Intelligentguess

So, now the communists want the government (the government that they themselves support and ensure that it does not take any decisions) to roll back the decision to grant freedom to public sector undertakings to invest a portion of their surplus funds in public sector mutual funds.

Frankly, I support their demand.

But not for the reason that they cite. It’s hilarious. The commies say that this decision would only ensure that foreign investors heap handsome profits. This only serves to show their naivete when it comes to matters of economy and markets.

It needs to be rolled back or should I say modified so that public sector undertakings can invest in all mutual funds, not just those that belong to the public sector itself. This ensures that there is a level playing field for all. No undue or unfair advantage should be provided to select entities based on lineage. Let competition rein and performance decide the turn of events in the marketplace.

Share This

Economist Ila Patnaik has written an excellent piece on the non tenability of India’s currency policy, specifically the Reserve Bank of India’s resolute defence of the Indian Rupee’s spot level against the US dollar.

Coming as it does on another addition of USD 3 bn to India’s forex reserves last week and the upcoming monetary policy statement on Tuesday, the lessons to be learnt from the article are timely.

In particular note the last two paras - repeated here:

A consistent monetary policy is one that is speculation-proof. The Bank of England never gets into a dogfight with speculators. It learnt its lessons in 1992. Now it calmly targets inflation. An inconsistent monetary policy invites speculative capital flows. The policy mistakes of the RBI are a source of risk. They induce unstable speculative capital flows.

The defence of the dollar is the root cause of these difficulties. The task of the credit policy announcement on July 31 is to show an exit strategy from this no-win situation. The goal must be to improve on the messy events of March 2007, when the rupee appreciation took everyone by surprise while the RBI stayed resolutely non-transparent. This requires improved transparency and communication by the central bank, and a programme to increase currency flexibility.

Share This

This is my second piece for DNA, which looks at the options before the RBI Governor when he unveils the first quarterly review of monetary policy for the financial year 2007-2008. /the policy review is due July 31, next Tuesday.
Here’s the link to the article.

Share This

DNA has published a small piece written by me on the subject of stress testing for Indian banks and financial institutions.

Here’s the link.

Feedback and Comments are welcome.

Share This

The ECB at at today’s meeting decided to leave the key ECB interest rates unchanged at 4.00%. The ECB stated that Monetary policy is still on the accommodative side

The ECB’s percepective on its future expectations is explained below:

.

Economic Activity

• Economic activity in the euro area in the second quarter of 2007 continued to expand in line with the ECB’s baseline scenario.
• The medium-term outlook for economic activity remains favourable.
• The strong rate of monetary and credit expansion reflects, in part, favourable financing conditions and solid economic growth.

The risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At medium to longer horizons, the balance of risks remains on the downside.

.

Price Stability

• The short-term profile of annual inflation rates continues to be determined largely by current and past energy price developments.
• The medium-term outlook for price stability remains subject to upside risks.
• Annual inflation rates are likely to fall only slightly in the months ahead before rising again significantly towards the end of the year.

.

Capacity Utilisation

Capacity utilisation is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage and profit margin developments.

.

Monetary expansion

• There are indications that higher short-term interest rates are now influencing monetary dynamics, although they have not, as yet, significantly dampened the overall strength of the underlying rate of monetary and credit expansion.
• The underlying rate of monetary expansion remains strong.

.

Given the vigorous monetary and credit growth in an environment of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term.

The next Monetary Policy decision is due on August 2nd 2007

Share This

Situation

• On a monthly basis Producer prices rose by 0.34% (0.43% in Apr’07)
• On an annual basis Producer prices rose by 2.36% p.a ( 2.37% p.a in Apr’07)

Background

1. Oil prices have risen by 6.29% on an average in Jun’07 (over May’07). This cause Core CPI ( ex Energy) to start rising.
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 basis points to 4.00%.
3. European GDP has been expanding in Q1 2007
4. The ECB has a monetary Policy meeting on July 5th 2007

.

(click on image for a better visual)

.

Conclusion

• A slight rise in PPI towards 2.50% p.a towards Sept’07 can be expected thanks to the rise in energy  prices in recent times.
• The effect of the rate hikes should push PPI down to the ECB target areas of 2.00% p.a to 1.50% p.a post Sept’07

.

Related links

• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

• Europe - Inflation down in May’07, but rising energy prices can change this picture
• UK : Inflation ( CPI and PPI ) drops in May’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

Share This

(Click on image for a larger Visual)

Share This

Situation

• On a monthly basis Consumer prices rose by 0.24 % (0.63 % in Apr’07)
• On an annual basis Consumer prices rose by  1.87 % p.a ( 1.91% p.a in Apr’07)
• On an monthly basis Core Consumer prices - EFAT ( Ex Energy, Food , Alchohol and Tobbaco ) rose by  0.17 % p.a ( 0.53 % p.a in Apr’07)
• On an annual basis Core Consumer prices ( EFAT) rose by  1.94% p.a ( 1.90 % p.a in Apr’07)

Background

1. Oil prices have risen by 6.29% on an average in Jun’07 (over May’07). This cause Core CPI ( ex Energy) to start rising.
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 bais points to 4.00%.
3. European GDP has been expanding in Q1 2007
4. The ECB has a monetary Policy meeting on July 5th 2007

6. Core Consumer Prices ( EFAT and ex- Energy ) viz bank rate ( click on image for a better Visual)

While CPI ( ex- EFAT) has been dropping on the interest rate hikes , CPI ( ex- Energy) remains on a rising trend.

i.e it is the drop in energy prices that has assisted the drop in ex-EFAT

.

7. CPI viz PPI (click on image for a better Visual)

Producer prices ( PPI) remains in a downward trend - and could indicate that CPI may not rise much further in the immediate future

.

Conclusion

Core CPI - EFAT has been dropping mainly due to drop in energy prices in the early part of the year

It can be expected that the recent rise in energy prices will cause CPI (EFAT)  to start rising and thereby have an effect on CPI ( ex- Energy) to rise further

This will be a major concern in the ECB - Monetary Policy meeting on July 5th 2007. The currency market has discounted a possibbility of a hike already ( Euro risen from 1.33 to 1.36 to the US $)

In the longer term the ECB is getting closer to pausing as its eight interest rate hikes since 2005 start to weigh on the euro zone growth.

.

Related links

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• UK : Inflation ( CPI and PPI ) drops in May’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

Share This

Situation in May’07

• On a monthly basis Consumer prices rose by 0.29 % (0.29 % in Apr’07)
• On an annual basis Consumer prices rose by  2.54 % p.a ( 2.75 % p.a in Apr’07)

• On a monthly basis Producer prices rose by 0.40 % (0.50 % in Apr’07)
• On an annual basis Producer prices rose by 2.46 % p.a ( 2.47 % p.a in Apr ’07)

• On an monthly basis Core Producer prices remained flat ( 0.20 % p.a in Apr’07)
• On an annual basis Core Producer prices rose by  2.43 % p.a ( 2.43 % p.a in Apr’07)

Background

• Both  CPI and PPI ( including core PPI) have been dropping for the past 2 months
• The Bank of England ( BOE) voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5% during their May meeting.
• The Bank of England’s inflation target is 2%. This is expressed in terms of an annual rate of inflation based on the Consumer Prices Index (CPI).
• Inflation growth was at a record high in Mar’07

. 

Core PPI ( click on image for the better Visual)

.

PPI ( click on image for the better Visual)

.

CPI ( click on image for the better Visual)

Conclusions

The series of rate hikes since June’06 have started taking effect

• The rate hikes from June’06 seems to have capped core PPI. Core PPI looks like moving to a sub 2.00% p.a towards end ‘07.
• PPI looks like retaining a 2.00% p.a - 2.9% p.a range till Sept ‘07. After this a drop to 2.00% p.a towards early 2008 can be expected
• CPI can be expected to drop to 2.0% p.a towards end’07. After this it is likely to range between 2.00 % p.a - 3.00 % p.a till mid’08.

..

The Bank of England has a Monetary Policy meeting on July 5th 2007. The market is expecting one more rate hike towards 5.75% ( from the current 5.50%).

This is because while inflation has come down in the past two months , there is a fear that manufacturers could utilise the strong demand to regain pricing power (creating medium term inflation). The GDP has continued to grow strongly in Q1 2007.

.

Related links

• UK - PPI Producer prices drop in Apr’07
• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

• UK Inflation (CPI) drops in Apr’07
• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

Share This

Situation

Fiscal deficit for the month of May’07 stood at -67.69 bn $

Fiscal deficit as a % of Real GDP stood at - 6.18% at the end of Q1 2007 ( Q1 always tends to have the worst fiscal situation as a % of GDP)

.

Background ( click on image for a larger visual)

. 

 .

 .

Conclusion ( click on image for a larger visual)

• Q2 always tends to have the best fiscal situation (Q2 for both 2005 and 2006 were at a fiscal surplus)
• We can expect the surplus as a % of GDP to be to be towards a 4.50% for Q2 2007.

. 

 .

 .

Related links

• USA - Record fiscal surplus in Apr’07 (highest since Apr’01)
• USA - Q1 2007 GDP annual growth revised to a lower level (lowest since 2003 Q3)
• USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
• USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
• USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
• USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

Share This