Chinese premier warns slowing growth raises job concerns

BEIJING (Reuters) - China's slowing growth poses a major challenge to job creation for the world's most populous nation and the country will need to achieve a "golden" balance between structural adjustment and growth, Premier Li Keqiang was quoted as saying on Sunday.

China's economy is set to grow at its slackest pace in 23 years in 2013, at 7.5 percent, as its export sales falter on fragile global demand.

The country's leaders have pledged deep economic reforms to shift away from an export-led economy to one more reliant on domestic consumption, while making it clear they will accept lower growth rates during the transformation. But Li said such a path would present challenges.

"China has already entered a new stage of development. To maintain a growth rate as rapid as in the past is not realistic, but development is the foundation to solving many problems," state media quoted Li as telling a recent meeting with business leaders.

"As a big country with 1.3 billion people, there is no certain pace of development that can cope with so many difficulties and problems, especially preserving jobs."

The premier added that China would need to find a "golden balancing point" between upgrading the economy and maintaining a reasonable growth rate to ensure further job creation.

China's leaders gather from November 9 to November 12 at a Communist Party plenum to discuss deepening reforms of the world's second largest economy.

Li told Chinese and foreign business leaders last week that China would further reform its government finances, financial markets and industry, among other areas.

(Reporting By Dominique Patton; Editing by Ron Popeski)

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Expert Views: RBI raises repo rate, cuts MSF rate

MUMBAI (Reuters) - The Reserve Bank of India (RBI) raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place to support the slumping rupee.

The central bank lifted its policy repo rate by 25 basis points (bps) to 7.75 percent, in line with the expectations of most analysts in a recent Reuters poll, despite the risks to an economy beset by sluggish growth. The banks' cash reserve ratio was held at 4 percent.

COMMENTARY

GANTI MURTHY, HEAD - FIXED INCOME AT IDBI ASSET MANAGEMENT

CO. LTD, MUMBAI:

"The policy was on expected lines. The good thing is that the liquidity was increased by way of an increase in term repo limits, but another hike is still possible given that the policy stance is still hawkish -- not dovish at all. He has cut the growth rate expectation and raised the WPI estimate, we should expect more (interest rate) hikes in the future."

NIZAM IDRIS, STRATEGIST WITH MACQUARIE CAPITAL, SINGAPORE:

"The comments so far from RBI suggests still hawkish bias in monetary policy setting, which is likely to be good as the focus is on anchoring inflation to facilitate future growth framework. Also, efforts on reducing CAD (current account deficit) is bearing fruits."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI:

"I didn't find him (the RBI Governor) ultra-hawkish. However, the comfort with which he has brought back normalisation of monetary policy shows his increasing comfort on the external sector.

"Secondly, while the repo rate is going to be higher than what it was pre-May, he did say that he would be mindful of some of the growth concerns, which seems to suggest that there may not be sharp, severe hikes in repo. There would be a calibrated approach, although we do not rule out one repo rate hike of 25 basis points. If at all, the rate hike would be front loaded, likely to be in the next policy."

ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET

MANAGEMENT, MUMBAI:

"RBI has continued and completed its calibration process with the Repo MSF difference now at 1 percent. The provision of another 0.5 percent on term repo would mean that along with Repo and standing liquidity facility, the overnight rate would cease to be at MSF but move between the Repo and the MSF (around 8.25%).

"It's a fairly neutral policy for long bond markets and further movements in yields should take cues from demand (and) supply. The overall guiding focus remains on inflation and one can't rule out another 25-50 bps hike till March next year -- if inflation remains sticky and if growth picks up."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL,

MUMBAI:

"The policy stance clearly reflects an inflationary concern while ensuring smooth liquidity measures in place to take care of the growth moderation. Today's policy tone indicates more of selective liquidity support measures while lowering the probability of repo ease in the subsequent meet.

"With higher inflationary pressure still intact, we expect the monetary policy to revolve around higher repo with smoother systemic liquidity. We believe the bond market has factored in the current phase of high repo-smooth liquidity and hence the yield curve is expected to remain range bound in the current quarter."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The RBI policy has certainly become more transparent as it has fulfilled market expectations of 25 bps hike in repo and 25 bps cut in MSF. As market expectations have been fulfilled there will not be any knee-jerk reaction across financial markets.

"Normalisation of the exceptional measures and the provision of additional liquidity support is positive for both the bond and credit markets. However, the reduction in the GDP estimate and increase in the inflation forecast underscores the possibility that India is passing through a stagflationary phase making the working of monetary policy in isolation difficult.

"Going ahead, there will have to be better co-ordination between monetary, fiscal and exchange rate policy in order to be able to tide over the current stagflationary phase."

GAGAN BANGA, MD & CEO, INDIABULLS HOUSING FINANCE, MUMBAI:

"Reducing the MSF rate by 25 basis points and improving the liquidity provided through term repos will reduce short-term rates, which will keep interest rates on home loans stable.

"Hike in the repo rate shows that the monetary policy continues to address the persistent inflation, which remains high when compared with other emerging market economies. Growth for now will have to be addressed by removing infrastructure bottlenecks and other structural policy measures."

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:

"Today's move was a follow-through of the hawkish September policy guidance as high and persistent inflation is seen as an impediment to the medium-term growth outlook. The new policy approach is a single-minded focus to contain inflationary expectations, with or without support from fiscal policy.

"This might carry short-term hurt to growth, but either way an accommodative monetary policy cannot spur recovery in isolation. On the other hand, however, risks that inflation might become generalised and entrenched are more material.

"With the cut in the MSF (Marginal Standing Facility) rate, the effective corridor now narrowed to 100 bps between the MSF and Repo rate....Going forward, there is still room for the other liquidity constraints to be unwound, but in a gradual and calibrated manner."

For link to graphic on India CPI and WPI, click link.reuters.com/zar28t

For Reuters policy web page, click http://in.reuters.com/subjects/rbi-policy-review

MARKET REACTION

The rupee strengthened rose to 61.52 per dollar from around 61.63 before the RBI decision.

The benchmark 10-year bond yield fell 6 basis points (bps) to 8.58 percent from levels before the decision, traders said.

The 5-year overnight index swap fell 7 bps to 8.20 percent, while the 1-year OIS fell 9 bps to 8.36 percent.

Shares gained, with the NSE banking sub-index up up 1 percent from being up around 0.3 percent before the RBI decision.

BACKGROUND

- Food inflation accelerated to a three-year high of 18.40 percent in September mainly on higher vegetable prices, including a 322 percent jump in onion prices, driving the benchmark Wholesale Price Index up by a stronger-than-expected 6.46 percent.

- Industrial output growth unexpectedly slowed to 0.6 percent in August from a year earlier, from an upwardly revised 2.75 percent pace in July, hurt by weak investment and consumer demand.

- India's economic growth hit a four-year low of 4.4 percent in the quarter through June, lower than expected and hurt by a contraction in mining and manufacturing.

(Reporting by Mumbai Treasury Desk; editing by Malini Menon)

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RBI raises repo rate as inflation weighs; rupee support eased

By Suvashree Dey Choudhury and Tony Munroe

MUMBAI (Reuters) - The Reserve Bank of India raised interest rates for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.

Facing some of the fiercest price pressures in Asia, the RBI lifted its policy repo rate by 25 basis points (bps) to 7.75 percent, in line with expectations in a Reuters poll.

"Overall WPI (wholesale price index) inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response," RBI Governor Raghuram Rajan said. He later said the RBI's next rate move would not necessarily be upwards.

While some RBI watchers say he may not yet be finished tightening, markets took comfort that Rajan's tone wasn't more hawkish and bond yields saw their biggest drop in three weeks.

"You should not see the fight against inflation as anti-growth. It is going to be the best medicine for sustainable growth going forward," Rajan told a media briefing.

In last week's Reuters poll, the median expectation was for no further policy moves in upcoming reviews.

With the rupee having stabilised after a steep May-August slide, the RBI also lowered its Marginal Standing Facility (MSF) rate by a further 25 bps to 8.75 percent, as expected, which eases liquidity in the banking system by lowering the cost of borrowing for lenders.

Rajan, a high-profile former chief economist at the International Monetary Fund, took office in early September and stunned markets in his first monetary policy review just weeks later by raising interest rates to combat price pressures dogging Asia's third-largest economy.

"Today's move was a follow-through of the hawkish September policy guidance, as high and persistent inflation is seen as an impediment to the medium-term growth outlook," said Radhika Rao, economist at DBS in Singapore.

India's benchmark 10-year bond yield dropped as much as 12 bps to 8.54 percent, as traders were relieved that the rate hike was accompanied by an MSF cut. The rupee erased all losses to gain on the day to 61.31/32 per dollar while stocks rose nearly 2 percent.

"Yields dropped because he has shown equal concern about growth and said that RBI doesn't want only to focus on inflation," said Harish Agarwal, a fixed income trader with First Rand Bank.

For graphic on India WPI, rates, industrial output, click http://link.reuters.com/deq95s

For graphic on India economy, click http://link.reuters.com/fuh42v

For Reuters policy web page, click http://in.reuters.com/subjects/rbi-policy-review

Video: RBI's rate hikes: Room for more?: http://link.reuters.com/kyd34v

FOOD FIGHT

India's annual food inflation accelerated to 18.4 percent in September, its highest since mid-2010, pushed up by prices of vegetables including onions and stirring public discontent ahead of national elections which must be held by next May.

However, the economy grew at just 4.4 percent in the June quarter, its slowest since early 2009. The 5 percent growth rate recorded in the last fiscal year through March was the weakest in a decade.

The RBI expects the economy to grow 5 percent again in the current fiscal year that ends in March, below its earlier forecast of around 5.5 percent but still above many private-sector forecasts.

"The pass-through of rupee depreciation into prices of manufactured products is acting, along with elevated food and fuel inflation, to offset possible disinflationary effects of low growth," Rajan said in his policy statement.

The headline wholesale price index unexpectedly hit a seven-month high in September of 6.46 percent as food prices surged -- well above the RBI's perceived comfort level of around 5 percent -- while the consumer price index jumped an annual 9.84 percent.

The RBI said on Tuesday CPI inflation would remain above 9 percent in coming months "absent policy action."

D.K. Joshi, principal economist at Crisil Ltd in Mumbai, said future rate moves would depend on inflation readings.

"If inflation surprises on the lower side, then you should see RBI holding. Otherwise, with this inflation trajectory, I think they will raise rates," he said.

The rupee slumped to record lows in August, at one point sliding some 20 percent for the year, on concerns about India's gaping current account and fiscal deficits, and as global investors dumped emerging market assets for fear the U.S. Federal Reserve was set to start tapering its massive stimulus programme.

To halt the slide, the RBI had jacked up the MSF rate by 200 bps in July. It rolled back 75 bps of that at its September 20 review and another 50 bps earlier this month.

Tuesday's cut returns the gap between the repo and MSF rates to the usual 100 basis points.

(Additional reporting by Swati Bhat, Neha Dasgupta, Himank Sharma and Subhadip Sircar; Editing by Kim Coghill)

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Boeing raises forecast as quarterly profit jumps; defense weak

By Alwyn Scott

REUTERS - Boeing Co reported a surprising 12 percent jump in quarterly profit and raised its full-year forecast on soaring commercial aircraft production and margins, sending its shares up as much as 6 percent to an all-time high.

The company also said on Wednesday that it will speed up production of its 787 Dreamliner, a long-awaited move that comes after a series of problems with the new, high-tech plane, and while Boeing is still pushing to improve the jet's reliability.

The strong third-quarter results from the commercial airplane business, which churned out more planes at higher profit margins in the quarter, compensated for weakness in the defense unit, where revenue rose just 3 percent, margins contracted and profit fell.

The commercial aircraft gains showed Boeing was not only on target to deliver a record number of jetliners this year, but was producing them efficiently.

But the optimism was tempered by continuing 787 problems, by the loss of a key order in Japan earlier this month, and by the prospect that profit margins will fall in the current quarter.

"Obviously that's a campaign that we did not want to lose," Boeing Chief Executive Jim McNerney said in a conference call, referring to rival Airbus' win of an order from longtime Boeing customer Japan Airlines Co Ltd .

"We will take it as a sign to try harder and do better," he said, noting that Boeing recently won an order for 34 of its forthcoming 777-9X jet from Deutsche Lufthansa AG . Lufthansa contracted at the same time to buy 25 Airbus A350s.

McNerney said the reliability of the 787 was averaging 97 percent, a decrease from 98.2 percent that Boeing cited in June, during a congressional hearing on the 787's burning battery problem, which prompted regulators to ground the plane for more three months earlier this year.

"We still have some customers that are not at that level (of 97 percent)," McNerney said on Wednesday. "It's frustrating."

False error messages account for about one-third of the reliability problems, he added. Boeing is putting people and spare parts around the world to help fix 787s quickly. The latest reliability concerns arose after Norwegian Air Shuttle took its new 787 out of service for repairs because of repeated problems.

MARGIN AT RISK

Boeing's commercial aircraft operating margin jumped to 11.6 percent in the latest quarter from 9.5 percent a year ago. But the gain begged the question of "whether this is a 'one off', or whether such levels can be sustained," analyst Robert Stallard at RBC Capital Markets wrote in a note.

On the conference call, Chief Financial Officer Greg Smith said the commercial airplane operating margin may soften in the current quarter.

"We expect fourth-quarter margins to be influenced by dilution from the (low margin) 787 deliveries, higher (research and development) primarily associated with the 737 MAX and timing of supplier payments," Smith said. Investments to lift production rates also will weigh on margins, he said.

The 787 margin rose from near zero to "very low single digits" in the third quarter as Boeing expanded the number of airplanes use to calculate costs by 200, to 1,300, and included the cost of 787-10 development.

After the conference call, Boeing stock declined from its early highs. The stock was up 5 percent at $128.63 in afternoon trading on the New York Stock Exchange after rising as much as 6.2 percent to $129.99.

"Clearly the 787 will be more detrimental for margins," said Ken Herbert, analyst at Canaccord Genuity Inc.

In contrast with the booming jetliner business, Boeing's defense operations were weakened by declining U.S. government spending, a charge to close the C-17 transport plane production line and other factors.

Military aircraft revenue fell 5 percent to $3.5 billion. Overall defense, space and security revenue rose to $8 billion from $7.8 billion, but operating margins contracted to 7.4 percent from 10.5 percent. Earnings in that division fell 19 percent to $673 million.

GUIDANCE RISES

Third quarter net income rose 12 percent to $1.51 a share from $1.35 a year ago as revenue increased 11 percent to $22.13 billion, Boeing said. The gain came largely from a 14 percent surge in deliveries to 170 aircraft in the quarter.

Core earnings, which exclude some pension and post-retirement costs, jumped 16 percent to $1.80 a share from $1.55.

The core earnings and revenue results topped analysts' average expectations of $1.55 a share and revenue of $21.68 billion, according to Thomson Reuters I/B/E/S.

Boeing raised its full-year core earnings forecast to between $6.50 and $6.65 a share from a previous outlook of $6.20 to $6.40.

"Simple takeaway is stay long," on the stock, Peter Arment, an analyst at brokerage Sterne Agee, wrote in a note. "We remain buyers at current levels given our long-term targets" of $164 on Boeing stock.

In a long-anticipated move, Boeing said it would increase production of the 787 Dreamliner to 12 aircraft per month in 2016, up from a target to 10 per month by the end of 2013. It plans to produce 14 per month before the end of the decade.

The plane has suffered a number of technical glitches during its first two years in service, including overheating batteries that grounded the worldwide fleet for more than three months earlier this year.

Rising production increases revenue and cash flow. But "given that it doesn't kick in till 2016, the benefits of this remains some way off," RBC Capital's Stallard wrote.

Boeing left unchanged its full-year revenue forecast at between $83 billion and $86 billion, and its target for delivering between 635 and 645 jetliners this year.

In the first nine months, Boeing delivered 476 planes, including 170 in the latest quarter. That means it needs to deliver 169 in the fourth quarter to hit its top target.

McNerney said Boeing expected to start work on its 777-X models later this year, cementing those long-awaited revamps of its best-selling wide-body plane, due to enter service by 2020. Industry experts widely expect that launch to coincide with major orders at the Dubai Airshow next month.

(Reporting by Alwyn Scott in New York; Editing by Gerald E. McCormick, Jeffrey Benkoe and Tim Dobbyn)

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