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Monday, December 27, 2010 12:15 PM

Food, Fuel Inflation Hits India; Primary Price Index Up 15%, Credit Expansion Up 23%

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China is not the only Asian economy that is overheating. Inflation in India is running at a double digit pace as is credit expansion. Please consider Food, fuel prices drive inflation worries

Rising prices in India of fuel and food are reviving worries about inflation and sent swap rates to 26-month highs as expectations grew for more rate increases in Asia's third-largest economy.

India's embattled government is expected to decide next week whether to increase state-set fuel prices as international crude oil hovered near two-year highs, a move that would have a broader inflationary impact than a decision earlier this month by state-run fuel retailers to lift the price of petrol.

In the year to Dec. 11, India's food price index rose 12.13 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.

"Inflation is becoming a problem now. We expect the RBI (Reserve Bank of India) to hike rates sooner rather than later. Now we expect 50-75 basis points of rate hike in the next year, most of which should happen in the first half," said Manish Wadhawan, director and head of rates trading at HSBC in Mumbai.

Inflation worries are spreading in Asia, with Singapore on Thursday posting November inflation near a two-year high and Chinese consumer inflation for November at a 28-month high.

"We will certainly do whatever is required to bring down prices of onions," Cabinet Secretary K.M. Chandrasekhar said.

India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed.

Last week, retailers raised petrol prices -- which were deregulated in June -- by nearly 6 percent.

Any rise above 2 rupees (4.4 cents) a litre in diesel must be approved by a ministerial panel, India's oil secretary told CNBC TV on Thursday.
Whatever It Takes

I have to laugh at statements like this: "We will certainly do whatever is required to bring down prices of onions."

What it takes is a slowing economy including a slowing of credit expansion.

Two or three quarter-point rate hikes will not do it. Nor will price controls. Yet, India's President Pratibha Patil is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12.

India Credit Expansion Up 23%

Please consider Credit-deposit growth gap behind liquidity crunch
The faster growth in bank credit than deposits is behind the present cash crunch, the Reserve Bank of India (RBI) has said. Year-on-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.

The liquidity deficit, indicated by banks' borrowing from the repo tender of RBI, has been over Rs 1 lakh crore on an average since November.

Low government spending, coupled with slack deposit growth and advance tax outflows, has resulted in the crunch.

On Wednesday, banks borrowed a record Rs 1.7 lakh crore from RBI.
Indian Bank targets up to 28% credit growth

Inquiring minds are reading Indian Bank targets up to 28% credit growth
According to a top official working with the Indian Bank, the bank has the plans to target the credit growth to around 28 per cent during the current fiscal year as the demand for the credit this year seems to have risen quite a bit.

"We expect a credit growth of 27-28 per cent this year," the Chennai-based bank's Chairman and Managing Director, T M Bhasin, said.

"RBI has always been judicious and its decision to decrease the statutory liquidity ratio by 1 per cent will definitely infuse more liquidity in the system," he said.
The sustained growth assumptions of India and China at about 10% each are simply not going to happen. Both countries are overheating and there is a not so little constraint called peak oil that will get in the way. Should India maintain its rate of growth, do not expect to see any containment in price inflation. The same holds true for China.

For more on China, please see China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows; Eight Reasons China Faces Hard Landing

India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both.

Mike "Mish" Shedlock
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