India starts to tighten monetary policy

India’s central bank took its first steps on Tuesday to unwind the ultra-loose monetary policy adopted during the global financial crisis, a further sign of the strengthening recovery across regional economies.

The Reserve Bank of India announced that local banks would have to boost their reserves, partly through the purchase of government bonds, in an effort to withdraw liquidity from the system and ward off the renewed inflation threat.

The move, which triggered a sell-off on the Bombay Stock Exchange, prepares the ground for an interest rate rise early next year as Asia’s third biggest economy shows increasing signs of shrugging off the downturn.

Australia raised rates earlier this month, the only Group of 20 economy to do so. South Korea is expected to tighten monetary policy in coming months as its economy strengthens.

The RBI pushed up the requirement for banks to hold at least 25 per cent of their deposits in government securities from 24 per cent. The RBI now expects the Wholesale Price Index, India’s key inflation gauge, to rise to 6.5 per cent by the end of March from a forecast of 5 per cent.

Tushar Poddar, economist at Goldman Sachs in Mumbai, said the ending of special support measures introduced during the crisis was “the first phase of the RBI’s exit from loose policy”.

The prime minister’s advisory panel last week predicted 6.5 per cent growth this fiscal year and said it saw no reason for a monetary policy change. Economists predict a change in direction next year.

Robert Prior-Wandesforde, a senior Asian economist at HSBC, said the RBI had joined policy authorities in Singapore, Hong Kong and South Korea in taking pre-emptive steps to cool the property market before bubbles developed.

The Financial Times October 2009

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It is little consolation to Mexicans that the slump is not their fault this time

AFTER suffering unprecedented drug-related violence and the swine-flu outbreak, Mexicans must feel they have already had a year’s worth of bad news. Yet on May 20th they were hit by another blow: the government said that the economy had shrunk by 5.9%, seasonally adjusted, in the first quarter of 2009, four times the predicted fall in Latin America as a whole. The grim figure leaves no doubt that serious pain awaits in the form of increased poverty and unemployment.

Unlike many past economic crises, the latest one does not bear a “made in Mexico” label. Instead, it is the nation’s close integration with the United States that has left it worse off than its Latin American peers. Exports across the Rio Grande are equivalent to a fifth of Mexico’s GDP, and have fallen by 36% in the past year as demand on the other side has collapsed.

The unemployment rate has risen from 3.6% to 5.3% over the past year. And for every two Mexicans without a job, there are three who are underemployed. These figures will rise further as job opportunities in the United States dry up. Since Mexico lacks unemployment insurance, the ranks of its poor are thus expected to swell. Although the government does provide welfare payments, adding huge numbers of new recipients to the rolls will take time.

With the government’s options limited, Mexico’s economic destiny is more or less in the hands of its northern neighbour. Although that has been a curse so far, many economists say it may soon become a blessing, since the United States is expected to begin its recovery faster than Europe or Japan. Even so, making up all the ground Mexico has lost will not be easy. The economy will probably need up to four years to return to its long-term growth trend-line in the absence of big reforms.

The Economist May 2009

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