Inflation falls below 5%

Reserve Bank of India (RBI) Governor Dr. Y.V. Reddy and Finance Minister P. Chidambaram can heave a sigh of relief with the benchmark inflation rate falling below 5%. This is the first time in 10 months that inflation, based on the Wholesale Price Index (WPI), has dropped below the central bank's target. The point-to-point inflation rate fell to 4.85% in the week ended May 26 from 5.06% in the previous week, the Ministry of Commerce and Industry said in a statement. That was much below the average estimates of around 5.05%. It was also the lowest rate since the end of July last year. In the annual monetary policy, announced in April, the RBI said that it aims to keep inflation close to 5% in the fiscal year ending March 2008, and will bring it down to 4-4.5% over the medium term. The central bank left its benchmark short-term rates unchanged at that meeting, but added that it would act swiftly if needed.

The WPI declined 0.1% to 211.7 from 211.9 in the previous week. The index of Primary Articles was down 0.3% at 220.5 versus 221.1 while the indexes of Fuel & Power and Manufactured Products were unchanged at 322.0 and 184.1, respectively. The Food Articles index dropped 0.5% to 220.5 from 221.6 while Food Products index declined 0.4% to 183.0 from 183.8. Fruits & Vegetables index slipped 2% to 244.9 from 250.0 while Edible Oils index was down 0.1% at 165.7 versus 165.8. However, the Cement index gained 0.2% to 212.4 from 212.0. Meanwhile, the Government revised the inflation rate for the week ended March 31 to 5.94% from the preliminary projection of 5.74%. Though its a big sentiment booster, the unexpectedly sharp fall in headline inflation is unlikely to prompt a change in monetary policy, unless there is a further moderation in prices.

NTPC asked to invest Rs 500 cr in Dabhol project

The government is unlikely to sell the Dabhol power plant`s LNG receipt facility as state-run utility NTPC has been asked to pump-in Rs 500 crore to bail out the project from defaulting on payments to contractors.

The Empowered Group of Ministers headed by External Affairs Minister Pranab Mukherjee, at its meeting yesterday, decided against hiving-off the LNG unit and instead asked joint promoters NTPC and GAIL to run the power plant and LNG terminal as integrated project, official sources said.

The Government was earlier mulling buying gas for the power plant from Reliance Industries instead of importing costly LNG and selling the five million tons LNG import and regasification terminal to bring down debt.

However, the valuation of the import terminal, together with cost of completing the unfinished portion and building a breakwater, came to over Rs 4,400 crore, much more than the Rs 2,800 crore needed to build a similar sized new facility.

Sources said NTPC would infuse an additional Rs 500 crore into Ratnagiri Gas and Power Pvt Ltd (RGPPL), the owner of the Dabhol assets, for completing the 2,150 MW power project.

While NTPC would operate the power plant, gas utility GAIL (India) Ltd would source five millions tons of LNG for the plant. The power plant requires 2.1 million tonnes of LNG, while the remaining will be sold to other consumers.

Sources said the additional investment would enable RGPPL to clear dues of Punj Lloyd and its British partner Whessoe, the contractors for completing the LNG terminal. The Punj Lloyd-Whessoe joint venture was hired in May 2006 but work came to halt in De cember as RGPPL was not paying bills


Bike makers cut production as sales slow

Shares of Hero Honda, Bajaj Auto and TVS Motor declined after the two-wheeler manufacturers said they had slashed production as higher interest rates bite demand. Hero Honda said its sales in June will be down by 40,000 units compared with May, while Bajaj Auto admitted to a 10% reduction in motorcycle output and TVS said it had cut bike production by 5000 units per month. A financial daily reported that the top three motorcycle makers have cut production and trimmed dealer inventories as sales fall due to a steep rise in interest rates over the past few months. Earlier, the newspaper had reported that Tata Motors had pared production of some trucks at its Pune plant as rising interest rates force transport companies and truck operators to postpone or drop purchase plans. Sales of Tata Motors' commercial vehicles fell by about 6% in May, with medium and heavy commercial vehicle sales down about 17%. Bajaj Auto's motorcycle sales were down 15% last month, while TVS' bike sales plunged 37%. Hero Honda's overall sales were down over 6% in May.


BOE holds rate steady

The Bank of England (BOE) left its key interest rate unchanged at a six-year high, as it awaits the impact of its previous monetary tightening steps. The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the Bank Rate at 5.5%. The bank's Monetary Policy Committee voted to raise rates by 25 basis points at its previous meeting in May. But, it also considered a 0.5% hike, which indicates that a further hike is on the cards unless there are some signs of slower growth or falling inflation. The May vote was also the first unanimous one in the recent tightening cycle. As a result, most economists predict another rate hike before the end of the summer, as inflation continues to be above the government's target rate.


ECB ups rate by 25 bps

In a widely expected move, the European Central Bank (ECB) hiked its key interest rate by another quarter percentage point to 4%, the highest since August 2001. This was the eighth rate increase in 19 months by the ECB and comes amid a backdrop of solid economic growth in the first quarter. The Frankfurt-based bank will increase its key rate at least once more this year, say analysts. Eurozone interest rates may rise to 4.5% or higher. They last peaked at 4.75% in October 2000. ECB President Jean-Claude Trichet failed to give a clear signal, as some investors had hoped for, on interest rate increases later this year. Trichet also said that ECB monetary policy was still accommodative - seen as a signal that more rate rises could be approved in coming months but not necessarily at the next meeting of the bank's policymaking bod


Inflation Contained, Economy Will Strengthen

In an exclusive interview with CNBC, Michael Moskow, president of the Chicago Federal Reserve Bank, said he believes inflation expectations are “well contained” and he sees stronger economic growth ahead.

“That doesn’t mean we’re not concerned about inflation,” Moskow said during an extended interview on “Squawk Box.” “It doesn’t mean that we don’t think inflation is the predominant risk going forward. But I think on the whole, inflation expectations are well contained.”

He warned that labor costs are increasing while productivity is slowing. Still, he’s optimistic about growth.

“The last quarter, GDP growth was very low – six-tenths of a percent,” Moskow said. “That’s history now. This quarter should be much stronger and, as we move through this year into next year, I see us moving toward potential growth, or long-term trend growth, in the economy. So, I would see improvement clearly from that first quarter.”

He said the Fed’s goal remained unchanged.

“Our objective is to have maximum sustainable growth and price stability,” Moskow said. “We look at the entire economy. We look at the financial markets as part of that. We look at all this data and then decide what’s best for the American people.”

Moskow is a voting member of the Federal Open Market Committee. He said it’s “appropriate to hold the federal funds rate at 5.25%.

“We have two objectives in monetary policy: Maximum sustainable growth and price stability,” Moskow said. “We’ve got to look at both those objectives in determining what our policy is going to be. The decision we make as to what’s the appropriate level for the Fed funds target, is going to depend on our looking at those two objectives.”

Moskow is scheduled to retire at the end of August.

“Inflation was much higher when I started,” he said. “I’m glad it’s lower today. I’d like to see it lower and I hope it’s moving in that direction. I think it is, but we still have a ways to go before we get to the level of inflation that I’m comfortable with on a longer-term basis.”



May Car sales up 9%

Domestic passenger car sales grew 9.07% in May at 96,922 units as against 88,863 units in the same month a year ago.
According to figures released by Society of Indian Automobile Manufacturers (SIAM), domestic motorcycle sales during the month were at 4,77,901 units as against 5,71,367 units in May 2006, down 16.36%.
Total two-wheelers sold in the country during May 2007 stood at 6,06,187 units, registering a dip of 9.88% as compared to 6,72,671 units sold in May a year-ago.
Domestic commercial vehicles sales during the month grew 1.06% at 33,262 units as against 32,914 units in May 2006.