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7 April 2008
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 Indian
Economy Next Quarter
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Inflation, as anticipated, is on the boil at
7% ? global trends and supply limitations make this difficult to reverse.
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Govt. swings in with duty cuts and export bans- but this is
unlikely to work. |
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Corporates have tough times ahead ? profitability hit by high
input prices and wage pressures. |
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RBI stand on interest rates vindicated - no rate cuts expected. |
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Pay Commission burden on fisc less than expected but it fails to
win hearts ? it will further feed inflation.
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Rupee slides down with high crude prices and FII investment
outflows in March ? no calm expected in markets ahead. |
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| India
: Kal, aaj aur kal |
| We got quite tired the last few months
warning about inflationary pressures, what is surprising to us is that
inflation appears to have surprised the government and financial markets. High
energy prices, asset price inflation, and high growth are an unbeatable
combination for overall price rise. True, the government tried all possible
tricks, and appeared to succeed quite admirably for a while, but that was
impossible to sustain for long.
The government can now let the rupee rise, increase interest rates or reduce
liquidity, and/or try and directly intervene in the markets by clamping on
prices. Given the seriousness of the situation, it will try all possible
measures. Of these, the last will be the worst possible solution since firms
and consumers get fudged price signals. But this will be most attractive for
the centre-left politicians; it is unlikely that either the FM or the PM will
be able to hold out.
However the government acts, some outcomes are quite predictable. First expect
some reduction in inflation in the next few weeks (inflationary tendencies are
typically lower in April), but the spectre of high inflation will not go away
throughout this year. Second, expect somewhat lowered growth this year.
Maintaining high growth is going to be the toughest challenge for this
government. Agricultural output seems to have taken a big hit with the recent
showers across north India, and it will be difficult to sustain high levels of
investment with the expected liquidity tightening and upward pressure on
interest rates. That is, there is not much the government can do, expect hope
that the international environment in crude and commodity prices changes
dramatically in the next few weeks.
While forecasts for growth in India are rapidly being revised downwards,
drastically towards 7%, we don?t share this pessimism. We maintain our estimate
of 8-8.5% growth as we had incorporated high inflation in our growth
expectations. That could however change if (i) the weather gods are not
benevolent, (ii) the international slowdown accelerates, and (iii) the
government over-reacts on either exchange or interest rates. In short, our
advice for the government at this point is ? do some tweaking and hope for the
best!
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| Sumita Kale & Laveesh Bhandari |
| 7th April 2008 Indicus Analytics |
| Contact : sumita@indicus.net &
laveesh@indicus.net |
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Economic Growth
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Indicus Forecast 2007-08
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| GDP |
8.2% |
| Agriculture |
2.8% |
| Manufacturing,
Mining & Electricity |
8.6% |
| Services
including Construction |
9.6% |
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Month of forecast: March 2008
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IIP growth in January slowed to 5.35% with manufacturing activity
growing at a 5.87% rate, mining at 1.81% and electricity at 3.29%.
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Infrastructure sectors have clocked in 5.5% for the period
Apr-Jan, compared to 8.9% for the same period last year.
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February growth in infrastructure however was faster at 8.7%, with
coal, electricity and cement clocking in higher rates of growth. |
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Electricity generation grew at 9.57% in February, but that was on
a low base of a 3.3 % growth in February 2007, not indicative of a positive
trend in performance. |
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ABN-AMRO purchasing managers index revealed slowest growth in the
last eight months for March, reflecting the downward trend in manufacturing
growth.
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India is all set to become second largest wireless network in the
world, beating the USA as it will cross 300 million subscribers in April. |
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Tele-density stands at 25.31% in February. Rural tele-density has
increased from 2 to 8 % over the last year.
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Railway freight earnings grew by 13.41% in the period
April-February compared to 14.89% last year; freight traffic registered a rise
of 8.99 % compared to 9.12% the previous period. |
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| Inflation
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Crude crossed the 100 dollar a barrel mark
and stayed around that level throughout March. |
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WPI provisional data for week ending March 22nd put inflation at
7.0%, with revision to January numbers bringing inflation way past the 4% mark. |
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Consumer Price Indices for February show rise in CPI (AL) to
6.38%, CPI(UNME) to 5.23%, while CPI(IW) is still low at 5.47%.
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CPI UNME item wise inflation shows that cereals have risen by
5.83%, oils and fats by 18.69%, milk and milk products by 10. 48% over the last
year.
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Pressure has come in not just from agricultural produce but also
from iron ore, steel etc. These are following global trends and not easy to
suppress domestically. |
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Current data indications show that while the April inflation will
be lower than March levels, in the range of 5.6-5.8%, inflation trend is still
on the upside, set to cross 6% in May. |
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| Interest
Rates
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While the Fed continued to cut rates in March, down by 300 basis
points now in the last six months. ECB maintains stance of no rate cuts,
looking at Eurozone inflation at highest in 16 years.
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As anticipated in our last newsletter, in India, the 10 year Gsec
yield stayed in the 7.5 to 7.7 range in March but shot past that level by the
end of the month as the inflation numbers came in high and the markets realised
the message that the RBI had been trying to give since the status quo
maintained in January review.
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Readers should note that these are uncertain times and inflation
will always have a priority over growth in the Indian economy, given the impact
on the poorer sections. In the April review, therefore the RBI take will depend
on how the data pans out over the following month.
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For the month ahead, expect the 10 year benchmark Gsec to have a
strong upside bias depending on the inflation data. Yields can cross 8% in the
short term.
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However, if the RBI maintains a status quo the yields can drop. In
short, expect more volatility in Gsec prices as markets adjust.
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| Exchange
Rates
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A month back, the RBI appeared to be fighting to defend the level
of 39 rupees to a dollar, the downward swing past 40 should have given it some
relief on that front, but a depreciation at this moment is not in the interest
of curbing inflation.
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Exports grew at 8.94% in rupee terms and 22.9 % in dollar terms
for the period April to February, imports grew at 15.42% in rupee terms at
30.21% in dollar terms, raising the trade deficit to $72.47 billion compared to
$49.32 billion last year. |
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The high crude prices are one reason for the rising oil import
bill but non-oil imports have also grown at 31.83% in the period
April-February.
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FII investment outflow in equity markets continued in March taking
out $ 2.8 billion since January, though the debt investment is still positive
overall at $ 885 million, there was an outflow from here in March. |
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Expect the rupee to range between 39 and 41 over the next couple
of months, with crude oil price and the financial market volatility impacting
the actual levels. |
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