India raises interest-rates by 0.5% in spite of getting cheap Russian oil

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by Shaun Richards

The present phase is seeing a wave of central banks all rushing to demonstrate that they are inflation targeters. This morning it has been the turn of India.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (June 8, 2022) decided to:

  • Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent with immediate effect.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent.

  • The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. ( Reserve Bank of India )

In terms of inflation targeting things are not going so well as India has a higher target that many and especially wide bands.

These decisions are in consonance with the objective of achieving the mediumterm target for consumer price index (CPI) inflation of 4 per cent within a band of
+/- 2 per cent, while supporting growth.

But even an upper band of 6% is not enough in the face of this.

CPI headline inflation rose further from 7.0 per cent in March 2022 to 7.8 per cent in April 2022, reflecting broad-based increase in all its major constituents.

The “broad-based” bit is bad for central bankers generically because last year they were trying to focus on core inflation and claim that things would be “transitory”. These days they cannot even cling to that.

Core inflation (i.e., CPI excluding food and fuel) hardened across almost all components, dominated by the transport and communication sub-group.

As to the detail for the inflation rise we are told this.

Food inflation pressures accentuated, led by cereals, milk, fruits, vegetables, spices and prepared meals. Fuel inflation was driven up by a rise in LPG and kerosene prices.

The issue of food and energy inflation in country with so many poor people is a troubling one. There had to be serious issues behind this announcement from the 14th of May.

Asserting that there is no wheat supply crisis in the country, Commerce Secretary BVR Subrahmanyam on Saturday said the government’s decision to ban wheat exports will help in controlling rising domestic prices and meeting the food requirement of India’s neighbours and vulnerable countries. ( Outlook India )

This being India let us check in on its cooking staple.

The average wholesale onion prices have increased by 35%, from to Rs 850 per quintal to Rs 1,150 per quintal during the last three weeks due to rise in demand as compared to supply. ( Times of India).

Of course those are issues now which it is too late to do anything about so the real causus belli so to speak is this.

 The MPC noted that inflation is likely to remain above the upper tolerance band of 6 per cent through the first three quarters of 2022-23.

They do note that the government has offered something of a helping hand.

In this context, supply side measures taken by the government in reducing excise duties on petrol and diesel, along with the other measures would help in mitigating the inflationary pressures to some extent.

Energy Problems

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This is a big issue for India as oilprice.com points out.

India, the world’s third-largest crude importer which relies on imports for more than 80 percent of its oil consumption, has seen a surge in its imports of Russian crude since the Russian invasion of Ukraine in late February.

How much?

In May alone, India imported over 24 million barrels of Russian crude, compared to 7.2 million barrels in April, which was the previous record high, according to data from Refinitiv Eikon cited by Reuters last week.

Indian imports of Russian crude are set to further jump in June, to around 28 million barrels, per Refinitiv Eikon oil flows data.

India is gaining quite a bit from this.

As of May 31, the discount of Urals to Brent stood at $34.45 per barrel. Front-month Brent Crude futures on the same day traded at over $124 in the late morning EST.

There is also the issue of coal.

Months of declining fuel inventories at power plants culminated in the worst power crisis in more than six years in April, disrupting industrial activity and forcing India to accelerate coal mining. ( Reuters)

This led to this.

MUMBAI, May 6 (Reuters) – India is planning to reopen more than 100 coal mines previously considered financially unsustainable,

This is a big issue for India.

On Friday, the coal ministry’s top bureaucrat said the world’s second-largest producer, importer and consumer of coal after China

It has got increasingly expensive.

COAL MARKET: Asian benchmark Newcastle coal (FOB, 6,000kcal/kg NAR) has jumped again above the incredible level of ~$400 per tonne, just below the all-time daily price set in March. Indian extra demand is tightening the market ( Javier Blas 17th of May)

The futures contract is at US $402 as I type this.

Yet the government is trying to keep power prices low.

India’s power tariffs, set by the respective states, are amongst the lowest in the world, as state-run distribution companies have absorbed higher input costs to keep tariffs steady. This has left many of these companies deeply indebted. ( Times of India)

There is an element of robbing Peter to pay Paul here as the bill is being switched from the consumer to the taxpayer who is usually the same person. But for now recorded inflation is being suppressed via this and the petrol tax reductions.

Trade

If we look at the numbers for April we see that the Indian government emphasises the 31% increase in exports compared to last year. That is welcome but they are more circumspect about the 31% rise in imports which mean that the trade deficit has risen from 15.3 billion US Dollars to 20.1 billion.

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It is always revealing when a country publishes its trade figures in US Dollars. The Rupee has fallen by a bit over 6% over the past year.

Comment

The RBI has raised interest-rates twice in short order. If you think about it logically it is rather curious to raise by 0.4% and then 0.5%. But the main issue is that like so many of their colleagues they are chasing rather than leading events which leads to the fear that having done nothing to try and stop inflation now ( which would have required a move last summer) they may be making any downturn worse.

If we address the downturn issue then the RBI is upbeat. Unlike our subject of yesterday,Japan, we see this.

,India’s real gross domestic product (GDP) growth in
2021-22 was 8.7 per cent. This works out to 1.5 per cent above the pre-pandemic level (2019-20)

With this forecast.

Taking all these factors into
consideration, the real GDP growth projection for 2022-23 is retained at 7.2 per cent,

Although I note even they think it is slowing fast.

with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced.

I can see how some Indian producers may be able to benefit from lower (Russian) fuel costs and then export cheaper products. But on the other side of the coin this does not cut it as the bill for energy is now much higher even with the discounts.

The impact of rising crude oil prices on petroleum, oil and lubricants (POL) import bill has been partly offset by export of petroleum products, which also benefitted from better price realisations in recent months.

Round tripping Russian oil will provide gains but comes with risks.

With a slowing world economy the RBI view looks rather rose-tinted to me.

Will all the cricketing nations raise interest-rates by 0.5% in this round?

 

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