[T.S.R:17297] Barclays-Winding Down The Recovery Trade; Negative BRICS

India:Just Hope And Prayer?

 

Indians are now hostage to Macro Fears, Inflation, Oil Shock, Policy Faux Pas At The Centre and Rapid Withdrawal Of Funds By The FIIs. Like the protagonist of the movie, "Guide", Raju the tourist guide, small time crook, failed lover and the converted messiah of the poor has hapless Indians looking upto 84 crore Gods, Rains and the Sheikhs of OPEC just to survive. In a slightly tongue in cheek hindsight, the bald but bearded Ben could also offer some solace to third world nations. Otherwise, everything from Real Estate to Banks and Automobiles will get spooked.

 

The key focus: Inflation and tightening monetary policy

 

Although inflation concerns have been evident for some time in the faster-growing emerging markets and have already resulted in some central banks raising interest rates towards positive real interest rate territory, this is only now coming into focus in developed economies, with the ECB effectively flagging an April rate hike at its last post-meeting conference.

 

We are already, to an extent, in uncharted territory, as emerging market central banks are in the process of tightening monetary policy for the first time without the Federal Reserve for guidance, as in previous rate hike cycles. Interest rate cycles are already relatively well advanced in major emerging markets such as Brazil (SELIC target rate 11.75%, +300bp from the April 2010 low), China (six-month lending rate 5.6% from a 4.9% low in October 2010) and India (repo rate 7.25% from a 4.75% low in March 2010), while base rates in the US, euro area and Japan have remained unchanged at 0-1%.

 

Higher headline inflation rates, and the threat of secondary effects on inflation expectations and wage inflation, have now pushed the ECB into signalling a likely interest rate increase at its next council meeting on 7 April. After that, our economists expect a further rise of 25bp at the July meeting, with the ECB maintaining the reference rate at 1.5% to year-end – this despite the fact that euro area core CPI rate remains close to a historical low of just 1%, not

far off the US personal consumption expenditure core price inflation rate of 0.8%.

 

The principal risk from rising headline inflation rates lies in the potential for central banks to react more aggressively than expected in raising base rates, with a consequent hit to economic sentiment and then activity levels as credit availability is reduced. This is a particular risk in Europe, given the fiscal drag already at work on GDP growth rates, thus reducing the economy's ability to absorb a second drag from higher interest rates.

 

Food and energy prices provide the principal inflationary impulse

 

The principal driver of higher headline inflation rates has been commodity prices, in particular food and energy prices. According to the UN FAO, world food prices have recently hit an all-time high due to structurally higher demand and are 34% higher than a year ago. This has been coupled with disruptions to global supply from adverse weather conditions and exacerbated by suspension of grain exports from countries such as Russia.

 

Add to this the pressures from higher crude oil prices (up over 40% y/y) and other raw materials such as copper, as noted above, and cotton (up 150% from a year ago), and the burgeoning pressures on consumer price inflation become evident.

 

 

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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