A 10% fall in the rupee against the dollar will raise headline inflation by around 60 basis points in the near term, says BNP Paribas in its report
WPI (wholesale price index) based inflation continued to surprise to the downside in June.
At 4.86% y/y, up from 4.70% in May, the headline rate was below the market expectation for a 4.94% gain and BNP Paribas’ forecast for a 5.1% increase. Moreover, the index’s back data were revised down for a second month in a row, with April’s headline WPI outturn marked down to 4.77% y/y from 4.89% initially reported. While far from considered the beginning of a trend, this suggests there is some probability that the May and June readings will also be pulled down, consistent with activity losing momentum rapidly around the turn of the fiscal year.
Drilling down into the report showed that the key factor driving today’s downward surprise was a sharper-than-anticipated slide of core inflation as primary food price inflation picked up as expected. Primary food inflation picked up from 8.25% in May to reach a four-month high of 9.74% y/y in June. Month-to-month swings in food inflation have been particularly volatile in recent months given the inter-play of large base effects, the lagged impact of last year’s deficient monsoon and then excess monsoon rain in the past couple of months.
The latter was particularly important in June, with fruit and vegetable inflation jumping from 2.8% y/y to 8.4% y/y reflecting a 4.3% m/m rise once the data are seasonally adjusted, the investment bank said in its report. The sequential surge suggests primary food articles inflation is likely to stay high in the near term. But, on the basis of a normal monsoon as projected by the IMD as we move further into the year, upside risks to food price inflation look limited.
BNP Paribas’ US-style, ex-food and energy gauge, which captures roughly 60% of the WPI basket, meanwhile, slipped to 2.4% y/y from 2.5% y/y in May; the lowest for 42 months. This measure had been around 5% y/y as recently as January this year. The Reserve Bank of India’s (RBI) preferred measure of underlying WPI inflation—non-food manufactured goods inflation—dropped to 2.1% y/y from 2.4% in May; its lowest reading since January 2010.
These softer-than-expected readings on core inflation are consistent with BNP Paribas’ estimate that sub-5% GDP growth has opened up an increasingly wide output gap, dragging down core inflationary pressure. With only a modest pick up in GDP growth expected over the next year (BNP Paribas targets FY2014 GDP growth of 5.5% against 5% in FY2013), the output gap should widen further, ensuring that core inflation moves lower through the balance of this year. The investment bank’s base forecast anticipates RBI’s core measure should slide to close to 1% by end-FY2014.
The recent slump in the rupee remains the key upside inflation risk that the central bank will remain wary of. However, according to BNP Paribas and also RBI’s estimates, a 10% fall in the rupee against the dollar will raise headline inflation by around 60 basis points in the near term. The current 9% fall in the rupee vis-à-vis the dollar over the past quarter hence will, other things equal, add roughly 0.5 percentage points to headline WPI.
But other things are not equal, as the broadly commensurate fall in commodity prices over the same period is likely to largely neutralise the impact of currency weakness; an assessment corroborated by the limited sequential rises in the core measures in June. This, when set against the backdrop of sub-par domestic activity growth, means headline WPI is likely to remain below RBI’s 5%-5.5% comfort level for much of the current fiscal year or so.
Overall, today’s WPI report will further reassure the RBI that upside inflation risks are contained. However, since Fed chairman Ben Bernanke’s testimony to the Congress on 22 May, foreign institutional investors have almost consistently been net sellers of Indian bonds and overall net portfolio (debt and equity) outflows have since totalled over $9 billion according to the Securities and Exchange Board of India (SEBI) data.
BNP Paribas doubts if RBI will deliver a rate cut before it sees more evidence of global risk appetite stabilising. Cutting rates at this point could risk further capital outflows at a time when the nation’s gross external financing needs are estimated at over $250 billion over the next fiscal year.
In the guidelines for issuing new banking licences, the RBI has put in a string of requirements to further its financial inclusion agenda, including making it mandatory for the proposed banks to open at least 25% of branches in unbanked areas
The Reserve Bank of India (RBI) does not have any target in mind on the number of banking licences to be issued in this round, a senior official of the central bank has said.
“As of now, we have received 26 applications. Financial inclusion has to be a pre-condition for such banks to come. How many banks will come, that depends upon their complete plan and analysis of their proposals,” RBI executive director R Gandhi said at an event in Mumbai today.
“We will have to wait for a few months before we decide how many banks will be given licence. There is no target number,” he added.
The number would depend on the proposal and business plans of the applicants. “It depends upon the proposal and business plans including their proposed efforts on financial inclusion. We cannot predict how many applicants will pass through these requirements,” he added.
About 26 players have applied for banking licences, including the likes of India Post, LIC Housing Finance, Reliance Capital, Aditya Birla Nuvo, and L&T Finance.
In the guidelines for issuing new banking licences, the central bank has put in a string of requirements to further its financial inclusion agenda, including making it mandatory for the proposed banks to open at least 25% of branches in unbanked areas.
On the issue of financial inclusion, Gandhi said there are enormous challenges that lie ahead in achieving it.
“Post independence, we had a resolution to give attention to poverty alleviation. Our economic planning had poverty alleviation as a key plank... Still, these 40 odd years, efforts have not made serious dent. This indicates the enormous challenges that lie ahead for us in achieving financial inclusion,” he said.
He also said that several new ideas and innovative approaches were required to achieve this goal.
RBI governor D Subbarao was originally supposed to address the gathering at a central Mumbai college today, but Gandhi had to step-in as a last minute arrangement as the governor rushed to New Delhi. He was also not able to make it to another engagement at a college in the city.
Subbarao will be meeting finance minister P Chidambaram and they are likely to discuss the challenges on the macroeconomic front.
Sunil Gupta is an auditor and director of several companies related with former minister Pawan Bansal's son and nephew. He is serving on the Canara Bank board since 2007, first as government nominee director and later as shareholder director
State-run lender Canara Bank is electing three shareholder directors in its forthcoming annual general meeting (AGM) on 22 July 2013. Out of the eight contestants, the first name is that of Sunil Gupta who is serving on Canara Bank’s board since 2007, first as a government nominee director and later as a shareholder director. Gupta, closely associated with Pawan Bansal, former minister of Railways, is also auditor and director of Bansi Raunaq Energy, a company owned by Pawan Bansal’s son Amit.
According to a report from the Economic Times, Gupta helped the former minister’s son to secure loans from Canara Bank. Gupta also recommended Vikram Bansal, the former minister’s nephew for the post of independent director on the board of Canara HSBC Oriental Bank of Commerce Life Insurance Co in August 2010. Vikram was also an authorised signatory of the insurance company, a joint venture of Canara Bank with Oriental Bank of Commerce (OBC) and HSBC Insurance Holdings. Just like Gupta, he also was director of Bansi Raunaq Energy.
“Gupta is a chartered accountant for a number of companies owned by the minister’s family and became a director in state-owned Canara Bank when Bansal was the junior minister for finance responsible for expenditure, banking and insurance,” the newspaper says.
As per the guidelines issued by the Reserve Bank of India (RBI), a director on the board of a bank has to disclose if he holds any similar position in any other entity, his membership in any corporate bodies and his interests as a partner or proprietor of firms.
While Gupta was director of Bansi Raunaq Energy, he was also nominated as director of Canara Bank. However, the newspaper quoted him as saying that “Bansi Raunaq Energy was a defunct company and hence there was no conflict of interest.”
According to the Economic Times report, Canara Bank had given loans of around Rs35 crore to companies owned by Pawan Bansal’s sons and a nephew. Gupta was also auditor of Theon Pharmaceuticals and ISIS Packaging, both associated with Amit Bansal. Both companies have collectively taken a loan of about Rs10 crore from Canara Bank.
Coming back to Canara Bank, during 2007 Gupta joined the board of directors as a government nominee director. He was appointed by the government under clause 9(3)(h) of the Bank Nationalisation Act for a term of three years.
As soon as his term as government nominated director was about to expire, Gupta was elected as shareholder director under clause 9(3)(i) of the Bank Nationalisation Act for a period of three years. He is again in the race to become shareholder director for the second consecutive time. Reportedly, Canara Bank has persuaded some of its institutional investors to vote for Gupta. However, this cannot be confirmed.
If elected, Gupta would be one of the firsts to complete a term of nine consecutive years as director on the Canara Bank board, once as government nominee and twice as shareholder director.
Important question, however, is can a person become a director for 12 consecutive years by using loopholes in the rules and provisions. The provisions under which the government appoints its nominee directors and shareholders elect their representative directors are different. Both permit two consecutive terms of three years each as director. However, somebody with connections at the right places can remain director on a state-run bank board by using these same provisions. Take for example, Gupta can get elected this time as shareholder director and after three years can again be appointed as government nominee director. That means a term of 12 consecutive years.