India forex reservces fall

India's Forex reserves fell by USD 691 million for the week ended June 27 to USD 311.79 billion as against USD 312.481 billion in the last week.

Reserves had jumped by USD 1.794 billion to USD 312.481 billion in the previous week.

Similarly, Foreign Currency Assets (FCAS) posted a decline of USD 694 million during the week and stood at USD 302.05 billion as compared to USD 302.744 billion in the previous week, reserve bank said in its weekly report in Mumbai on Friday.

FCAS, expressed in US dollar terms, include the effect of appreciation or depreciation of non-us currencies such as euro, sterling and yen held in reserves, RBI said.

Gold reserves and special drawing rights, during the week, were static at USD 9.202 billion and USD 11 million respectively, the apex bank said.

India's reserve position in the international monetary fund rose in the second consecutive week to USD 527 million, up USD 3 million from USD 524 million in the past week, RBI said.

Worst economic outlook in a decade awaits G8

Between surging oil prices, food inflation and a credit crunch that's depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.

The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost USD70 a barrel — which seemed high at the time.

Since then, the US subprime mortgage crisis has erupted, roiling markets and battering financial firms. Oil has doubled to above USD140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability.

"Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.

"Now you have a financial disorder where the epicenter is the US," he said. And fuel and food inflation "are serious matters that affect large numbers of people."

Host Japan had put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight.

Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.

On oil, analysts are skeptical that the G-8 leaders — representing the US, Japan, Britain, France, Germany, Russia, Italy and Canada — will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.

Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the US and Britain said the focus needed to be on boosting production capacity that has barely kept up with growing global demand.

Soaring crude prices have already forced India, Malaysia, and Indonesia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China hiked fuel prices as much as 18 percent.

At the same time, prices of corn, wheat, rice and soybeans and other farm goods have surged due to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.

Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.4 percent.

On the food front, the G-8 leaders may announce an aid package or pledging agricultural investment in poorer countries, experts say.

The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent the leaders will most likely avoid saying anything specific about interest rates and currencies. The European Central Bank raised its benchmark interest rate a quarter point Thursday, suggesting it saw inflation as a greater threat than slower growth.

Overall, the summit's main goal will be demonstrating confidence that they can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.

Given the meeting's emphasis on climate change, the leaders could highlight the links between energy issues and global warming by stressing the importance of energy efficiency and alternative forms of energy, said Goldman's Hormats.

"The key thing is not what they do at these meetings but what they do at home," he said.

Oil and energy have remained recurring themes at the annual summits, said Hormats, who participated in several of the first meetings, which started in 1975. That initial gathering came after the 1973-74 oil embargo, when fuel prices surged after Middle East oil producers cut off the US and other countries supporting Israel.

"We now have another oil crisis," Hormats said.

The summits were originally meant to focus on economic issues, but the agenda has expanded to include terrorism, Africa's development and the environment.

The group's membership also has grown from six to eight, adding Russia in 1997.

But many argue that it should be expanded to include China, the world's fourth-largest economy, and other emerging powerhouses like India and Brazil — especially to tackle global issues like energy and climate change.

"At what point will the G-8 realize we're no longer the steering committee for the world economy?" said Lael Brainard, a former deputy national economic adviser in the Clinton administration who attended several summits in the 1990s and now is a director at the Brookings Institution, a Washington think tank.

Already, the G-8 has been reaching out. It plans meetings with African leaders on the summit's first day, and later with leaders from China, India, Mexico, Brazil and South Africa — countries that someday might be a part of the Group of 13.

"These countries are critical to the solution of any of these problems," said Brainard. "I believe it's only a matter of time" until the club expands.

World News

ECB hikes key interest rate by 25 bps

As expected, the European Central Bank (ECB) hiked its key interest rate by 25 basis points to reign in inflation, even though economic growth has slowed in line with the global trend. The ECB boosted its key lending rate to 4.25%. This was the first increase by ECB in 13 months. President Jean-Claude Trichet hinted that he was done boosting borrowing costs for now. He played down the prospects of a series of interest-rate increases, saying that the quarter-point hike will help bring inflation back below 2%. The euro headed for a weekly decline against the dollar on speculation a worsening European economic outlook will rule out future rate increases. The 15-nation currency traded near a one-week low against the dollar after Trichet said he has no bias and that economic growth is not flattering.

IEA cuts oil demand forecast on record prices

The International Energy Agency (IEA) cut its five-year forecast for global oil demand, saying that record high prices and slower economic growth will reduce demand. The Paris-based agency cut more than 3mn barrels per day from its 2012 global demand forecast. A drop in OPEC spare capacity to 1mn barrels per day by 2013 will keep the market tight, the IEA said in its Medium-Term Oil Market report. The agency, which advises 27 of the world's most industrialised nations, cut oil demand estimates for each year between 2009 and 2012 by about 3%. The IEA forecast that global oil demand will rise to 86.87mn barrels a day in 2008, down 1.4mn from the 88.27mn barrels it projected in last year's report. Global oil demand will expand by 1.5mn barrels a day, or 1.6% a year on average in the five years between 2009 and 2013, the agency said, compared with a forecast of 2.2% a year to 2012 in its previous report, issued last July.

Moody's upgrades Japan's debt rating

Japan's debt rating was increased one level to 'Aa3' by Moody's, citing government's continuous effort to restrain spending to reduce debt. This is now the fourth-highest investment grade. "The increase from A1 was prompted by expectations of continued fiscal restraint and consolidation, coupled with an easing-out of the debilitating effects of deflation," Thomas Byrne, senior vice president of Moody's said. The upgrade came eight months after Moody's raised the rating to 'A1' and puts Japan on a par with Taiwan and Cyprus. Japan still ranks the lowest among the G7 nations. Within the G7 only Italy, with 'Aa2', and Japan have ratings below the top 'Aaa' grade. Economists say Japan has not done enough to pare the debt, which the OECD estimates stands at 182% of GDP.

India Strategy - July 4 2008

India Strategy - July 4 2008