2012 NYJC_Prelim H1_CSQ_2 (Mark_Scheme)

Extract 1 India’s inflation problem eases Lower inflation should allow the Reserve Bank of India to cut rates within months – so long as the eurozone crisis doesn’t bring capital flight risks to the fore There’s no doubt about the Reserve Bank of India’ s (RBI) desire to cut interest rates to support the slowing economy: RBI deputy governor Subir Gokarn said as much two weeks ago. WPI (Wholesale Price Index) inflation in last month was 6.55% year-on-year, down significantly from 9.5% in November and at its lowest for more than two years. The speed of the turnaround has not been quite as great as that implies, since base effects and food prices accounted for most of the fall. As Capital Economics puts it: “Two factors explain why the annual inflation rate has fallen so steeply. Firstly, large price rises in December and January the previous year have dropped out of the annual comparison. Secondly, food prices have been declining as a result of a good harvest: vegetable prices alone have fallen by more than 30% in the past two months, and overall food price inflation is now near zero.” Still, with underlying trends looking favourable – over the last three months, prices of non -food manufactured goods increased at an annualised rate of less than 5%, says Capital Economics – a first rate cut looks possible within the next three months. That should be good news for an economy that is showing the combined effects of the RBI’s 13 rate hikes this cycle, a slowing global economy, a eurozone c risis-induced nervousness in global markets about providing financing to emerging market companies and poor sentiment over corruption scandals and the slow pace of reforms. GDP growth in the July -September quarter was 6.9% year-on-year and the fourth quarter figure due out soon may well be significantly lower. So hints that cuts are on the way aren’t coming a moment too soon. That said, inflation is not the central bank’s only headache: the country’s large current account deficit and resulting dependence on foreign investment inflows is also a persistent worry. So while the RBI’s bias is clearly towards cutting rates as soon as possible – by far the m ost likely outcome – it’s still conceivable that another twist in the eurozone crisis might yet hold it back www.emergingmarkets.org – 14 February 2012 Extract 2 Japan’s Central Bank Marks a Goal for Higher Inflation TOKYO — Hoping to win its long -futile battle against falling prices, Japan’s central bank on Tuesday said it would try to kindle inflation, setting a goal of 1 percent, by pumping tens of billions more dollars into the economy. The Bank of Japan on Tuesday said it would expand a program of buying government bonds as a way to inject additional money into the economy. And it set a goal of continuing the effort until inflation had reached 1 percent. The government said Monday that the Japanese economy shrank at a 2.3 percent annual rate in the October-to-December