Inflation, fiscal deficit cause no great concern — HSBC analyst

NOV 5: Rising inflation and fiscal deficit are not "worrisome" concerns in the present economic scenario as money supply is well...

NOV 5: Rising inflation and fiscal deficit are not "worrisome" concerns in the present economic scenario as money supply is well within the control to ensure prices are not fuelled, a Hong Kong and Shanghai Banking Corporation Limited (HSBC) analyst said.

"The `core’ inflation excluding oil is benign since wholesale price index (WPI) excluding oil, would be at three per cent instead of 6.86 per cent of last reported week and average money supply (M3) growth was lower at 13.5 per cent as against the previous year’s level of 15-16 per cent," Head of Interest Rate Trading of HSBC Monish Tahilramani said here.

He said though average inflation in this fiscal hovered around 5.99 per cent compared to previous year’s level of 2.66 per cent, the main contribution had been from fuel, weighing 14 per cent, which rose by as much as 33 per cent.

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The growth of inflation of primary articles with a weight of 22 per cent had been flat and that of manufactured products with a 64 per cent weight had risen by two per cent.

Expressing optimism, he said bank rate would stay at eight per cent and monetary conditions would rule easy and liquidity would drive short-term rates lower which would be cushioned by sovereign issuances in the long run.

On the fiscal discipline, he said that gross fiscal deficit (GFD) was running at 38 per cent as against the budgeted level of 65 per cent.

Monish said gross non-Plan deficit was 37 per cent of the total deficits which was lower than last year’s figure of 44 per cent and positively direct tax revenues had risen by 69 per cent and reminded that government’s borrowing were already two-third through.

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On the positive side of interest rates, India Millenium Deposit targeting two billion dollars from the NRI communities could absorb Rs 10,000 crore in the government’s borrowing.

However, he cautioned that tensions in the Middle East, RBI’s proclivity towards the long end and `nursing’ the rupee would have to be seen as negative sides of the interest rate.

Citing that rising interest rates in the US had reached a plateau, he said "though interest rate differential between rupee and dollar was low, it is at least not untenable."

He said forward obligations were to the tune of $ 2.225 billion as on August-end of the current fiscal as against $ 0.75 billion of the last fiscal.

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On the exports, he said even after excluding software exports, it was up 22 per cent in the first half of current financial year; imports (excluding petroleum products) were 15 per cent up and petroleum product imports rose by 86 per cent.

"FIIs were the biggest joker in the current fiscal, as its volatility ranged from $ 600 million to negative $ 20 million and the year witnessed reverse FDI due to firms like Powergen, Hindalco, Mobile and Tata’s acquiring hotels in New York," he added.

Investments in the first four months were more than the whole of the last fiscal, he said, concluding there existed light at the other end of the tunnel.