Disappointing Inflation Figures
Inflation figure proved to be a non-event again.It is either because people feel there is no co-relation between the inflation figure published and what they are actually paying for necessities. Or it is because the market has already discounted for the low rates and its like ‘ho-hum-so-what’ kind of reaction.
Inflation came down to as low as 0.13% for the week ended 30th May 09 as against 0.48% last week. But hidden in this low inflation figure is a message for the future – interest rates are bound to go up by Jan 2010.
Present Liquidity
Right now there is a lot of liquidity in the market and banks, which are sitting tight on the rates and pots of money, will soon loosen their purse strings. Be it at the behest of the Finance Minister or economic conditions, banks will bring down the rates in the immediate few days. It is not expected that RBI will announce rate cuts but it is the turn of the banks to now act on the earlier rate cuts announced and bring down the PLRs.
Once money starts flowing in, economic revival starts happening, then demand is bound to pick up. And once demand starts picking up and economic growth starts showing a better pace, prices or inflation starts going up. Economic growth and inflation also go hand-in-hand. Inflation and interest rates move in tandem while economic growth rate and inflation move in opposite directions. So to bring down the prices, it becomes essential to put some curb on the supply of money and thus interest rate hikes will come in.
Inflation In coming Days
Once growth starts picking up in India, it will gallop and in that context, inflation is also expected to more than double up. The Indian economy is showing slow but sure signs of recovery and strong recovery is expected to happen by Q4FY10. Economists are predicting inflation to go up to as high as 5.5-6.5% levels by the end of this current fiscal.
Crude Pricing in Coming Days
Crude which was ruling low for some time has also started picking up and today it rules above the $70/barrel price. This rise in crude, without any cut in oil output is also an indication of activity slowly picking up. And once globally, recovery starts happening, naturally demand for crude is expected to go up considerably. Oil experts, on a conservative note, expect crude to rule at around $85/barrel by Dec 09 and expect it to go up to $95/barrel levels by end of 2010.
Interest Rates may rise in 2010
About 60% of India’s import basket comprises of oil imports and naturally, we are at a disadvantage when crude rises. This will only further add on to the inflationary pressures. Even a 10% price hike in petrol and diesel would add on around 0.6% to benchmark wholesale price index.
And based on previous discusssions, it seems inevitable that interest rates would go up by Jan 2010.