QE3 could be negative for India

The benefits of QE3 for India could be an increase in flows into India, thereby boosting the equities market, says a Kotak research note. But QE3 is also likely to boost commodity prices, including global crude oil prices

India is unlikely to benefit much from QE3 (third round of quantitative easing), says a Kotak Research note. Further liquidity is likely to boost commodity prices, including global crude oil prices—a negative for the import bill. Export growth is unlikely to be boosted significantly as Kotak does not expect major economic benefits out of QE3. Thus, there is every chance that the CAD (current account deficit) will stay at an elevated level while the fiscal correction tends to be a moving goal-post even after the hikes in the administered fuel prices, says the Kotak Research note.


Kotak predicts that in the near term enhanced global risk appetite could lead to an increase in flows into India, thereby boosting the equities market and tending to appreciate the currency. However, given continued risks of policy implementation on the European side and with the ‘Fiscal Cliff’ in the US, sustained risk appetite is unlikely. Consequently Kotak expects the Euro-US dollar conversion rate to ultimately correct.


Kotak sticks to its range on the dollar of about Rs54-Rs57, given lasting weakness in domestic fundamentals in India.


Kotak sums up the developments in US, in the context of QE3, as Fed delivers market’s “wish list”. The FOMC (Federal Open Market Committee, which is the policy-making arm of the US Federal Reserve) is committed to expanding the Fed’s balance sheet, basing its arguments on poor labour-market conditions and inflation being below the 2% target.


The Fed will buy MBS (mortgage-based securities) securities worth $40 billion a month, continue with its Operation Twist until the end of the year and maintain near zero rates until mid-2015. Even as economic returns of the QEs are likely to have diminished at the margin, the hope is to attempt to re-flate the economy.


According to the Kotak Research note, the Fed action suggests open-ended monetary easing. Fed’s QE3 is focused mainly on buying $40 billion of agency mortgage-backed securities a month rather than the conventionally close-ended QE1 and QE2. However, the nature of QE3 differs from past QEs, as for the first time the Fed tied the scale, timing and quantum of its asset purchase policy to the progress of the economy on a monthly basis, especially the unemployment rate. It is not clear as to what unemployment rate the Fed is targeting but its own forecasts suggest the unemployment rate might not fall to 7% even by the end of 2014.


Kotak says that as a consequence, the Fed’s purchases of $40 billion of MBS a month could continue for long, given that the long-term comfort level of unemployment rate for the Fed is about 6%. The Fed would also continue to reinvest principal payments from its holdings of agency debt and agency MBS in agency MBS. Effectively, the Fed would be purchasing about $85 billion a month.


Kotak predicts diminishing economic returns of the QE. The Fed has done all that the market had been expecting. However, the fear is that, like the earlier QE, this round might also not translate into much benefit in kick-starting economic activity. The clogged monetary transmission, owing to the liquidity trap, has resulted more in market outcomes than economic ones.


Going ahead, with global growth remaining low and with European debt problems looming, the Euro-US dollar conversion rate could correct to 1.18-1.24 over the next three months, especially as the implications of the “Fiscal Cliff” looms large in the US.


Inflation to rise to 8% by year-end; forget rate cut, says Nomura

Nomura expects headline WPI inflation to rise above 8% by end-2012, and hence there is no scope for the Reserve Bank of India to cut rates until the end of 2012

WPI (Wholesale price index) based inflation rebounded to 7.55% y-o-y (year-on-year) in August from 6.9% in July, although it is closer to Nomura’s expectations of 7.4%, according to a “First Insights” note from Nomura Economics Research. June WPI was revised to 7.58% from 7.25%. The uptick in August was led by an across-the-board pick up in prices.


Nomura expects headline WPI inflation to rise above 8% by end-2012, and hence there is no scope for the Reserve Bank of India (RBI) to cut rates until the end of 2012.


The global brokerage firm expects primary inflation to remain under pressure in the coming months due to the recent surge in global commodity prices and higher food prices. In fact, the Reuters Jefferies CRB index in rupee terms is currently at a four-year high, which suggests that input cost pressures are rapidly building.


Thursday’s diesel price hike should directly add about 65 basis points (bps) to the headline inflation, and Nomura estimates that the combined direct and indirect impacts from higher transportation costs will total about 100 bps.


According to the global brokerage firm, rising global commodity prices, the lagged effect of rupee depreciation and capacity constraints are the main culprits for the sticky core inflation.


Food inflation rose to 9.1% y-o-y from 8.7% as prices of manufactured food items, cereals and pulses rose which more than offset the decline in prices of fruits and vegetables. Core inflation (WPI manufactured, ex-food) also moved up to 5.6% y-o-y in August from 5.4% in July, led by an increase in prices across all sub-components.


Fuel inflation also rose sharply to 8.3% y-o-y in August (6.0% in July) due to higher prices of naphtha, turbine fuel and electricity. Therefore, the inflation rate for all three sub-components increased this month, according to Nomura.


Truckers increase freight charges by 15% across India

All India Motor Transport Congress said it decided to pass on the burden of diesel price hike to customers by increasing freight charges by 15% across India

New Delhi: The All India Motor Transport Congress (AIMTC) on Friday said it has increased freight charges across the country by 15% following the hike in diesel prices, reports PTI.


"We have decided to pass on the burden of increase in diesel price hike to customers. The freight charges will be increased with immediate effect by 15% across India," AIMTC spokesperson GP Singh told PTI.


He further said the transport industry was not in a position to absorb the price hike. "The increase in diesel price will hit the common man as the cost of basic items will shoot up," he said.


Asking for a roll back of the diesel price hike, Singh said the government has not heeded the transporters' plea not to increase diesel price and AIMTC was keeping "all our options open" to press for its demand.


The apex body of truckers across the country, AIMTC claims to have around 80 lakh trucks under its aegis.


Yesterday, the government hiked diesel prices by a steep Rs5.62 a litre. This was the biggest-ever hike in diesel prices excluding VAT or local sales tax following which the fuel is sold at Rs46.95 per litre in the national capital as against Rs41.32 a litre earlier.


Diesel prices were last hiked by Rs3.37 per litre in June 2011.


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