Page 182 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 10: Theories of Inflation

Notes
Swap Rates
“With inflationary pressures persisting, we expect yields to remain elevated for a prolonged
period,” Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai, said in an
interview yesterday. She predicts the 10-year rate will rise to 8.50 percent by the end of the
current financial year in March.
The difference between India’s 10-year bonds and U.S. Treasuries widened to 494 basis
points today from 463 at the end of last year.
India’s one-year swap rate, the fixed cost needed to receive a floating interest rate, climbed
to 7.27 percent from 6.96 percent on Dec. 10. Comparable rates in Brazil have gained 37
basis points to 12.28 percent, those in Russia have climbed 14 basis points to 5.29 percent
and those in China have increased 11 basis points to 3.20 percent.
India’s government bonds have lost 0.3 percent so far this month, Asia’s worst performance
after South Korea, the Philippines and Singapore, according to indexes compiled by HSBC
Holdings Plc.
Rupee Drops
The rupee has slid 1.5 percent in January, the third-worst performance among Asia’s 10
most-traded currencies excluding the yen, on concern costlier oil prices will push up the
import bill in an economy that buys about 75 percent of its fuel overseas. Crude-oil prices
in New York, which reached a two-year high of $91.55 a barrel on Jan. 3, traded at $88.72
yesterday.

“There’s a risk of inflation becoming generalized due to the spill-over effect of higher oil
and food prices,” Jay Shankar, an economist at Mumbai-based Religare Capital Markets
Ltd., said in an interview yesterday. “If crude-oil prices go beyond $120 a barrel, it isn’t
unlikely that the RBI may raise rates by as much as 175 basis points.” He expects the
repurchase rate to climb 100 basis points to 7.25 percent by the end of the year.
The rupee rose 0.17 percent to 45.37 per dollar today, according to data compiled by
Bloomberg. The currency will trade at 46 by the end of March and weaken to 47 by the end
of the year, said Poddar, who was an economist at the International Monetary Fund before
joining Goldman.

‘Politically Sensitive’
The cost of protecting the debt of government-owned State Bank of India, which some
investors perceive as a proxy for the nation, has increased 11 basis points from the end of
last year to 171 as pressure mounts on the government to curb gains in prices. Credit-
default swaps pay the buyer face value in exchange for the underlying securities or the
cash equivalent should a government or company fail to adhere to its debt agreements.
Indians voted out at least two federal governments and one state administration in the
past 15 years after inflation reduced their purchasing power. The World Bank estimates
828 million Indians, or 66 percent of the population, live on less than $2 a day.
“Inflation is a politically sensitive issue,” N. R. Bhanumurthy, an economist at the
New Delhi-based National Institute of Public Finance and Policy, said in an interview
yesterday. “It’s imperative for the government to gain control over prices ahead of state
elections.”
Question:
Analyse the entire issue and possible effects of inflation.
Source: www.bloomberg.com

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