India’s food inflation eases to its lowest in nearly six years

• Annual food inflation eased for a ninth straight week to its lowest in nearly six years in mid-December on improved supplies, bolstering hopes of a cooling in overall inflation that will allow the RBI to shift focus to reviving growth by cutting rates.
• Food price index rose 0.42 percent in the week to December 17 from a year ago, its slowest rise at least since April 2006, as prices of vegetables, potatoes and onions fell by up to 11 percent on new crop arrivals in markets.
• Annual fuel inflation eased to 14.37 percent in the latest week from 15.24 percent a week earlier, government data on Thursday showed.
• “Moderating food prices should cool overall inflation. We expect headline inflation below 8 percent in December,” said Aditi Nayar, an economist with ICRA.
• “It will allow the Reserve Bank of India to be on pause for a few months, before it starts cutting rates in April-June quarter next year.”
• India’s headline inflation was 9.11 percent in November, staying stubbornly above 9 percent for a year mainly driven by high food prices.
• The RBI, which has raised its interest rates 13 times since March 2010 to tame sticky inflation, expects the headline inflation to ease to 7 percent by March.
• With risks to economic growth mounting, pressure is building on the RBI to reverse its tight monetary stance.
• The RBI left its rates steady at its last review early this month and sent a strong signal that its next move was likely to be an easing of monetary policy.
• Analysts widely expect the RBI to cut rates by 25 basis points by mid-2012, a Reuters poll found early this month.

India is confident of raising 400 billion rupees this fiscal by selling shares in state-run firms

• The union government of India is confident it will meet its target of raising 400 billion rupees this fiscal year 2011-12  by selling shares in state-run firms, a senior finance ministry official with direct knowledge of the matter said.
• The government is working on a plan to raise funds by pledging stakes held in tobacco-to-hotels group ITC, industrial conglomerate Larsen & Toubro  and Axis Bank, the senior official said on Tuesday.
• These funds would be placed with a new investment vehicle that would buy back the government’s stake in state-run firms, said the official, who spoke on the condition of anonymity.
• The shares in ITC, Larsen & Toubro and Axis Bank are held through the Specified Undertaking of the Unit Trust of India (SUUTI).
• “The whole impression that SUUTI (route) will not materialize is wrong. We are still working on the modalities,” the official said.
• “We are going to meet the disinvestment target.”
• So far this fiscal year, New Delhi has managed to raise only about $250 million through the sale of a stake in Power Finance Corp in May.
• With the stake-sale programme failing to take off and tax revenue under pressure from slowing economic growth, worries about India’s public finances are growing.
• On Monday, the government announced to sell 150 billion rupees of bonds on December 30 in an unscheduled auction to fund an “emerging cash requirement”.
• The official said the unscheduled auction is part of the borrowing for the second half of the fiscal year that ends in March 2012, which has been advanced.
• In September, the government increased its borrowing target for the second half of the fiscal year to 2.2 trillion rupees from the budgeted 1.67 trillion, but said this was unlikely to affect the fiscal deficit target of 4.6 percent of gross domestic product.
• The financial markets are not so sure.
• The fiscal deficit for the current fiscal year is widely expected to reach 5.5 percent of GDP, which would force the government to borrow an extra 353 billion rupees.
• “No doubt, there is pressure on the fiscal deficit front. But we are still to decide about our borrowing requirements,” the official said. “Once we work that out, we will notify it.”
• However, New Delhi could go for higher borrowing as the budgeted fiscal deficit target will be missed, Press Trust of India reported on Tuesday, quoting an anonymous government official.
• “Growth slowdown is a big challenge. We may miss the direct tax target … meeting 4.6 per cent fiscal deficit target is out of the question,”  the official as saying.
• “There has to be extra (market) borrowing to bridge (the revenue) deficit. If deficit increases then the government will have to borrow.”
• Bond dealers are already fretting that the government could announce additional bond auctions, pushing up bond yields.
• The benchmark federal bond yield shot up on Tuesday after Monday’s unscheduled debt sale announcement. The 10-year benchmark bond yield ended at 8.48 percent, after rising as much as 8.59 percent on the day. On Monday, it gained 12 basis points to close at 8.49 percent.
• The official sought to allay the markets concerns.
• “Growth in advance tax numbers has slowed down. It is an open secret now,” the official said. “However, there will not be a huge shortfall in revenue receipts.”

many may now have to take on hedging mechanisms

•  Foreign mutual funds that invest in Indian shares are trailing onshore rivals by the widest margin in 13 years due to a dive in the rupee, raising the risk of sharp investor withdrawals unless funds embrace unfamiliar and costly currency risk hedging.
• The contrast in performance highlights how foreign funds – there are nearly 180 of them collectively managing some $32 billion – have been caught off-guard by volatility in the Indian currency, and many may now have to take on hedging mechanisms.
• “The philosophy for most offshore funds that run dedicated India strategies is that they want to take an explicit call on India as a whole,” said Binay Chandgothia, a managing director at Principal Global Investors that manages over $200 billion.
• “Hedging is not a huge focus for a lot of them.”
• The rupee has dropped more than 16 percent against the U.S. dollar since July, making it Asia’s worst performing currency this year. That has piled on the agony for foreign investors already suffering from a near-25 percent slide in the BSE Sensex this year.
• India-focused foreign stock mutual funds have seen cumulative outflows worth $4.5 billion this year to end-November, according to data from industry tracker Lipper. Their Indian peers have seen net inflows worth $1.34 billion, data from the Association of Mutual Funds in India showed.
• Offshore equity funds lost an average 31.4 percent in January-November, 11.6 percentage points more than the average loss in funds based in India, Lipper data showed. Onshore funds manage $37 billion in assets.
• The last time foreign funds underperformed by more was in 1998 when they gained 4.3 percent on average, but lagged the 17.7 percent average return of onshore equity mutual funds.
• Barring two funds betting on the consumer goods sector and two arbitrage funds run by the fund unit of Goldman Sachs in India, all equity funds have posted negative returns in 2011.
• Funds that focus on infrastructure lead the pack of losers.
• The worst performers to end-November are HSBC India Infrastructure Equity and OkasanAM India Infra Related Equity, down 59 percent and 45 percent, respectively. Both funds measure their performance in Japanese yen, which has strengthened more than a fifth against the rupee, adding to the losses from falling infrastructure shares in Asia’s worst-performing stock market this year.
• Japan-based, India-focused funds manage $5.5 billion, the highest among the offshore funds. Their return divergence with onshore peers was 15.6 percentage points, Lipper data showed.
• Vijay Krishna-Kumar, adviser to the TCG IndiaStar hedge fund founded by Purnendu Chatterjee, a former adviser to investor George Soros, said the divergence will drive people to hedge more, though much of the damage has been done.
• “As with most things, the moment most start doing it, that will be the time to buy the rupee. It already looks way overdone short term (but short term only),” he said in an email response to a Reuters inquiry.
• In the second half of the year, exposure to foreign exchange risk made Indian hedge funds the worst performers in the global hedge fund industry, according to Eurekahedge. That’s partly due to the way hedge funds investing in Indian equities are required to operate.
• Due to regulatory restrictions that prohibit foreign investors from going short Indian shares on the cash market, hedge funds have to use the country’s large single-stock futures market to hedge long positions or make outright bearish bets.
• However, 20 percent of the value of the short exposure needs to be paid to domestic brokers as margin. As this is in rupees it further adds to the currency risk, according to Farhan Mumtaz, a hedge fund analyst at Eurekahedge in Singapore.
• For those looking to manage foreign exchange risk, there are a few options but they tend to be expensive.
• Buying rupee forward contracts, which would lock in the exchange rate at the time the contract was entered into, would, on average, take 5 percent off the annual bottom line.
• “Both hedge funds and long-only funds in India generally don’t hedge because of the prohibitive cost,” said Hong Kong-based Ravi Mehta, founder of India-focused hedge fund Steadview.
• Moreover, many investors actually want funds to take exposure to the currency, reckoning the rupee will appreciate over the long term given India’s economic fundamentals, say market experts.
• But those assumptions have unravelled this year as political inertia, a high import bill due largely to crude oil and gold, and deleveraging in Europe’s banking system, which has triggered a scramble for dollars, have battered the rupee.
• “They remain completely unhedged on the currency exposure and therefore take a massive hit when the rupee depreciates as it has in 2011,” said Gautam Prakash, founder of United States-based hedge fund Monsoon Capital.
• Monsoon India Opportunities is down just 3.8 percent this year, which Prakash said is partly because they actively hedged out currency exposure.
• Others may have been less nimble.
• Dhruva Raj Chatterji, a senior analyst at Morningstar in India, said some firms offer variants of funds which can do hedging, but these had relatively small assets and haven’t been able to protect the downside this year.
• The offshore non-deliverable forwards market in the rupee is among the most liquid in Asia, with the Chinese yuan and Korean won. Global banks carrying out trades for themselves or for foreign institutional investors playing India are the dominant participants.
• “Many long/short managers do it, but it’s unclear as to how investors may view this since it also demands an FX competence, which may be outside the remit of many managers,” said TCG IndiaStar’s Kumar.

how grim 2012 can become

• When tomorrow’s historians write about the Great Stagnation that blighted the rich world’s economies in the early 21st century, 2012 is in danger of standing out as a depressing turning-point. It could be the year in which a weak recovery is walloped by avoidable policy errors—mistakes that send economies from Italy to Britain back into recession.
• There will be parallels with 1937, when a wrong-headed tightening of fiscal and monetary policy dragged down America’s economy and extended the pain of the Depression. The details are different, but in 2012, too, avoidable errors will ensure that the Great Stagnation lasts far longer than it needs to.
• The first, and biggest, of these errors will be Europe’s mishandling of the euro crisis. Despite the obvious failure of Europe’s “muddling through” strategy, there will be more of the same. The holes in the latest rescue plan, hammered out in October, will become ever more obvious in 2012, even if it survives political wobbles in Greece. In each of the three big areas where European politicians claim they acted boldly—creating a financial firewall to convince investors that solvent but illiquid economies such as Italy and Spain will not be forced to default, recapitalising banks and dealing once and for all with Greece’s unpayable debts—the plans will prove to be a timid middle course. Just enough will be done to fend off financial catastrophe; not enough to solve the underlying problems.
• Under its new Italian president, Mario Draghi, the European Central Bank (ECB) will remain reluctant to be the lender of last resort to illiquid governments. Nor will Europe’s creditor governments add to the region’s rescue funds or introduce Eurobonds backed by the might of the euro area as a whole. Instead the firewall will be pieced together with a complicated mix of guarantees, special-purpose vehicles and creative borrowing. Europe’s main rescue fund, the European Financial Stability Facility, will issue partial guarantees for new sovereign debt. It will provide seed capital for new financial structures into which Europe hopes to tempt sovereign-wealth funds and private investors—hopes that will prove quixotic.
• The complexity of a jerry-rigged firewall will undermine its effectiveness. A similar story will play out in Europe’s efforts to bolster its banks. Banks will be forced to increase their risk-weighted capital ratios by the middle of 2012. But they may do so by shrinking their assets, thus constricting credit and exacerbating the squeeze on Europe’s economies. And without a steely European bank regulator or a single finance minister to oversee the process, fears about banks’ health will not go away.
• The fragility of Europe’s defences means the big debt write-down that Greece needs will be both less effective and unnecessarily dangerous. Greece’s private creditors will see a “voluntary” restructuring in 2012, with the nominal value of the debt reduced by 50%. That will be a big step forward, but still not enough to restore the country to solvency. Contortions to keep the debt deal “voluntary” (and so avoid triggering credit-default swaps) will do lasting damage to that market.
• Just as in 2011, the uncertainty created by this muddle-through approach will weigh heavily on financial markets. The economic damage from it will become more evident, particularly as embattled banks curtail their lending. Worse, this uncertainty will be compounded by the second avoidable error of 2012: an excessive embrace of short-term budgetary austerity.
• Most rich countries will begin 2012 feebly, with GDP growth well below its trend rate. Yet virtually all plan to step up the pace of austerity. As a group, the big economies of the rich world will see budget cuts worth more than 1% of GDP in 2012, twice as much as in 2011 and one of the biggest collective tightenings on record.
• The rich world will see one of the biggest collective tightenings on record.
• Some countries, particularly the embattled economies on the periphery of the euro zone, have no choice. They have lost the confidence of financial markets and are being pushed by their rescuers to slash deficits. Britain’s government refuses to adjust its course for fear of losing markets’ confidence. Policymakers in Germany and the Netherlands are fiscal hawks by faith, believing austerity is the only appropriate remedy for the rich world’s ills. In America the tightening will come by default, as Republicans in Congress refuse to pass Barack Obama’s latest stimulus plan and as temporary tax cuts expire.
• This fiscal contraction will weigh heavily on the rich world’s growth. Fortunately, central banks—in contrast to 1937—will try to counter, rather than compound, the problem. The ecb will cut short-term interest rates close to zero; the Bank of England will add to the quantitative easing (QE) it restarted in October 2011; America’s Federal Reserve will also do more QE and may set an explicit target for long-term interest rates. Such monetary easing will prevent a severe downturn, but it will not stop the recovery from stalling. Some countries will be pushed back into recession: certainly Italy, probably Britain, possibly America.
• That pain would be worth enduring if it led to a better medium-term budget outcome. Unfortunately, in far too many places it won’t. In some cases that is because of another set of budget mistakes. In America, for instance, political gridlock will prevent any progress in dealing with the country’s medium-term deficit problem, even as it enshrines short-term tightening. Elsewhere, such as in Europe’s periphery, the scale of budget tightening will cause such economic damage that the countries’ debt outlook will darken rather than brighten. Instead of a virtuous cycle where fiscal austerity leads to greater confidence and better prospects, the opposite dynamic will take hold.
• Might booming emerging markets help? Not as much as you might think. China’s own growth is slowing, as it must if inflation is to be checked. And with less room now to respond with another spending binge, China and other emerging economies will be more vulnerable to damage from a new downturn in the West.
• How grim 2012 becomes will depend on how far, and for how long, politicians persist with their misguided policies. In many countries the election cycle bodes ill. America is unlikely to see big political compromises in a presidential-election year. On both sides of the Atlantic a deep recession or a serious financial crash would probably induce bolder solutions. But the most likely outcome is an economy not quite weak enough and a crisis not quite large enough to galvanise spineless politicians. That’s why 2012 will be the year of self-induced stagnation.

fresh U.S. financial sanctions on Tehran, a cause of worry for Indian refiners

• Indian companies have begun talks with alternative suppliers to slowly replace Iranian oil, fearing their current mechanism for payments to Tehran for some 350,000 barrels a day (bpd) via Turkey could soon succumb to sanctions, industry sources said.
• Plans for fresh U.S. financial sanctions on Tehran have worried its Asian customers who fear they will have no way to pay for crude imports from Iran.
• India, which a year ago lost one conduit for payments, is already looking for alternatives as Halkbank, the Turkish bank handling some transfers, refused to open an account for Indian refinery Bharat Petroleum Indian refiners are also upset that Iran has asked them to pay about $15 million as interest on delayed payments in the first seven months of 2011 when they could not transfer funds.
• India’s biggest refiner, Indian Oil Corp., has sought an additional two million barrels of crude from Saudi Arabia for January, a source privy to the development said. IOC buys about 30,000 bpd oil from Iran.
• Saudi Arabia has not yet agreed to supply the extra barrels, this source said. Allocations for January have already been done.
• India’s Mangalore Refinery and Petrochemicals Ltd, the biggest Indian client of Iran with imports of about 150,000 bpd, has sought extra supplies from Saudi Aramco and Kuwait Petroleum, a separate source said.
• Saudi has already agreed to supply 20,000 bpd extra barrels to MRPL in 2012.
• Another Indian refiner, Hindustan Petroleum, plans to tap the spot market for low sulphur oil to help it meet local pollution regulations, besides seeking more volumes from other suppliers, a company source said.
• HPCL earlier this week issued a spot tender after a gap of about 10 months for purchase of sweet crude oil.
• A local state pollution control body has asked it to either cut runs at its southern India plant or lift processing of low sulphur oil. HPCL buys about 70,000 bpd oil from Iran.
• The latest U.S. proposals allow countries allied to the United States to seek exemptions.
• Officials at Indian oil firms say they would approach the country’s oil ministry to ask it to request exemptions.

many Europeans have sought inspiration from the United States

• In the frantic race to save the euro, many Europeans have sought inspiration from the United States, perhaps the most successful monetary union in history. Germany’s council of economic experts has proposed a debt “redemption pact” modelled on the American federal government’s assumption of state debts in 1790. To European federalists, America demonstrates that monetary union cannot survive without fiscal union. And proponents of a European lender of last resort to insulate sovereigns from liquidity crises note how America can still borrow at 2% thanks to a deep and liquid government bond market backstopped by the Federal Reserve.
• Look more carefully, however, and the American example is more complicated. Fiscal and currency union did indeed kick-start America’s early economic development. But fiscal and monetary frameworks were so rudimentary that they contributed little to nation-building.
• America began life as a fiscal basket-case. The federal and state governments were deeply in arrears on loans taken out to finance their war for independence from Britain; federal debt traded at 50 cents on the dollar, state debt for 20 cents or less. Alexander Hamilton, the first Treasury secretary, considered it vital to America’s economic health to re-establish faith in the national credit. He proposed in 1790 that the federal government assume the states’ war debts and then arrange a new schedule of payments and interest to refinance all of the republic’s unpaid bills. Holders of the restructured bonds would be encouraged to exchange them for capital in a new central bank that would issue a uniform currency to unify the states’ financial systems.
• Foreshadowing the rifts within Europe today, Hamilton’s plan was deeply divisive. Virginia and other southern states that had paid off their debts resented being asked to pay taxes to bail out the others. Hamilton at one point feared for the future of the union if his plan did not pass: “Our credit will burst and vanish; and the States separate, to take care every one of itself.”
• Virginia eventually withdrew its opposition in return for having the nation’s new capital located on its borders. But Hamilton’s success at forging a fiscal union did not mean America now also had a fiscal policy that would transfer resources from strong states to weak. For the first century of America’s existence, the federal government’s presence was minuscule. Its total expenditures were usually less than 2% of gross domestic product (compared with 25% now), not much different from the European Union’s expenditures today as a proportion of the EU’s GDP, and the overwhelming share went to national defence. America did not become a transfer union until the New Deal of the 1930s.
• Nor did the federal assumption of state war debts in 1790 mean the entire country was thereafter liable for the debts of individual states, as European nations would be under proposals for Eurobonds. In the 1820s and 1830s many states borrowed overseas to fund canals and other internal improvements.
• Jonathan Rodden of Stanford University says some investors in such bonds apparently thought the federal government stood behind them. But that expectation was shattered when, following the depression of the late 1830s, nine states defaulted. In subsequent decades, most adopted balanced-budget laws to limit the growth of their debts. Michael Bordo of Rutgers University says the lesson for Europe is to ban bail-outs and stick by the rule.
• As for monetary union, America twice created central banks in its early years and then dismantled them because of populist dislike. Private, state-chartered banks issued their own currencies which often traded at a discount to those of other banks, depending on a bank’s perceived ability to redeem the currency in specie (gold and silver). Rapid growth in the western states led to perpetual shortages of money, high interest rates and, it appears, balance-of-payments deficits with eastern states. Those deficits were financed by eastern capital as specie moved into western banks. But western banks still habitually issued more bank notes than even that increased specie could back, leading to inflation.
• Peter Rousseau of Vanderbilt University notes the Second Bank of the United States would sometimes accumulate the banknotes of weak banks and present them en masse for redemption. If the bank could not comply, it failed. This had the effect of forcing deflation on those regions with failing banks, and thus redressing the balance-of-payments imbalances that had developed. But it also fuelled resentment at the bank and in 1832 President Andrew Jackson vetoed the renewal of its charter.
• America spent the next 80 years without a true central bank, and as a consequence suffered repeated banking panics and depressions. But the economic union, if anything, grew tighter (with the exception of the South, before and after the civil war). For all the shortcomings of America fiscal and monetary institutions, capital and labour did move freely from state to state. When one state suffered higher unemployment, its people left for better opportunities in another. By one estimate, the north-east and south-Atlantic regions’ share of the labour force declined from 93% in 1800 to 52% in 1860, while the Midwest’s share grew from less than 1% to 23%.
• Today, Europeans remain far less mobile than Americans, despite the EU’s free market in labour. This is probably the result of linguistic and cultural barriers and of inflexible labour laws. The ultimate lesson of America, then, is that what holds an economic union together has less to do with fiscal and monetary institutions than the desire of its people for closer political cohesion. That is an example that Europe is struggling to emulate.

Two views of the future

• Somebody is going to be proved wrong in 2012 and will lose a lot of money. Either the bullion market or the Treasury bond market is mistaken about the long-term inflationary outlook.
• By early September 2011, gold was trading at around $1,900 an ounce, an indication that investors felt inflation was set to soar. Such an outlook would normally be bad news for government-bond markets. But the ten-year Treasury bond was simultaneously yielding less than 2%, an indication that the “bond vigilantes” were far more concerned about deflation than inflation. Although the gold price fell and bond yields rose in October, the underlying contradiction didn’t disappear.
• Such historically low bond yields might seem a very bad bargain indeed. But investors have the example of Japan to ponder. Many years of fiscal deficits, a high debt-to-GDP ratio, low interest rates and quantitative easing (QE): Japan has tried the lot without escaping from its economic doldrums. By September 2011 its ten-year bond yield had slipped below 1%.
• If the rich world is following Japan’s template, equity markets are likely to have a rough 2012. A year in which Treasury bond yields stay at 2% or below would probably be one in which America at least flirted with recession. But equity investors are unlikely to be much happier if the gold bugs turn out to be right. Although shares may be a better hedge against inflation than government bonds, they are still prone to suffer if prices rise sharply, as they did in the 1970s. Equity valuations, as measured by the price-earnings ratio, tend to be highest when inflation is low and stable. Furthermore, a sharp rise in inflation would probably force the Federal Reserve to abandon its commitment to keep interest rates at their current low levels. That commitment is itself a sign of the Fed’s worries about the economic outlook.
• Indeed, unlike 2008 or 2009, the equity markets may not get much of a hand from the authorities in 2012, since policymakers seem to have run out of ammunition. Interest rates are about as low as they can go, while debt-burdened governments are opting for austerity rather than further pump-priming. Europe’s travails weighed on investors’ minds throughout 2011, as politicians looked for a way to deal with the high debts incurred in Greece and other countries.
• There is always the hope of further QE, with the central bank creating money to buy financial assets. But the policy has become controversial, with Texas’s governor, Rick Perry, a candidate for the Republican nomination for the American presidency, describing the idea as “almost treasonous”. Nor is it clear that previous rounds of QE did much to help the real economy.
• The best hope for equity investors is that both the gold bugs and the bond vigilantes are wrong.
• Political uncertainty may also weigh on the markets next year. Although Wall Street denizens may not be great fans of President Barack Obama (and generally prefer Republican leaders), they might also be concerned if a tea-party-inspired candidate took the White House. An immediate commitment to balance the budget might be a rather more austere economic diet than equity investors would desire, even if bond investors took cheer. Meanwhile, in Europe, the French presidential election may make it more difficult to make further progress on dealing with the debt crisis (not an easy matter at the best of times).
• However, the picture for equity investors is not necessarily one of total gloom. For a start, markets react not just to the economic fundamentals but to how the fundamentals differ from their expectations. Stockmarkets suffered a setback in the summer of 2011, for example, because economic growth turned out to be weaker than expected. All the bad news about 2012 may have been priced in by the time that year begins.
• Secondly, the markets are also forward-looking. So even if the developed world does slip into recession in 2012, at some point investors will start anticipating a recovery later in the year, or in 2013.
• A further cushion for investors is that the corporate sector’s financial position has been strong. American profit margins on some measures were even higher in 2011 than they were before the credit crunch; the last time they were so high was in the 1960s. Although that suggests margins are due for a fall, companies have built up a cash cushion to protect themselves against recession; some may even use the weakness of the economy as an opportunity to launch an acquisitions spree.
• The best hope for equity investors in 2012 is that both the gold bugs and the bond vigilantes are wrong. Rather than succumbing to inflation or recession, the global economy will muddle through, as it has many times in the past. Such an outcome is perfectly possible, although investors will want to keep fingers, toes and everything else crossed before they commit their life savings to such a benign view.

India needs new policy initiatives, says finance minister pranab mukharjee

• India will need to take new policy initiatives to revive slowing growth and control inflation as fiscal and monetary options are increasingly limited, the finance minister said.
• Economic gloom in India deepened on Thursday with the rupee hitting another record low, adding to price pressures a day after government data showed inflation in November stayed above 9 percent for the 12th consecutive month.
• “Options for fiscal steps as well as monetary measures are increasingly limited,” Pranab Mukherjee told an industry event. “However, there is potential for policymaking in other areas.”
• Sharp increases in interest rates were hurting growth and India needed practical solutions to address its economic slowdown, such as building political consensus to open up sectors to foreign investment, he said.
• Earlier this month New Delhi was forced to suspend plans to open its $450 billion supermarket sector to foreign firms such as Wal-Mart Stores Inc, backtracking from one of the government’s boldest reforms in years in the face of a huge political backlash.
• After raising interest rates by 375 basis points over 13 moves since early 2010, the central bank is expected to pause at its scheduled policy review on Friday after industrial output in October slumped for the first time in more than two years.
• “Slowdown in industrial growth is of particular concern and its impact on employment,” Mukherjee said. “There are also immediate concerns relating to fiscal deficit and the current account deficit.”
• The rupee slumped to a record low of 54.30 to the dollar on Thursday, as investors grew increasingly bearish about the outlook for both the domestic and global economies, raising the prospect of further capital outflows from emerging markets.
• The sliding currency, which has tumbled nearly a fifth from its July high, has added to the headaches of an already beleaguered government and has complicated monetary policymaking for the RBI.
• Headline inflation, which stood at 9.11 percent in November, is “unacceptable”, the finance minister said. The central bank has projected inflation to ease to 7 percent by the end of March.

Can OPEC do more to prevent a global recession than the Fed?

• Can anything save us? With the United States paralysed, Europe tearing itself to pieces and China desperate to control inflation, there seems to be no safety net for a world economy on the brink of recession. But what about OPEC?
• Every global recession since the 1970s has been preceded and painfully aggravated by a sharp spike in oil prices, so OPEC may appear an unlikely saviour. In 2012, however, a collapse in the price of oil—not just a modest decline, but a plunge deep enough to revive American consumption and to transform the Greek, Portuguese, Spanish and Italian trade deficits­—could be the deus ex machina that averts a catastrophic double-dip.
• An oil-price decline of 40% from the peak of May 2011 would bring down Brent crude from $127 to $77 a barrel. For the American economy, which consumes 7 billion barrels of oil annually, a $50 fall in the oil price would offer a stimulus roughly equivalent to a $350 billion tax cut, even without allowing for parallel declines in natural gas and coal. If most of the price reductions were concentrated in the months around the new year, they could well be sufficient to avert an American recession and revive financial confidence in the euro zone.
• But is it reasonable to hope for such a happy outcome? The answer, as usual in economics, is yes and no.
• Yes, in the sense that a $50 decline from the 2011 peak would merely reflect the slowdown in the global economy and would bring the Brent oil price back to where it was in the autumn of 2010. Most commodity analysts believe, however, that such an abrupt reversal is very unlikely. They insist that the $50 increase in oil prices that occurred in the first half of 2011 was not just a temporary response to supply disruptions in north Africa and the surge in demand for fuel oil caused by the Japanese nuclear disaster. Instead, the oil inflation of 2011 was widely believed to reflect a long-term structural increase in demand from China and other developing economies running into the inexorable limit of a global oil supply that is at or near its geological peak.
• Whatever the geology behind this “peak oil” theory, there are reasons to ignore it in assessing the interaction between oil prices and global growth in 2012. The most obvious is the price of the American oil benchmark, West Texas Intermediate (WTI). By early October 2011, WTI had already fallen by roughly $30 from its May peak of $113 and was back to its level of October 2010. In America, then, the oil-price surge triggered by the Arab spring had been reversed by October 2011—and the benefits of cheaper oil seemed likely to help American consumer spending and investment by the turn of the year.
• Analysts committed to the “peak oil” theory have ignored this evidence, insisting that the fall in American oil prices was a temporary aberration and the much higher Brent price was a more accurate global benchmark. And indeed the OPEC “reference basket”, a blend of prices charged by OPEC producers, remained much closer to the European than the American benchmark. Economic and political logic both suggest, however, that the unprecedented divergence of $30 between Brent and WTI is much more likely to be arbitraged away by a fall in the European oil price than a rise in the United States.
• The economic logic is that demand is certain to weaken as a result of the near-recession in the global economy. So it is hard to imagine why American oil prices would suddenly rebound. Much more likely is that the shortage of light sweet crude in Europe will be made good as 2012 progresses—first out of excess American inventories and then by recovering Libyan output.
• The political logic is equally compelling. If OPEC decided to cut production, global oil prices could, in theory, converge upwards to the $100-plus European level instead of falling to the American benchmark of $80 or below. But will OPEC really try to defend a price of over $100 and watch the world economy sink into a new recession? Unlikely.
• A worldwide recession could cause oil prices to plunge by far more than $30. In 2008 Brent and WTI both collapsed by $120—from $150 to $30. After the Arab spring, Middle Eastern governments feel more vulnerable than ever before. This is particularly true of Saudi Arabia, the only oil producer with the ability to vary output in a big way and influence prices. The last thing the Saudis want is another 2008-style plunge. By pumping more oil and thus helping to ease global oil prices into a range of $60-80, the Saudis and OPEC could do more to prevent a global recession than the Fed, the White House or the European Central Bank. This could be the year when OPEC finally realises that it serves its own interest by supporting, instead of sabotaging, global growth.

India’s economic gloom deepens as rupee fuels inflation

• India’s economic gloom deepened on Wednesday as figures showed a record low rupee is adding to Reserve Bank of India’s (RBI) inflation headache and an adviser to the prime minister said there was little that could be done to check the currency’s slump.
• An 18 percent slide in the value of the rupee since July is adding to a growing worry of economic crisis in the country as stubbornly high inflation ties the hands of the central bank from easing policy to try to turn a grim economic outlook.
• A worsening fiscal picture means the government’s financial firepower is also limited. Parliament is in gridlock, preventing approvals for investment that could help offset a ballooning current account deficit.
• Indeed, C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, suggested there was little policymakers can do to counter the slide in the currency.He said the rupee was subject to the whims of global investors, who are buying the dollar as a safe haven from the euro-zone debt crisis.
• “The behaviour of the rupee is also a reflection of the behaviour of the dollar,” he said. “There is very little that can be done.”
• Data on Wednesday showed wholesale prices, the main gauge of inflation in India, rose 9.11 percent in November from a year earlier. That showed inflation actually fell from 9.73 percent in October thanks to a sharp pull back in food price pressures.
• However, fuel inflation rose to 15.48 percent from 14.79 percent and manufacturing inflation increased to 7.7 percent from 7.66 percent as the tumbling rupee pushed up import costs.
• The slide in the rupee has caught policymakers flat-footed and by firing up import costs it is undermining the RBI’s forecast for inflation to drop to 7 percent by March. That potentially pushes back when the central bank could ease policy.
• The rupee fell to a fresh low of 54 per dollar on Wednesday.
• Many economists believe it will fall further, in turn keeping downward pressure on Indian stocks, which are off 22 percent in 2012, among the worst in Asia. The main index fell 0.76 percent on Wednesday.
• “The bearish sentiment is very strong and there is nothing going for the rupee,” said Hari Chandramgathan, a foreign exchange dealer with Federal Bank.
• While the central bank has stepped in to smooth volatility in the foreign exchange market, it has not mounted a spirited defense of the currency and is not expected to do so given limited reserves and the need to fund a swelling trade deficit.
• “Central bank has a limited flexibility, but I think they should intervene,” said M. Govinda Rao, a member of Prime Minister Manmohan Singh’s economic advisory team.
• “RBI can intervene, but since the balances are not large, there is a serious problem. RBI cannot be immune to that,” he said, adding that one possibility is to raise interest rates on deposits of non-resident Indians.
• The current account deficit hit $14 billion in the April-June quarter, nearly triple the previous quarter’s tally.
• The risk is that a plunging rupee will be seen by investors as reason enough to pull capital out of the country, adding yet more downward pressure on the currency and setting off a balance of payments crisis.
• Deutsche Bank said in a Nov 24 report that now is “India’s time of reckoning” and UBS said investor sentiment “has gone from cautious to outright scared.”
• The rupee is vulnerable because external debt payments of about $20 billion are due in the first half of 2012 and because importers are not effectively hedged, said Sailesh K. Jha, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore.
• “We anticipate continued net outflows from the equity market into first half of 2012 as the uncertainty on the outlook for India growth, inflation and macroeconomic policies lingers,” said Jha, who expects the currency to touch 57 in the first quarter of 2012, with 60 possible in the first half.
• India’s economy has been battered by local setbacks and global headwinds. The government had originally projected growth of 9 percent in the fiscal year to March 2012.
• Now, analysts say India will struggle to grow even 7 percent, a sharp drop from 8.5 percent in 2010/11.
• Such forecasts were supported by data on Monday showing India’s industrial output slumped more than 5 percent in October from a year earlier, far worse than expected and the first fall in over two years.
• Central banks elsewhere in the world, including in China, Brazil and Indonesia, have started to ease monetary policy as dark economic clouds gather globally.
• India’s central bank will not be able to move so fast.
• Headline inflation has been above 9 percent for 12 consecutive months despite 13 rate increases since March 2010 that have lifted the repo rate — the policy rate — to a three-year high of 8.5 percent from 4.75 percent.
• While November’s inflation was the lowest in a year, it brought little joy to investors, who pushed up bond yields and swap rates.
• The central bank indicated in October that further rate rises may not be needed if inflation comes down, raising hopes in India that rates might start to come down, but the rupee’s drop complicates that.
• “The rapid depreciation of the rupee is going to throw out of the window all the calculations on inflation, given the contribution of imported inflation to manufactured product price inflation,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
• The central bank reviews monetary policy on Friday, but with inflation stubbornly above 9 percent it is widely expected to keep rates on hold.
• “Even though the RBI will definitely pause on rates, the exact timing from which it would have started easing interest rates has once again turned uncertain due to the tumbling currency,” Nitsure said.
• Tight cash conditions in the money market have fuelled speculation that the central bank might lower the cash reserve ratio, the percentage of deposits banks must maintain with the RBI, as early as Friday. However, a Reuters poll showed economists don’t expect a CRR cut before 2012.
• “The RBI is unlikely to jump the gun either on CRR or on the repo rate just yet. I think these are both early next year outcomes. But on Friday what it will do is it will sound a lot more dovish. That in itself is an important change,” said Rajeev Malik, an economist with CLSA in Singapore.