levels, thereby preventing a sharp run up in revealed inflation numbers.

More worryingly, the final inflation number for the week ended December 16 has been revised upwards to 5.73% (from the provisional figure of 5.43%). It does not bode well if the trend of the final numbers being revised sharply upwards, continues. It has been so for some time now.

Update : The sub index for Primary Articles (comprising Food and other essential Non food items) has  dropped marginally week on week to 215.8 from 216.1. Have food prices really come down? Hard to say, but expect more of such moderation in the provisional numbers. After all, crucial elections are due, and the provisional numbers are probably driven more by politics, rather than ground level economics. The reality can, for the time being be postponed to the final numbers. By that time, elections would have come and gone.

Note : Provisional WPI (and therefore inflation) numbers are released with a delay of two weeks. This is updated with the final number after three months. While, the provisional numbers is highlighted well by mainstream media, rarely has focus been cast on the final updated number.

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Situation 

On an annual basis -  Orders grew by by 3.99 % p.a in December 2006 compared to December 2005.
The index grew by 6.09 % p.a in November and 10.24%  p.a  in October.

On a monthly basis - Orders index grew by by 2.8%  in December 2006 compared to November 2006. ( 1.1%  in November but fell by 0.3%  in October)

As compared to the same period last year - the rate of growth has been steadily dropping since August 2006 ( 14.24 % p.a ) and the current growth is the lowest since July 2005 ( where it was in a rising trend).

Conclusion 

This has an impact in two areas :

- The Production Indices ( IIP )  cannot be expected to rise in the coming 2-3 months ( read also: Euro area Industrial Production )

-  ECB will need to consider the negative impact of raising Interest rates further -  on falling New Orders / IIP .  

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