IMF SUPPORTING ADDITIONAL FISCAL TAPERING TO STAY AWAY FROM OVER HEATING

Emerging Asia is all set to continue leading global economic growth over the next couple of years but risks are increasing, particularly from a very high inflation and surging commodity prices amidst political unrest in some of the Middle East countries, said the International Monetary Fund (IMF) on Thursday. Asian growth will continue to be driven by economic powerhouses China and India. The IMF expects the Chinese economy to grow 9.5% while India will expand about 8% over the next two years. However, the multilateral body also cautioned against pockets of overheating across the region as inflation increases rapidly and capacities face increasing pressure. Higher global oil and food prices were further adding fuel to the problem.

The wholesale price index (WPI) , India's main inflation gauge, is expected to rise by an average 8.8 percent for the fiscal year ending March 2011 before easing to 6.4 percent in the following year. This is considerably higher than 8.3 and 5.7 percent forecast in the October survey. Driven by costlier food items, wholesale price inflation soared to an annual 8.43 percent in December,Real policy rates are still negative in several regional economies, including China and India,' observed the IMF in its report titled 'Asia and Pacific: Managing the next phase of growth'. The agency added that even if signs of overheating are mixed, keeping real interest rates too low for too long could contribute to financial instability. As such, key Asian central banks, including the Reserve Bank of India (RBI) should look at more aggressive monetary tightening to ensure economy remained stable. Inflation in India continues to remain higher despite the RBI hiking its key policy rates eight times in the last financial year. Headline inflation accelerated in last couple of months to 9% as the core inflation (price rise in non-food manufacturing space) too accelerated.This has put the central bank into a tight corner. Clearly, somehow the policy makers have missed the underlying momentum of inflation.

The central bank has to think again now if it wanted to continue with a calibrated policy of hiking rates by 25 bps at a time or if it was time for more aggressive policy tightening. Most economists now expect inflation to remain at elevated levels in the current financial year as well as rising costs have not been fully passed on to consumers. For instance, even as the crude prices are ruling at around $120 a barrel, India's retail fuel prices continue to be aligned to crude prices of around $75 a barrel. However, the risk that RBI would face in the more aggressive tightening scenario is that growth is already showing some signs of moderation and rapid rate hikes from here on will risk a far greater slowdown than what might be needed to avoid overheating. This is particularly so because in case of India the lag in monetary transmission is quite longer, running into a few quarters, and therefore the central bank would also have to work out how far the already implemented tightening has transmitted into the system.

Bond yields were trading range bound with positive bias since most of the traders preferred to stay on the sidelines ahead of the central bank's annual policy review on Tuesday. The Indian market has priced in at least a 25 basis points increase at the central bank's policy review early next week, but there is a possibility the rise could be 50 bps. Further, dealers were also eying the results of Rs 6000 crore of cash management bills later on Friday.

The yields on newly issued 10-year benchmark, the 7.80%-2021 was higher at 8.13% from its previous close of 8.11%, ahead of policy decisions on Tuesday. The benchmark five-year interest rate swaps was up 1 basis point at 8.27% from its previous close of 8.26%. The Reserve Bank of India has today announced the auction of 77-day Government of India Cash Management Bills for a notified amount of Rs. 6,000 crore. The auction will be conducted on April 29, 2011 using 'Multiple Price Auction' method. While on the other hand The partially convertible rupee was currently trading at 44.39/40, stronger compared with its Thursday's close of 44.43/44. The rupee opened at 44.42/43 and has touched a high and a low of 44.46/47 and 44.39/40 respectively. The index of the dollar against six major currencies was down 0.04 percent at 73.089 points. The May currency future was trading at 44.63/64 with a spread of 0.0025 and a volume of 600,124. The contract opened weaker at 44.78/79 against its previous closing of 44.66/67. The open interest (OI) stood at 892,337 up by 4.41% compared to its prevoius close of 854.615.