R & D - Inflation Report (mid dec 2008)

R&D Report Analysts -----------------------------------Shivanth B. Pande’ Economist & Financial Analyst Research Head Shivanth@nibl.com.np

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Santosh Pokharel Economist & Financial Analyst Research Officer santoshpk@nibl.com.np

The Year-on-Year inflation rate as of midDecember 2008 according to Nepal Rastra Bank‘s (NRB) latest macroeconomic report is 14.1%.

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Wholesale Price Index (WPI) based inflation in India as of Jan 24th 2009 is 5.07 %

Nischal Bajrachyara Research Fellow nischal@nibl.com.np

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Asian Development Bank (ADB) has projected economic growth rate of 3.5% for the current fiscal year

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The NPR and INR have strengthened against the USD. However the Forex market is still volatile due to global economic uncertainty.

Kanchan Pandey Research Fellow kanchan@nibl.com.np Upasana Rana Research Fellow upasana@nibl.com.np Sharad Ghimire Research Fellow sharad@nibl.com.np

Inflation According to the latest macroeconomic report from Nepal Rastra Bank (NRB), the year-on-year (y-o-y) CPI rose to 14.1 % in mid Dec 2008 from 5.7 percent in the previous year. However, after five months of continuous price increment (See Figure 1), the y-o-y inflation figure has come down from 14.5 % in mid-November to 14.1 % in mid-December 2008. The year-end annual report from the NRB shows that the average annual consumer inflation was 7.7 percent in 2007/2008. Rising inflation, according to the NRB report, has been driven primarily by significant rise in food and beverages (17.2 percent) as well as non food and services (10.8 percent) group.

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Figure 1: The Year-on Year (y-o-y) inflation figure (Source: NRB)

While prices in Nepal have been skyrocketing, inflation in India has been easing recently. The Wholesale Price Index (WPI) based inflation rate has come down to 5.07% for the week ending on Jan 24th from 5.64% the week earlier. After reaching double digit numbers in mid-2008, the WPI based Indian inflation figures have been coming down gradually during last few months. Economists expect the inflation rate in India to go down to 3 percent by March.

Economic Growth According to the recent Asian Development Bank (ADB) analysis, Nepal’s economy is projected to have a 3.5% economic growth in the current fiscal year. During its annual budget, the government of Nepal has targeted 7% economic growth for the current fiscal year. According to the ADB outlook for Nepal 2008, the Nepal’s economy is projected to grow at 4.3 % in 2009.

Foreign Exchange NPR-USD Due to the appreciation of the INR against the USD, the NPR has strengthened vis-àvis USD during the past week (See figure 2).

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Figure 2: USD-INR exchange rate for Feb 1 to Feb 6 (Source: NRB)

INR-USD The INR-USD has been very volatile of late (See figure 3). The recent volatility in the exchange rate can attributed to the current global economic distress and the massive outflow of foreign funds from the Indian equity market. After appreciating against the USD during much of 2006 and 2007 (See figure 4), the INR started losing its value against the greenback as foreign institutional investors (FII) started liquidating their positions in the Indian equity market. Foreign institutional investor (FII) withdrew more than 13.5 billion USD from the Indian equity market in 2008.

The outflow of funds continues in 2009 with FII taking home USD 1 billion so far in 2009.

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Figure 3: INR-USD exchange rate from between Sept 08 to Jan 09

Figure 4: INR-USD exchange rate from 2004

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