Inflation in manufacturing at 8-yr high

Index for manufactured goods up 6.06% in the year to mid-Dec

The rate of inflation for manufactured products is currently the highest in the last eight years. The inflation rate for manufactured products, computed on the basis of the wholesale price index, is the highest since 1994-95.

During the year to December 13, 2003, the latest date for which data are available, the index for manufactured products moved up from 148.4 as on December 14, 2002 to 157.4 as on December 13 this year, a rise of 6.06 per cent.

With international commodity prices touching new highs, it's not too difficult to guess why this index has moved up so sharply. A look at the sub-indices that constitute the main index for manufactured products clearly shows the reasons.

By way of example, the sub-index for basic metals and alloys has increased from a level of 146.3 as on December 14, 2002 to 179.4 as on December 13, 2003, a rise of 22.6 per cent. A year ago, the rise in this sub-index was 6 per cent. The sub-index for "basic heavy organic chemicals" was up 8 per cent YOY as on Dec 13 this year.

Does this rise in metal prices indicate the return of pricing power for manufacturing? That's unlikely, because prices for final products have not risen. The sub-index for "metal products", for instance, has risen by only 0.3 per cent. The sub-index for "motor vehicles, motorcycles, scooters, bicycles and parts" has increased by a mere 0.46 per cent.

Clearly, while commodity producers have been able to raise prices, riding on the back of global demand, final goods producers using metals have not been able to do so. This trend ties in neatly with the global trend of commodity prices rising thanks to Chinese demand, while prices of final goods fall thanks to Chinese supply.

Credit growth and liquidity

Overall, non-food credit growth this fiscal may be lower than last year, but that trend has changed in the last three months. In the period from September 19 to December 12, the rise in non-food credit has been Rs 36,780 crore, compared with a rise of Rs 23,447 crore over the same period last year.

Putting it differently, the rise in non-food credit in the last three months has been 50 per cent more than the rise in September-December 2002. The table below gives the details:

Growth in non-food credit has been higher in each of the last three months, although the pace of increase has slowed down from the peak September-October period. Yet, in spite of credit growth, liquidity in the money market continues to be as strong as ever, with banks parking Rs 23,370 crore in repos on Monday.

The reason for the liquidity is also clear from the table ""- it's due to the massive rise in deposits in the November-December 2003 period. What caused this extraordinary deposit growth? The rise in banks' net foreign assets.

These assets rose by Rs 25,970 crore between November 14 to December 12, far more than the Rs 10,450 crore rise in the preceding month. The very strong foreign institutional inflows and the RBI's policy of mopping up dollars is clearly the catalyst, keeping liquidity high, pressing interest rates down and helping to prop up the bond market.