India in for inflation spiral

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Arun Goyal | 08 Apr, 2008
India which is Asia's third-biggest economy expanded 9.6 percent in the financial year ended March 2007. The government estimates growth at 8.7 percent in the year, but export expansion slows. The current account deficit widened to $ 5.4 billion in the fourth quarter from $ 4.7 billion the previous quarter, the central bank reported on March 31.

Inflation is "unacceptably high" and the Reserve Bank of India is ready to take steps to contain it, Reddy said on March 31, after wholesale prices unexpectedly rose 6.68 percent in the second week of March. Latest figures show inflation at seven percent plus.

Volatility in the Indian rupee will rise after the Reserve Bank of India meets on April 29 to decide on interest rates, according to Morgan Stanley.

Implied volatility on one-month rupee options fell to 7.8 percent from a five-month high of 9.85 percent on March 17, when the currency touched a six-month low against the dollar as stocks slumped. Investors should buy options that profit from larger fluctuations after the RBI meeting, Morgan Stanley wrote in a research note.

The RBI rate is unchanged at 7.75 percent since March 2007. RBI is seeking to slow inflation from a 13-month high, while supporting the economy as global demand slows. The rate is expected to rise as monetarist solutions prevail over supply side answers.

The RBI's reaction to inflation will be revealed at the April meeting and will determine the rupee's road.

The rupee has retreated 1.1 percent this year to 40.1250 per dollar as the benchmark stock index slumped 24 percent.

Dollar may gain: The dollar will likely gain 1.7 percent to $1.55 per euro and remain little changed near 100 yen by the end of June, according to the estimate of analysts and economists. At the start of 2008, they expected the dollar to strengthen to $1.48 per euro and 110 yen.

The greenback tumbled 7.6 percent against the euro last quarter to $1.5788. It slid 10.8 percent to 99.69 yen, the most since falling the same amount in the third quarter of 1999, as a decline in stocks from New York to Tokyo and credit market losses led investors to sell high-yielding assets funded with low-interest loans in Japan.

Interest rates: The Bank of Japan's benchmark rate is 0.5 percent, compared with 2.25 percent in the U.S. and 4 percent for the European Central Bank. The rate in Switzerland, another source of funds for so-called carry trades, is 2.75 percent.

Royal Bank of Scotland in Edinburgh, the fourth-biggest foreign-exchange trader, forecasts the dollar will trade at $1.57 per euro by June 30, after the currency exceeded its previous estimate of $1.52 by March 31.

The US currency may strengthen as a slowdown in the world's largest economy spreads to other regions, weakening their currencies, according to London-based Barclays Capital, the fifth-biggest currency trader.

The dollar has gained 2.2 percent against the pound since the Bank of England cut rates by a half-percentage point on December 6 to revive growth. The pound will weaken 0.2 percent to $1.98 by June 30, according to the survey of strategists.

India enters Ethiopia: Ethiopia and India have signed a memorandum of understanding in the leather sector for joint development of the industry through technology and market collaborations.

Under the MoU, India will be allowed to access Ethiopia's rich leather resources. Fiscal incentives for setting up manufacturing and training facilities will also be given to the Indian leather industry.

India will collaborate with Ethiopia in terms of capacity building, setting up research institutes and training manpower in leather sector to explore new markets and produce new products to compete with developed nations.

Mr Pillai said that developing countries like India and African countries should put their resources together to fight competition from the developed world. He said that India would provide funds for capacity building and setting up training institutes in Ethiopia and other African countries at the CII-Exim India-Africa partnership Summit.

Leather Complex in Nellore: The Andhra Pradesh Cabinet on 3rd April approved setting up of a Rs 194.01 crore International Leather Complex by the state-owned Leather Industry Development Corporation of Andhra Pradesh at Krishnapatnam in Nellore District to attract large domestic and foreign tannery companies.

The Cabinet meeting, chaired by Chief Minister Y S Rajasekhara Reddy, approved the project designed by the Central Leather Research Institute. The Union Government will provide Rs 29 crore as assistance to the Complex, Information Minister A Ramanarayana Reddy told reporters.

The world class infrastructure project would come up on 412.41 acre of land developed by the Andhra Pradesh Industrial Infrastructure Corporation with a view to exploit emerging global leather trade opportunities and create sustainable direct employment to 5,000 people and indirect employment to 10,000 persons, he said.

The State Government would provide infrastructure such as roads, power and water for the project, he added.

Anti-dumping duty on Vietnam Shoes in EU may go in October 08: It is very likely that Vietnam-made leather-capped shoes exported to the EU will no longer bear the anti-dumping tax in October 2008, according to the Competition Administration Department under the Ministry of Industry and Trade.

According to the European Commission's (EC) notice about the anti-dumping taxation on Vietnam and China-sourced shoes, if there is no contention about the administrative review from involved parties, the taxation will be finalised on October 7.

In principle, European producers may file petitions, requesting the review of tax levels. They need to provide proof to show that if the anti-dumping taxation is not maintained, dumping activities will re-occur, potentially damaging the European leather shoe industry.

The anti-dumping lawsuit against Vietnam and China-made leather-capped shoes was raised in 2005. In April 2006, EC decided to impose the preliminary tax rates of 16.8% on Vietnam-made and 19.4% on China-made shoes.

Vietnam stated that it did not dump shoes on the EU market, and that the EU's imposition of the anti-dumping tax on Vietnamese shoes did not truly reflect the situation.

Low labour costs and modern technologies are the biggest advantages of Vietnam's shoe industry.

The tax imposition has been badly affecting Vietnam's shoe industry, which employs more than 500,000 labourers, 80% of whom are female.