NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS

UNCLAS SECTION 01 OF 02 NEW DELHI 003224 SIPDIS SENSITIVE SIPDIS USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT PASS TO USTR DHARTWICK/CLILIENFELD/AADLER DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA ABAUKOL TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN STATE FOR SCA/INS MICHAEL NEWBILL AND EB/TRA JEFFREY HORWITZ AND TOM ENGLE E.O. 12958: N/A TAGS: EAGR EFIN EINV ETRD IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS REF A: NEW DELHI 02347 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of July 9 - 13, 2007. India's Housing Index To Track House Prices -------------- ¶2. (U) In light of the recent surge in real estate prices, the government has launched a new Housing Index, Residex, to be tracked by the National Housing Bank (NHB),the government's main housing refinance institution, in collaboration with the Finance Ministry, according to local press. The index is likely to help municipalities, revenue departments, and even banks to track the overall trend of property loans and link them to price trends. The data also will be used to estimate the house wealth and data on the black economy. Banks and housing finance companies will use it in portfolio evaluation an collateral security for their housing loans. The data is also expected to form the basis for policy decisions such as rationalizing stamp duty, capital gains tax, municipal tax and determining mortgage rates and to be a useful tool for macroeconomic policy analysis for monetary and fiscal policy formulation. The index was developed for five years from 2001 to 2005 and is comparable with the wholesale price-based index and consumer price index. The index will be revised every six months, giving an idea of how prices have moved. In its pilot phase, the index will cover just five cities-Bangalore, Bhopal, Delhi, Kolkata and Mumbai. In the next phase, the regulator will compile indices for 35 cities/towns with a population of more than a million based on 2001 census. Rupee Appreciation Dilemma Re-Emerges -------------- ¶3. (U) The central bank has been back in the currency market, buying $1.2 billion in dollars last month to stem the continued rise of the rupee. After several months of sitting on the sidelines allowed the rupee to strengthen from 45 to the dollar to 40 to the dollar (Ref A),the central bank's recent efforts to keep the rupee from further appreciation -- currently at a nine-year high -- probably reflect pressure from exporters and/or the Ministry of Commerce on behalf of exporters, worried about an adverse impact on export competitiveness. We had expected the central bank to intervene again at some point, given the rupee will continue to face upward pressure in the face of high, sustained capital inflows. The time was apparently right, as inflation has moderated from a two-year high of 6 percent to close to 4 percent in the last month. However, the central bank's overall quandary has not disappeared: protecting the rupee's value by buying dollars injects more rupees into the local economy, pushing up inflationary pressures and placing more upward pressure on interest rates, which can slow growth. Some analysts are pointing to April and May industrial production data that shows production has slowed compared to last year - a sign, analysts say, that last year's interest rate hikes have dampened growth in retail such as housing, automobiles, and consumer goods. Capital goods production is still good, indicating that business confidence remains high and investment continues, despite higher interest rates and a strengthening rupee. ¶4. (SBU) While the RBI still needs to decide how much it will intervene in the forex market, the government just announced a new export relief package, estimated to cost the government roughly $300 million in the next year, to mitigate the rupee appreciation's adverse impact on exporters' margins. The relief will mainly consist of import duty refunds and subsidized interest rates. Although the impact is not clear-cut nor the same for all export sectors, analysts do expect companies' earnings reports for April to June to show lower profits. Further, a new study by the Association of Chambers of Commerce (Assocham) has forecasted that the strengthening rupee will cause exports to fall below the government's $160 billion target by about $15 billion for the current fiscal year. Assocham assesses that the services textiles, leather, sugar and pharmaceutical sectors are likely to be worst hit, because they export primarily to the US. NEW DELHI 00003224 002 OF 002 ¶5. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi MULFORD