August 2010

9th August 2010
Indian Economy Next Quarter
Inflation now high on monetary policy agenda.
Good monsoons to push down food price inflation, but overall inflation to continue.
Internally divided RBI expected to give in to calls of additional 50-75 basis point hike.
IIP growth down, less than double-digit manufacturing growth this quarter.
Rate hikes with strong growth estimates can bring in capital flows ? expect volatile Re.
Crude price hovers higher globally, but no clear cues from govt about domestic revisions.
India : Kal, aaj aur kal

RBI raised rates for the second time in July. This is not what we expected it to do, given the rather soft attitude so far on rates. Yet it looks like the inflation hawk has struck hard. But has the RBI really changed its thinking or is it being forced to change? Even though the monetary policy document is very clearly in favour of squashing the inflationary pressures, subsequent comments and movements at the RBI indicate that there is considerable dissent within. What are the issues at stake? The RBI has always maintained that inflation has been driven by food prices and with a good monsoon now and higher sowing in the kharif season so far, these prices should be coming down. It is true that the inflation estimate was revised upwards for April, inflation was therefore worse than was thought earlier and the rise in fuel prices will give a general pressure for prices across the board. But it is also true that it is the government to blame for the high food prices and pathetic stock management. Unfortunately, apart from some finger pointing to the state governments, there does not seem to be impending change there. The trouble is that even though inflation is trending down to touch 6% levels by the year end, there are enough of pressures in the system to push the RBI for more aggressive hikes, more than the expected additional 50-75 basis points by the year-end.

To make matters worse, industrial growth, as expected is already on its way down, but faster than expected. In the first revision to the provisional numbers for April, IIP growth fell by more than a percentage point. Whether we look at unadjusted growth numbers or to a 3 month moving average series of seasonally adjusted annual returns so far, the trend is clear. While May numbers came in at 11.3% yoy, we expect the quarter ahead to turn in growth around 8%. The economy is expected to grow at 8.5+ rate this year but with a tightening interest rate regime this is becoming less likely. With slowing down of manufacturing growth, the upward momentum will continue to be powered by the service sector and this seems to be what the government is more comfortable with.

Looking ahead, there are lots of trouble spots still. While the area sown in most crops is higher than last year, pulses and oilseeds remain below 2008 levels. These will continue to be pressure points for Indian households. Global crude prices will be volatile and the range of $70-90 a barrel is sufficient to wreck a lot of inflation estimates. To top it all, there is still no clarity on the fuel decontrol mechanism. Whether it is changing fundamental systems of food stock management or implementing a policy already announced, this government seems intent on moving really slowly on issues that matter.

The net result is that the government will continue to compensate for its mismanagement by taking actions that will impact growth. The fall in IIP growth is cause for concern and if the government does not get its act together the 8.5% expectation will need to be lowered.

Sumita Kale and Laveesh Bhandari

9th August 2010, Indicus Analytics

Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it.

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Economic Growth
IIP for May showed a much slower growth than the previous month, 11.5% over last May and these are provisional estimates. April estimates of 17.6% were revised downwards by one percentage point in the first revision.
Manufacturing slowed to 12.3%, while mining and electricity grew by 8.7% and 6.1% respectively in May.
Electricity generation grew by 3.7% in June and provisional estimates for July put growth at 3.81%.
The infrastructure sectors grew by 3.4% in June, with the highest growth clocked by oil of 6.8%.
Kharif crop sowing till 23rd July was up by 9.1% over 2009, with some deficit in jowar, soyabean, maize, and sunflower.
The HSBC PMI for manufacturing showed a rise in July to touch 57.6, compared to a deceleration in June from the month before. New orders were driven by domestic demand, with export orders also showing considerable rise.
The HSBC Markit Business Activity Index fell to 61.7 in July, from 64 in June, still well into the expansion mode.
Naukri Jobspeak index moved up to 947 in June, compared to 913 in May, hiring is up.
Air traffic has improved significantly over last year, latest data for May shows growth by 3.4% in aircraft movements, 20.5% in passenger movements, while cargo was up by 34.5%. Patna airport had the highest growth in aircraft movement of 74.1% due to introduction of Indigo and increased frequency of operation of Jet and Kingfisher.
Indian Railways generated 8.33% more revenue earnings from commodity-wise freight traffic during April-June 2010 as compared to last year, while the Net Tonne Kilo Metres went up by 4.73% over the same period.
17.98 million new wireless subscriptions were added in June. Broadband subscribers grew to 9.45 million in June, growing by 2.27% over May.
The automobile industry posted its best ever monthly sales of 12,37,461 units in July, beating the previous high achieved in March 2010. Car sales grew by 38% in July, compared to a year ago.
Read:Double-digit dreams
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Inflation according to provisional WPI estimates stood at 10.6% in June, with the April estimates revised upwards. Manufacturing product inflation was provisionally estimated at 6.7%.
Inflation estimates for primary articles stood at 14.36% for the week ending 24th July, showing a downtrend, while the category of Fuel, Power, Light and Lubricants rose by 14.26% due to the revision in fuel prices.
Consumer price indices showed high inflation ? 13.73% for CPI IW and 13.02% for CPI AL for the month of June ? however the downward trend continues.
Both input and output price indices under the HSBC PMI showed a rise in July, though at a smaller rate than the previous year.
Wheat prices are up globally, with the drought in Russia causing stock concerns, despite FAO estimating adequate supplies.
Crude oil prices have crossed $80 per barrel in early August, however the government and oil companies have not come out with a definite mechanism for domestic price revisions.
Read: Bottlenecks to prolong high India inflation
Interest Rates
RBI raised rates asymmetrically in its July-end review, repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 basis points to 4.5%.
With rate reviews every month and a half now, rate hikes will be more frequent than anticipated as the stance of the policy points to more aggressive tightening.
The yield on the 10 year benchmark gilt was rising smoothly in the early part of July, and jumped up from 7.6799% before the policy to touch 7.845% on 2nd August, following a comment from an RBI official indicating that a tighter regime was warranted.
Read: Rate hikes but by how much more?
Read: Confused signals
Read: Next rate hike in September, more later
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Exchange Rates
Exports during June were valued at US $ 17.745 billion, 30.4 % higher in dollar terms (27.1 % higher in rupee terms) than last year. Imports during June were valued at US $ 28.299 billion, up by 23.0 % in dollar terms (19.9 % in rupee terms) over last year.
Oil imports during June were valued at US $ 8.354 billion, 26.5 % higher than last June, while non-oil imports were estimated at US $ 19.946 billion, up 21.5 %.
The trade deficit for April - June, 2010 was estimated at US $ 32.267 billion, higher than the deficit of US $ 23.475 million during April -June, 2009.
The rupee stayed in the 46-47.4 range to a dollar throughout July. With considerable volatility expected in the global situation, the rupee will trade between 46 and 48 to a dollar in the month ahead.
Read: Could the rupee hit 50 again?
Read: Rupee climbs towards seven week high as India?s growth rates spur inflows
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