Emerging Markets: India


By Aaron Chaze

With its fifth rate rise of the year India’s central bank, the Reserve Bank of India, launched another attack on inflation last month. The bank upped its key rate to 6.0% from 5.75% in the face of inflation that, depending on which ministry of commerce inflation measure is employed, is either firmly lodged in double figures or is easing back to just under 10%. The central bank also signaled that it might continue to raise rates depending on the inflation situation in the coming months. Further wage and price inflation could be expected, the bank admitted, as industrial production surged by 13.8% and merchandise exports grew by 22.5% year-on-year in July. India’s GDP expanded by 8.8% in the April-June 2010 quarter.

India’s cabinet approved a proposal to introduce options on commodities reversing a six-decade old ban on options trading. At present Indian commodity exchanges are allowed to trade only futures contracts, which were introduced in 2003. However, financial institutions and foreign investors are still not allowed to participate in the commodity markets. Before the options are introduced the Indian parliament will need to approve the cabinet decision.


Fighting back: India’s central bank is battling inflation

The Indian government is also pushing ahead with plans to sell its stakes in two major corporations, Coal India and Steel Authority of India. In the case of the Steel Authority of India, the largest steelmaker in India, the company will sell 5.0%, and the Indian government will sell an additional 5.0% of its own holding. The government may raise as much as $3.3 billion from the sale of shares in the Coal India IPO, which would make the sale the nation’s largest IPO. The government has a target of nearly $10 billion from its privatization program for the 2010–2011 fiscal year, and it has barely raised $500 million in stake sales so far this year, so expectations will be high from these two pending stake sales before the end of the year.