NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS

UNCLAS SECTION 01 OF 02 NEW DELHI 003224

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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.

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5. (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi

MULFORD