India’s central bank is expected this week to hike interest rates for the seventh time in less than 12 months to clamp down on soaring inflation as clouds gather over the country’s booming economy.
Shares on the Mumbai Stock Exchange, one of last year’s hottest markets, have fallen to three-month lows due to expectations of interest rate rises, which will dampen economic growth currently running at 8.5 percent to 9 percent in Asia’s third-biggest economy.
Annual inflation zoomed last month to 8.43 percent, up by nearly 1 percentage point from the previous month, led by a spike in the cost of food, gasoline prices and commodities.
The Reserve Bank of India (RBI) has warned of “surging inflation.”
Further souring the mood, investment house Goldman Sachs issued an alert this month on India and China over inflation, telling clients to shift into Wall Street and other “old world” share markets as a safer bet in coming months.
“We expect the Reserve Bank will raise rates by 25 basis points but the possibility of 50 basis points also has to be entertained,” HSBC chief economist Lief Lybecker Eskesen said.
Rising prices have emerged as a major political and economic challenge in emerging markets across Asia, with China also expected to raise interest rates early next month to combat 5 percent inflation and a property bubble.
In India, pressure has been steadily growing on the central bank and government to act to rein in inflation which threatens Indian Prime Minister Manmohan Singh and his Congress party in the run-up to key state elections this year.
Rising food prices have added to public anger over a series of massive corruption scandals, creating a toxic mix for Singh’s administration just 18 months into its second term.
The price of onions, for example — a staple on family shopping lists and a politically potent issue — has tripled to 80 rupees (US$1.75) a kilogram in a few months.
“A lot of countries are still flirting with deflation. On the other hand, we are having surging inflation,” RBI Governor Duvvuri Subbarao said last week.
India’s central bank has been one of the most aggressive in raising the cost of borrowing as the South Asian economy roared out of the global downturn.
It has raised rates six times since last March, pushing the repo — the rate on loans it makes to commercial banks — to 6.25 percent and the reverse repo — the rate it pays to banks for deposits — to 5.25 percent.
Economists are split on the efficacy of raising interest rates to tackle inflation driven by food prices, but all agree that sustained rising prices can lead to a destabilizing wage-price spiral.
This was one of the concerns raised by Goldman Sachs in its report on India, which also focused on a yawning record current account deficit of 4.1 percent of GDP.
Investor enthusiasm for China is also cooling as it fights inflation and a property bubble amid expectations that the US will experience a strong recovery.
“Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather,” said Tim Moe, Goldman’s chief Asia-Pacific strategist, British media reported.
However, Goldman Sachs and other economic houses say they are still bullish on the longer-term outlook for India with its vast market of 1.2 billion people.
“There are near-term hiccups for sure,” said Rohini Malkani an economist at Citi India, but the obstacles will “not be enough to derail the [India] story” with its vast consumer market.
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments. The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said. The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades. The local currency surged as exporters rushed to
PRESSURE EXPECTED: The appreciation of the NT dollar reflected expectations that Washington would press Taiwan to boost its currency against the US dollar, dealers said Taiwan’s export-oriented semiconductor and auto part manufacturers are expecting their margins to be affected by large foreign exchange losses as the New Taiwan dollar continued to appreciate sharply against the US dollar yesterday. Among major semiconductor manufacturers, ASE Technology Holding Co (日月光), the world’s largest integrated circuit (IC) packaging and testing services provider, said that whenever the NT dollar rises NT$1 against the greenback, its gross margin is cut by about 1.5 percent. The NT dollar traded as strong as NT$29.59 per US dollar before trimming gains to close NT$0.919, or 2.96 percent, higher at NT$30.145 yesterday in Taipei trading