Retail inflation nosedives in wake of India’s cash crackdown

India’s sudden move on Nov. 8 to cancel 500-rupee and 1,000-rupee banknotes, which accounted for 86 percent of the cash circulating in the economy, has disrupted daily life. (Reuters)
Updated 13 December 2016
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Retail inflation nosedives in wake of India’s cash crackdown

NEW DELHI: India’s retail inflation cooled to a two-year low in November after Prime Minister Narendra Modi’s shock currency replacement program dented consumer spending, fueling hopes of an interest rate cut by the central bank at its next policy review.
Consumer prices rose by an annual 3.63 percent last month, their slowest pace since November 2014, government data showed on Tuesday. Economists surveyed by Reuters had expected prices to rise 3.90 percent year-on-year, compared with a 4.20 gain in October.
Food inflation was 2.11 percent last month, lower than October’s 3.32 percent.
Modi’s sudden move on Nov. 8 to cancel 500-rupee and 1,000-rupee banknotes, which accounted for 86 percent of the cash circulating in Asia’s third-largest economy, has disrupted daily life, depressing consumer demand.
People struggling to get new notes are holding back on spending, except for immediate and urgent needs.
November’s reading is way below the Reserve Bank of India’s (RBI) 5 percent inflation target for March 2017 as well as the medium-term target of 4 percent.
With the cash shortage hitting consumer demand, some economists expect headline retail inflation to stay below 4 percent in coming months and undershoot the RBI’s March target by at least 50 basis points.
“I expect the demonetization impact to help cool off inflation till February, due to demand contraction,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings in Mumbai.
“I expect RBI to cut rates in February.”
In a sign of things to come, Indian services activity plunged into contraction in November for the first time since June 2015, due to a sharp decline in demand, a survey showed, while factory activity also slowed.
Still, the RBI surprised investors last week by keeping interest rates on hold, saying the impact of the currency swap program on the economy would be transitory. The central bank also flagged inflationary risks emanating from the currency shortages that could endanger the winter crop and an uncertain outlook for global crude prices and increasing volatility in the foreign exchange market.
Crude oil prices this week hit their highest level since mid-2015, after the world’s top crude producers agreed to the first joint output cut since 2001.
The US dollar’s rally against emerging market currencies, such as the rupee, on bets that Donald Trump will adopt policies to spark growth, has also raised the specter of imported inflation.
“There is limited scope for deeper easing,” said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership.

RBI official held
Investigators arrested a central bank official Tuesday for allegedly illegally exchanging old bills worth some Rs15 million ($222,000) for new ones.
India’s Central Bureau of Investigation arrested K. Michael, an official at the Reserve Bank of India, in the southern city of Bangalore after they found him working with a state bank employee to convert old banknotes without legal documentation.
“K. Michael... has been arrested for his alleged involvement in converting old 500-rupee and 1,000- rupee notes worth Rs15 million into 100-rupee notes,” a CBI official told AFP on the condition of anonymity.
Investigators also found him hoarding Rs16 million in new 500-rupee and 2,000-rupee notes. The RBI said Michael was a junior official and had been suspended.
“The concerned employee has been suspended,” S.S. Mundra, an RBI deputy governor, told reporters. “We have instituted investigation and due action will be taken once the details are known.”
The CBI has also registered criminal cases of cheating against several public and private bank employees. Seven middlemen in Bangalore were also arrested for “converting unaccounted cash” and more than Rs9 million were recovered, an official told AFP.


Crisis at India's Jet worsens as it grounds planes, faces strike

The debt-laden carrier has delayed payments to banks, suppliers, pilots and lessors. (Reuters)
Updated 27 min 8 sec ago
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Crisis at India's Jet worsens as it grounds planes, faces strike

  • More than 20,000 people are employed in the company
  • The company had to stop more than 50% of their aircraft due to insufficient funds

MUMBAI: India's Jet Airways was fighting multiple crises Wednesday after grounding six planes, leaving it with only a third of its fleet flying, while pilots have threatened to walk out and a major shareholder is reportedly looking to offload its huge stake.

The problems at India's number-two carrier come as other airlines struggle to turn a profit despite the sector rapidly expanding in the country over recent years.

Jet, which employs more than 20,000 people, is gasping under debts of more than $1 billion and has now been forced to ground a total of 78 of its 119 aircraft after failing to pay lenders and aircraft lessors.

In a statement late Tuesday announcing its latest grounding, the firm it said it was "actively engaging" with lenders to secure fresh liquidity and wanted to "minimise disruption".

But with hundreds of customers left stranded, Jet's social media accounts have been flooded with often suddenly stranded passengers demanding information, new flight tickets and refunds.

"@jetairways We book our flights in advance so that we save on travel cost and you are sending cancellation (message) now?", read one irate tweet on Wednesday.

"I have sent a DM (direct message) regarding my ticket details. Please respond!", said Sachin Deshpande, according to his Twitter profile a design engineer.

Another, Ankit Maloo, wrote: "Received an email for all together cancellation of flight days before departure without any prior intimation or communication over phone!"

The firm is also facing pressure from its many pilots who have not been paid on time, with unions threatening they will walk off the job if salaries do not arrive soon.

"Pilots will stop flying jet planes from 1st April 2019 if the company does not disburse due salaries and take concrete decisions," a spokesperson for the National Aviator's Guild, a pilots union, told AFP.

India's aviation regulator on Tuesday warned Jet Airways to ensure that staffers facing stress are not forced to operate flights.

Meanwhile, Bloomberg reported that Etihad Airways of the United Arab Emirates has offered to sell its 24 percent stake in Jet to State Bank of India (SBI).

A collapse would deal a blow to Prime Minister Narendra Modi's pragmatic pro-business reputation ahead of elections starting on April 11.

India's passenger numbers have rocketed six-fold over the past decade with its middle-class taking advantage of better connectivity and cheaper flights.

The country's aviation sector is projected to become the world's third-largest by 2025.

But like other carries, Mumbai-based Jet has been badly hit by fluctuating global crude prices, a weak rupee and fierce competition from budget rivals.

Alarm bells for Jet first rang in August when it failed to report its quarterly earnings or pay its staff, including pilots, on time. It then later reported a loss of $85 million.

In February, it secured a $1.19 billion bailout from lenders including SBI to bridge a funding gap, but the crisis has since deepened.

"Jet Airways is rapidly reaching a point of no return and running out of assets to keep itself afloat," Devesh Agarwal, editor of the Bangalore Aviation website, told AFP.

"The only solution is equity expansion by diluting its stakes but Jet is just trying to cut losses and running out of options," Agarwal said.

Shares in Jet Airways were down more than five percent on Wednesday.