tag:blogger.com,1999:blog-57837942024-03-14T03:27:37.295+01:00India Economy WatchUnknownnoreply@blogger.comBlogger240125tag:blogger.com,1999:blog-5783794.post-12896920390425825022011-06-19T17:42:00.002+02:002011-06-20T10:54:30.048+02:00India's Economy Hits What Has To Be A Very Welcome "Soft Patch"<blockquote>“If you look at the world, it would inevitably appear India’s growth is preordained. The world needs working hands. The world needs back offices. India seems to be a natural fit…We are producing a workforce which is not only for India, but a global workforce.”<br />Sunil Bharti Mittal, founder and chairman of New Delhi-based Bharti Enterprises</blockquote>As the European Central Bank moves steadily and earnestly forward with its ongoing rate hike cycle - in so doing sending one fragile economy after another along Europe's periphery drifting off towards recession - there is at least one prominent global central banker who must be feeling vindicated in the policy stance he has taken to try and bring the rampant inflation from which his country has been suffering back under control. Duvvuri Subbarao is Governor of the Reserve Bank of India, and under his stewardship the central bank has been hard at work over the last twelve months trying to credibly fight inflation. So far raised rates have been raised ten times, and the bank has managed to claw the annual rate of wholesale price inflation back from its peak of 10.9% to the current level of 9.06%. Hardly a level to be complacent about, but then Mr Subarrao seems far from complacent.<br /><br /><br /><a href="http://1.bp.blogspot.com/-euJnAVDOMBU/Tf4nEhQOWqI/AAAAAAAASL4/WJ_eVFSnQ1Q/s1600/wholesale%2Bprices.png"><img border="0" alt="" src="http://1.bp.blogspot.com/-euJnAVDOMBU/Tf4nEhQOWqI/AAAAAAAASL4/WJ_eVFSnQ1Q/s400/wholesale%2Bprices.png" /></a><br /><br />Obviously there is long way to go yet awhile before he can even reach his short term inflation target, which is why he warned again following last week's monetary policy meeting - when the benchmark repo rate was raised to 7.5% - that monetary tightening in India would continue even at the cost of further slowing economic growth. In so doing he underlined his determination to reach his inflation objective of 6 percent “with an upward bias” by March 31, 2012 and maintain the credibility of the bank as an independent entity. So, be warned, when this man says "strong vigilance" he means it, even though, as has to be recognised, central bank rates are still negative at this point.<br /><br /><a href="http://2.bp.blogspot.com/-jGRbjwmgNHw/Tf4mIFkZu7I/AAAAAAAASLw/iklb7Gl10OA/s1600/India%2BInterest%2BRates.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-jGRbjwmgNHw/Tf4mIFkZu7I/AAAAAAAASLw/iklb7Gl10OA/s400/India%2BInterest%2BRates.png" /></a><br /><br />As a result of this posture India’s economy may, he accepted, expand by only “around 8 percent” in the financial year through March, a reduction on the 8.6 percent he previously estimated, and significantly short of those double digit growth rates India must be aiming for in the near term. In fact most forecasters agree with Subarrao, and see India's growth dropping back from last years sweltering 10.3% pace, indeed the majority of commentators are agreed that in the very short term this would be no bad thing. India's inflation is structural, and needs containing so the economy can accelerate to its full growth potential, which I personally estimate to be well into the double digit zone. I have felt and been arguing so for some years (see me berating the Economist on this very topic of India's growth potential <a href="http://indiaeconomywatch.blogspot.com/2007/12/economist-on-india.html">here in 2007</a> and <a href="http://indianeconomy.org/2006/11/29/sizzling-or-just-right/">here in 2006</a>). It is highly likely India can easily fact break all those earlier Chinese records when she really gets going, such is the country's potential, but that potential can only be realised if the old phantoms which haunt the economy are hunted down and eliminated. High on the "hit list" here has to be the inflation curse.<br /><br /><a href="http://1.bp.blogspot.com/-lvsUwWQyKNY/TfZO8gCGZ_I/AAAAAAAASJ4/Eu76c6kaHoE/s1600/India%2BLong%2BTerm%2BGDP.png"><img border="0" alt="" src="http://1.bp.blogspot.com/-lvsUwWQyKNY/TfZO8gCGZ_I/AAAAAAAASJ4/Eu76c6kaHoE/s400/India%2BLong%2BTerm%2BGDP.png" /></a><br /><br />Purging the endemic inflation out of the system is as much an attitude change as anything, and Duvurri Subbarao is hard at work trying to achieve it. People need to get used to the idea that they cannot simply solve their short term problems by raising prices and passing on their inefficiencies to customers, and that the reason they can't do this is that the central bank is there to make sure they don't.<br /><br /><br />As I say, India’s current inflation problem is largely a structural one, and is in large part due to supply side rigidities coupled with low capacity slack in some of the key sectors. Ultimately only government initiated reforms and substantial infrstructural investment can get to the heart of the problem, but the central bank has a key role to play in this, especially by demonstrating to would be investors that the financial and price environment is a stable one. The current bout of energy and food price inflation is a particular concern given the risks that the country's supply side deficiencies and rigidities could generate second round effects and feedback into core prices. This is important, since unlike in many developed economies, India’s inflation is, in part, a demand-driven phenomenon. And since it is demand driven, it is susceptible to the application of monetary policy.<br /><br />In any event, more interest rate rises are certainly in the pipeline, and the markets are taking the central bank growth warnings seriously: stocks peaked in November, and they show no sign of reviving in the short term.<br /><br /><a href="http://3.bp.blogspot.com/-OJH74M-Hzts/Tf5SQlsscWI/AAAAAAAASMY/X0jtEhzxwMQ/s1600/India%2BMSCI.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 271px" src="http://3.bp.blogspot.com/-OJH74M-Hzts/Tf5SQlsscWI/AAAAAAAASMY/X0jtEhzxwMQ/s400/India%2BMSCI.png" border="0" /></a><br /><br /><b>It's The Demography Silly!</b><br /><br />Now, if we take a look at the way things worked out in the first decade of the present century, you might want to ask yourself how I can be so sure that India is destined to become one of the leading players in the global economy over the next decade or two. Surely up to now the Emerging Markets story has been very much a China one.<br /><br /><a href="http://3.bp.blogspot.com/-i0u5pjslPnQ/Tf3GpbvC_rI/AAAAAAAASLQ/wepJui2JiGI/s1600/One.png"><img border="0" alt="" src="http://3.bp.blogspot.com/-i0u5pjslPnQ/Tf3GpbvC_rI/AAAAAAAASLQ/wepJui2JiGI/s400/One.png" /></a><br /><br />Well my answer would be, it's the demography silly! Now I am sure there will be no shortage of people lining up out there just waiting to tell me that I am wrong, that demography isn't destiny, and I don't know what else. So I am here to answer them, saying you are right, in economic terms demography may well not be everything, but it sure as hell is a big part of the picture, a much bigger one than many economists are willing to admit. This is the real problem, since mainstream neo-classical economics and structural-reform-oriented microeconomic analysis virtually screens demographic dynamics out of the picture.<br /><br />And it is the underlying comparative demography of the two huge emerging "mega-countries" that suggests to me that while the global growth story at the present time is largely a China one, poll position could easily pass over to India at some point during the next decade. The principal reason I feel so confident in saying this is that India's demographic transition is a much more balanced one, producing a far more stable population pyramid than the one China is about to find itself landed with.<br /><br /><a href="http://3.bp.blogspot.com/-bUlMm_bNaOc/TfZYAVDl7KI/AAAAAAAASKA/ya6vtJDVb7Q/s1600/Nine.png"><img border="0" alt="" src="http://3.bp.blogspot.com/-bUlMm_bNaOc/TfZYAVDl7KI/AAAAAAAASKA/ya6vtJDVb7Q/s400/Nine.png" /></a><br /><br /><br /><b>In The Long Run - We Are All OLD</b><br /><br />Population ageing is a global phenomenon, one which has been affecting all societies and all countries since the start of the industrial revolution. The last 250 years have seen enormous and swift changes in the structure of our populations. During nearly roughly 10,000 years prior to the coming of modern society population median ages and structures varied very little, but since the the end of the 18th century, and driven by movements in fertility rates and life expectancy, populations all across the globe have been steadily ageing. <br /><br />Put very simply this ageing comes in two waves, which could loosely be called the first and second demographic transitions. During the first transition fertility falls from very high levels to population replacement ones, the proportion of those in the working age groups rises constantly, while life expectancy increases such that the population in the 65 to 80 age group steadily increases. This is the time when pension Pay As You Go pension systems are introduced, since people still can believe they are sustainable.<br /><br />During the second transition, fertility in many countries falls well below replacement level and stays there for several decades. Life expectancy rises such that the over 80 population becomes a significant part of the total population and the working age population goes into long-term permanent decline in both absolute terms and as a proportion of the total. As this happens, people start to worry about the sustainability of those very same pension systems they have just introduced, while financial markets begin to ask questions about the posibility of sovereign default.<br /><br />Again simplifying, the developed societies are now well into the second ageing phase, while the so called emerging (or "growth" economies) are at some point or other along the first one. And the the big difference between India and China is the velocity with which they are passing through the first phase.<br /><br /><b>Quick-fixes Normally Don't Work</b><br /><br />Back in the 1970s China opted for a short term solution to its perceived population problem by applying drastic social surgery in the form of the one child per family policy. Their problem was, of course, a very real one, since the underlying population explosion made it very hard to feed everyone, but as is often the case with such drastic remedies, in the longer run the cure may turn out to have been even worse than the ailment.<br /><br />Fertility in India, on the other hand, has declined much more slowly (always accepting, naturally, that there are very large differences between North and South) and as a consequence the poulation ageing process is much slower. While the proportion of population in the under 14 age group declined from 41 per cent in 1961 to 35.3 per cent in 2001 (that is, by 5.7 percentage points), the proportion of population in the age group 15-59 increased from 53.3 per cent to 56.9 per cent (that is, by 3.6 percentage points). The proportion of those over 60 increased from 5.6 per cent to 7.4 per cent (that is, by 1.8 percentage points).<br /><br />In strictly numerical terms the changes seem much larger. The increase in the 15-34 age-group population, for example; has been quite dramatic: from 174.26 million (31.79 per cent) in 1970 to 354.15 million (34.43 per cent) in 2000. This age group is currently projected to peak in 2030 at around 485 million.<br /><br />According to UN Population Division projections even though the 15-34 age group will only start to decline in absolute terms in India post 2030, it started to fall as a proportion to the total population last year. But for the time being the rate of decline is marginal (being projected to drop from 35.4 per cent in 2010 to 34.5 per cent in 2020, to 32.4 per cent in 2030). After 2030, however, the rate of decline will accelerate (dropping to 29.7 per cent in 2040, and 26.6 per cent in 2050 according to the forecasts). Yet even given this there will still be a massive 441.1 million people in the age group by the time we reach 2050.<br /><br /><br />This demographic evolution will have important implications for the country's labour market. India's labour force, which was estimated at 472 million in 2006, is expected rise to around 526 million in 2011 and then grow steadily hitting 653 million in 2031. The labour force growth rate will remain higher than the rate of increase in total population until 2021. According to Indian government estimates, 300 million young people will enter the labour force between now and 2025, by which time approximately 25 per cent of the global labour force (or one worker in four) will be Indian.<br /><br /><a href="http://1.bp.blogspot.com/-9UDX2c1-Wtc/TfZYx6pd7VI/AAAAAAAASKI/8xcQ04KqZgE/s1600/2011-06-12_181719.png"><img border="0" alt="" src="http://1.bp.blogspot.com/-9UDX2c1-Wtc/TfZYx6pd7VI/AAAAAAAASKI/8xcQ04KqZgE/s400/2011-06-12_181719.png" /></a><br /><br />Meanwhile, as can be seen in the accompanying charts, China's working age population is in the process of peaking both numerically and as a proportion of the total population.<br /><br /><br /><a href="http://4.bp.blogspot.com/-50J6j8amzwY/Tf3ptumaMLI/AAAAAAAASLo/znC-NMF-L0k/s1600/China%2BPresentation%2BSeven.png"><img border="0" alt="" src="http://4.bp.blogspot.com/-50J6j8amzwY/Tf3ptumaMLI/AAAAAAAASLo/znC-NMF-L0k/s400/China%2BPresentation%2BSeven.png" /></a><br /><br />China is getting old far too fast. By 2040, assuming current demographic trends continue, there will be 397 million Chinese over 65 - more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined.<br /><br /><a href="http://2.bp.blogspot.com/-GHV4_WP3_T4/Tf3m8JjqHAI/AAAAAAAASLg/Mnh2eXQfuG0/s1600/China.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-GHV4_WP3_T4/Tf3m8JjqHAI/AAAAAAAASLg/Mnh2eXQfuG0/s400/China.png" /></a><br /><br />The population pyramid is shifting fast (unusually fast for a country with China's income level), and the degree of ageing we should anticipate, in terms of both absolute numbers and velocity, is simply staggering. It is during the 2020’s that China’s age wave will arrive in full force. The elder share of China’s population seems set to rise steadily from 11 percent of the total in 2004 to 15 percent in 2015, and then leap to 24 percent in 2030 and 28 percent in 2040. Over the same period, China’s median age will climb from 32 to 44.<br /><br /><br />Thus China’s ageing is characterised by the unusual speed with which it is occurring, something which should not surprise us given that the outcome is the result of a massive social engineering experiment. To give an idea, while Europe's over 65 population crossed the 10 percent threshold back in the 1930s, it is not expected to reach the 30 percent of the population mark until the 2030s, a full century later. China, on the other hand, will traverse this same distance in a single generation. The magnitude of China’s coming age wave, is simply staggering. And if the economic consequences of the first (positive) part of China's demographic transition have already been large and significant, we should now be beginning to brace ourselves for the other part, the demographic downside.<br /><br /><br /><br /><a href="http://1.bp.blogspot.com/-dXpqYmTpXgc/Tf3mYr83JdI/AAAAAAAASLY/WfDWRlyERx8/s1600/China%2BUS.png"><img border="0" alt="" src="http://1.bp.blogspot.com/-dXpqYmTpXgc/Tf3mYr83JdI/AAAAAAAASLY/WfDWRlyERx8/s400/China%2BUS.png" /></a><br />So India has huge potential, including the potential to act as a sheet anchor for a global economy in a state of shock as China struggles with the enormous challenges which will face it. But will India really be able to realise the potential it has? To think about this. let's go back to the short term economic development of the Indian economy, and back to the world of Duvarri Subarrao and the battle he is fighting over at the Indian central bank.<br /><br /><b>India's Exports Are Growing Fast</b><br /><br />Now first of all the good news: India's merchandise exports rose sharply in May, helped by a surge in shipments of engineering and electronic products. They jumped 56.9% year-on-year to reach $25.9 billion, and totalled $49.8 billion for the first two months of the fiscal year that started on April 1, an increase in 45.3% over the same period a year earlier.<br /><br /><a href="http://2.bp.blogspot.com/-MG0rUYBxIy4/TfZZdcbIjvI/AAAAAAAASKQ/hVUGSiw18_Y/s1600/Indian%2BExports.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-MG0rUYBxIy4/TfZZdcbIjvI/AAAAAAAASKQ/hVUGSiw18_Y/s400/Indian%2BExports.png" /></a><br /><br /><br /><b>But So Too Are Its Imports</b><br /><br />In fact India runs a trade deficit (well, someone has to). May imports surged 54.1% to $40.9 billion, touching the highest level in four years and only adding to concerns about the widening trade deficit. India's goods trade deficit was $15 billion in May - the widest level since August 2008<br /><br /><a href="http://2.bp.blogspot.com/-wLiwP-nGpBI/Tf5WbWHokEI/AAAAAAAASMo/m_EuXNAC7fQ/s1600/Trade%2BDeficit.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 226px" src="http://2.bp.blogspot.com/-wLiwP-nGpBI/Tf5WbWHokEI/AAAAAAAASMo/m_EuXNAC7fQ/s400/Trade%2BDeficit.png" border="0" /></a><br /><br /><br /><b>Governance IS A Problem In India</b><br /><br />So here we have the first sign beyond the inflation that all is not entirely well in the Indian economy. If India has a trade deficit, then this means that someone somewhere is borrowing money. And indeed they are, since while private sector indebtedness in India is low (despite rising consumer credit), government debt is high, indeed it is very high by emerging economy standards.<br /><br /><a href="http://2.bp.blogspot.com/-IL9B-ptPCqA/TfZdUnlj6KI/AAAAAAAASKw/SXJKpnkVLAo/s1600/India%2BGovt%2BDebt%2Bto%2BGDP.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-IL9B-ptPCqA/TfZdUnlj6KI/AAAAAAAASKw/SXJKpnkVLAo/s400/India%2BGovt%2BDebt%2Bto%2BGDP.png" /></a><br /><br />But when you have an economy expanding at 8% a year, and set to accelerate to over 10%, so much government debt is hard to understand, especially since all the evidence suggests that it is not being used to finance a massive, and much needed, infrastructure overhaul. And at the present time India's general government deficit is running at near to 10% of GDP. Part of the problem here are India's state governments, but even the performance of central government leaves a lot to be desired. Finance Minister Pranab Mukherjee has promised to marginally reduce the central government budget component to 4.6 percent of GDP in the current financial year, down from 4.7 percent in the previous 12 months, but even this minor correction now seems to be in some doubt, since Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in Mumbai recently that the target would be “difficult to achieve".<br /><br /><br /><a href="http://1.bp.blogspot.com/-xT9AKbr8IsU/TfZbo-rpK3I/AAAAAAAASKo/k_H6tEpU0M4/s1600/India%2BFiscal%2BBalance.png"><img border="0" alt="" src="http://1.bp.blogspot.com/-xT9AKbr8IsU/TfZbo-rpK3I/AAAAAAAASKo/k_H6tEpU0M4/s400/India%2BFiscal%2BBalance.png" /></a><br /><br /><b>As A Result India Has Trouble In The Current Account Department</b><br /><br />With a fiscal and a trade deficit it is hardly suprising that India's current account position has been deteriorating in recent years. India reported a current account deficit equivalent to $9.7 Billion in the fourth quarter of 2010, down from $16.8 billion in the third quarter, and the situation may have even improved again during the first quarter given the strong export performance, but the IMF are still forecasting a small increase for 2011, up to 3.7% of GDP from 3.2% in 2010.<br /><br /><a href="http://2.bp.blogspot.com/-OHoFV49RAjQ/Tf47pw8uqxI/AAAAAAAASMA/qasLq4-1yV4/s1600/India%2BCurrent%2BAccount%2Bdeficit.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-OHoFV49RAjQ/Tf47pw8uqxI/AAAAAAAASMA/qasLq4-1yV4/s400/India%2BCurrent%2BAccount%2Bdeficit.png" /></a><br /><br /><br />At the present time the deficit is being financed by short term capital inflows - India's reserves stood at $313 billion at the start of June, up from $271 billion a year earlier (a rise of 15%).<br /><br /><br /><a href="http://2.bp.blogspot.com/-XIJLRc3Iy7k/TfZeEnvfS_I/AAAAAAAASLA/R3rSBHx-HvE/s1600/indian%2BFX.png"><img border="0" alt="" src="http://2.bp.blogspot.com/-XIJLRc3Iy7k/TfZeEnvfS_I/AAAAAAAASLA/R3rSBHx-HvE/s400/indian%2BFX.png" /></a><br /><br />Net private capital inflows to emerging market economies can be expected to keep growing this year (provided there is no financial accident in Europe) and could even reach $1.1 trillion in 2012 according to a recent estimate by the Washington-based Institute of International Finance. As the IIF says, “The strength of capital flows is still presenting policy challenges in a number of emerging economies, especially those already facing pressures from rising inflation, strong credit and asset price growth and rising exchange rates" - India's case precisely.<br /><br />Just as importantly, many of the inflows are short term, and are primarily used to fund bank loans and equity purchases. The share going into infrastructural and other projects is comparatively small.The Bank For International Settlements (the central bank of the central banks) highlighted just this problem in their latest quarterly report, drawing attention to the extent to which the rapid growth in lending to emerging market economies might be “hot” money, subject to withdrawal at short notice. According to the bank, most of the growth in lending to EMs between the second quarter of 2009 and the end of 2010 was driven by short term lending, and an estimated $418bn, or 79 per cent, of the increase consists of loans with maturities of less than one year. This compares with the 49 per cent of lending to EMs falling into this category between the start of 2006 and the middle of 2008. And the bank also highlighted just how the trend of increasing reliance on short-term lending was highly concentrated among borrowers in the Asia-Pacific region which accounted for 84percent of the recent rise.<br /><br />These proportions look horribly like what we were seeing entering emerging economies in Eastern Europe in the run up to the Lehman debacle, which means if we do have a sharp reversal in risk sentiment on the back of the Eurozone debt crisis, emerging Asia would look to be very exposed, a point which is not lost on central banker Subbarao, <a href="http://www.bloomberg.com/news/2011-05-10/subbarao-says-india-requires-capital-inflows-to-finance-deficit.html">who warned on precisely this topic in a recent speech in Zurich</a>.<br /><br />After the U.S. announced its second round of quantitative easing in August 2010, “the prospect of easy liquidity in the U.S. seemed to prompt a large increase in capital flows to emerging market economies, threatening domestic price and financial stability,” he told his audience. Since the U.S. quantitative easing policy had also put pressure on global commodity prices, the "combination has put some emerging market economies in a policy bind, but higher interest rates will only intensify capital inflows, potentially putting more pressure on exchange rates and domestic stability. In India’s case, the concerns on this account currently are less acute since capital flows are needed to finance our current-account deficit.Yet even for us, the composition of the inflows remains an issue,” he said. “About three-quarters of the current-account deficit has been financed by volatile capital inflows.” And those inflows, in situations of stress could easily reverse, as he knows only too well.<br /><br /><br /><b>We Should Never Forget India Is Still An Emerging Economy</b><br /><br />Having said all this we should never forget that India is still an emerging economy, one which has made great strides forward in recent years. And despite many difficulties India has remained a democracy since independence. It is a country where human rights are by and large respected, and where institutional quality is gradually improving. As I am suggesting here, the central bank is becoming more and more independent. Corruption is still a BIG problem, but eventually this has solutions. At the same time India is a country of individuals, of creativity and strong entrepreneurial spririt and, to close with a professional bias: India produces economists of extraordinary quality.<br /><br /><br />And, as I said above, maybe demography isn't everything, but we should never forget that it is a large and important part of the picture.<br /><br /><a href="http://4.bp.blogspot.com/-nva8Y0zB1qE/TfZe8D2zXMI/AAAAAAAASLI/HQZTZvgCKd4/s1600/2011-06-11_200418.png"><img border="0" alt="" src="http://4.bp.blogspot.com/-nva8Y0zB1qE/TfZe8D2zXMI/AAAAAAAASLI/HQZTZvgCKd4/s400/2011-06-11_200418.png" /></a><br /><br /><br />This post first appeared on my Roubini Global Econmonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-90404784841612534262009-06-20T12:29:00.000+02:002009-06-20T12:32:55.040+02:00Facebook LinksQuietly clicking my way through Bloomberg last Sunday afternoon, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC4zbsgMD6x8">I came across this</a>:<br /><br /><br /><blockquote><strong>Facebook Members Register Names at 550 a Second</strong><br /><br />Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.<br /><br />Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name. </blockquote><br /><br />Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:<br /><br /><blockquote>Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.</blockquote>Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.<br /><br />In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.<br /><br />So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-56065098902350407802009-05-23T11:48:00.002+02:002009-05-25T23:38:32.274+02:00Don't Get Carried Away Now!As Paul Krugman recently pointed out, one of the central points they made in the latest IMF World Economic Outlook was that recessions caused by financial crises tend to get resolved on the back of export-lead booms, with countries normally emerging from the crisis with a positive trade balance of over 3 percent of GDP. The reason for this is simple, since consumers are so laden-down with debt from the boom period, they are naturally more obsessed with saving than borrowing during the initial crisis aftermath. So much then for the typical crisis, and the typical exit. But musing on this point lead Krugman to an additional, rather disturbing, conclusion: since the present financial crisis is truly global in its reach, the habitual exit route to recovery will only work after we are able to identify <strong>another planet</strong> to send all those exports to (shades of Startreck IV). The joke may seem a rather exaggerated one, in poor taste even, but behind it there lies a little bit more than a grain of truth. <a name="2471557242"></a><br /><br />But not everywhere is gloom and doom at the moment, and on the other side of the world they woke up reeling from different kind of bounce last Monday morning, on learning that India’s outgoing government had been not only been re-elected, but had been thrust back into power on a much more stable basis. And that was not the only pleasant surprise in store for those reading their morning newspapers in London, Madrid or New York, since India's main stock index - the Sensex - shot up as much as 17% during early trading on receiving the news, while the rupee also surged sharply. So just one more time we find ourselves faced with the prospect of living in a rather divided world, where on one side we have growing and deepening pessimism, while on the other we see a burst of optimism, with someone, somewhere, getting a massive dose of that "let a thousand green shoots bloom" kinda feeling. Perhaps we should ask ourselves whether there is any connection?<br /><br /><br />Well, and to cut the long story short, yes there is, and the connection has a name, and it's called sentiment. Indeed sentiment is precisely why the recent (and highly controversial) US bank stress tests were so important. Their real significance was not for any relevance they may have from a US banking point of view (which was, of course, highly contested), but for the reassurance they can give market participants that there will not be another financial explosion in the United States (as opposed to a protracted recession, and long slow recovery), or put another way, to show the days of "safe haven" investing are now over. Risk is about to make a comeback, and the only question is where?<br /><br />Which brings us straight back to all that earlier talk of coupling, recoupling, decoupling, and uncoupling which we saw so much of a year or so ago (or to <a href="http://www.economist.com/opinion/displaystory.cfm?story_id=13697292">Decoupling 2.0, as the Economist calls it</a>). And to the world as we knew it before the the demise of Lehmann brothers, where commodity prices were booming like there was no tomorrow on the one hand, while credit- and housing-markets markets were steadily melting down in the developed economies on the other, where growth was being clocked up in many emerging economies at ever accelerating rates, while the only "shoots" we could see on the horizon in the US, Europe and Japan were those of burgeoining recessions.<br /><br />The point to note here is not just that a significant group of investors and their fund managers spent the better part of 2008 busily adapting their behaviour to changed conditions in the US, Europe and Japan, but rather that a very novel set of conditions began to emerge, as the credit crunch worked its way forward and property markets drifted off into stagnation in one OECD economy after another. Just as they were finally announcing closing time in the gardens of the West almost overnight it started "raining money" in one emerging economy after another - as foreign exchange came flooding in, and the really hard problem for governments and central banks to solve seemed to be not how to attract funding, but rather how to avoid receiving an excess of it. Thailand even attained a certain notoriety by imposing capital controls with the explicit objective of discouraging funds not from leaving but from entering the country.<br /><br />Then suddenly things moved on, and day became night just as quickly as night had become day as one fund flow after another reversed course, and the money disappeared just as quickly as it had arrived. Behind this second credit crunch lay an ongoing wave of emerging-market central bank tightening (during which Banco Central do Brasil deservedly earned its spurs as the Bundesbank of Latin America) with the consequence that one emerging economy after another began to wilt under the twin strain of stringent monetary policy and sharply rising inflation. Thus the boom "peaked" in July (when oil prices were at their highest), and momentum was already disapearing when the hammer blow was finally dealt by the decision to let Lehman Brothers fall in late September. By November all those previous positive expectations were being sharply revised down, with the IMF making an initial cut in its global growth estimate for 2009 - to 2.2 percent from the 3.7 percent projected for 2008. The World Bank went even further, and by early December was projecting that world trade would fall in 2009 for the first time since 1982, with capital flows to developing countries being expected to plunge by around 50 percent. By March 2009 they were estimating that the volume of world trade, which had grown by 9.8 percent in 2006 and by 6.2 percent in 2007, was even likely to fall by 9 percent this year.<br /><br />Having said this, and while fully recognising that the future is never an exact rerun of the past - and especially not the most recent past - given that emerging economies have been the key engines of global growth over the last five years, is there any really compelling reason for believing they won't continue to be over the next five? Could we not draw the conclusion that what was "unsustainable" was not the solid trend growth which we were observing between 2002 and 2007, but rather the excess pressure and overheating to which the key EM economies were subjected after the summer of 2007? And if that is the case, might it not be that the "planet" we need to find to do all that much needed exporting to isn't so far away after all, but right here on this earth, and directly under our noses, in the shape of a growing band of successful emerging economies.<br /><br />According to IMF data, the so called BRIC countries actually accounted for nearly half of global growth in 2008 - China alone accounted for a quarter, and Brazil, India and Russia were responsible for another quarter. All-in-all, the emerging and developing countries combined accounted for about two-thirds of global growth (as measured using PPP adjusted exchange rates) . Furthermore, and most significantly, the IMF notes that these economies “account for more than 90 per cent of the rise in consumption of oil products and metals and 80 per cent of the rise in consumption of grains since 2002”.<br /><br />But behind the recent emerging market phenomenon what we have is not only a newly emerging growth rate differential, since alongside this there is also alarge scale and ongoing currency re-alignment taking place, a realignment driven, as it happens, by those very same growth rate differentials. The consequential rapid and dramatic rise in dollar GDP values (produced by the combination of strong growth and a declining dollar) has meant that a slow but steady convergence in global living standards - at least in the cases of those economies who have been experiencing the strongest acceleration - has been taking place, and at a much more rapid pace than anyone could possibly have dreamed of back in the 1990s, even if the long term strategic importance of this has been masked by the recent collapse in commodity prices and the downward slide in emerging stocks and currencies associated with the post-Lehman risk appetite hangover. Which is why, yet one more time, that simple issue of sentiment is all important, or using the expession popularised by Keynes "animal spirits".<br /><br /><br /><strong>Carry On Trading</strong><br /><br />But now we have a new factor entering the scene. The US Federal Reserve, along with many of the world's key central banks, has so reduced interest rates that they are now running only marginally above the zero percent "lower bound", and the Fed is far more concerned with boosting money supply growth to fend of deflation than it is with restraining it to combat inflation. Not only that, Chairman Ben Bernanke looks set to commit the bank to maintain rates at the current level for a considerable period of time.<br /><br />In this situation, and given the extremely limited rates of annual GDP growth we are likely to see in the US and other advanced economies in the coming years, all that liquidity provision is very likely to exit the first world looking for better yield prospects, and where better to go than to to look for it than those "high yield" emerging market economies.<br /><br />The Federal Reserve could thus easily find itself in the rather unusual situation of underwriting the nascent recovery in emergent economies like India and Brazil , just as Japan pumped massive liquidity straight into countries like New Zealand and Australia during its experiment with quantitative easing between 2001 and 2006. And the mechanisms through which the money will arrive? Well, they are several, but perhaps the best known and easiest to understand of them is the so called carry trade, which basically works as follows.<br /><br />Stimulus plans and near-zero interest rates in developed economies boost investor confidence in emerging markets and commodity-rich nations whose interest rates are often in double figures. Using dollars, euros and yen these investors then buy instruments denominated in currencies from countries like India, Brazil, Hungary, Indonesia, South Africa, Turkey, Chile and Peru - which collectively rose around 8% from March 20 to April 10, the biggest three-week gain for such trades since at least 1999 . A straightforward and simple carry-trade transaction would run like this: you borrow U.S. dollars at the three-month London interbank offered rate of (say) 1.13% and use the proceeds to simply buy Brazilian real, leaving the proceeds in a bank to earn Brazil’s three-month deposit rate of 10.51%. That would net anannualized 9.38% - under the assumption that the exchange rate between the two currencies remains stable, but the real, of course, is appreciating against the dollar.<br /><br />Other options which immediately spring to mind are Turkey, where the key interest rate is currently 9.25 percent, Hungary (9.5 percent) or Russia (12 percent). And the cost of borrowing is steadily falling - overnight euro denominated inter-bank loans hit 0.56 percent last week, down from 3.05 percent six months ago after recent moves by the European Central Bank to cut interest rates and pump liquidity into the banking system. The London interbank offered rate, or Libor, for overnight loans in dollars is thus down to 0.22 percent from 0.4 percent in November. And while the ECB provides the liquidity, the EU Commission and the IMF provide the institutional guarantees which - in the cases of countries like Hungary or Romania - mean that even is such lending is not completely free from default risk, they are at least very well hedged.<br /><br />Indeed Deustche Bank last week specifically recommended buying Hungarian forint denominated assets, and according to the bank the Russian ruble, the Hungarian forint and the Turkish lira are among the trades which offeri investors the best returns over the next two to three months. Deutsche Bank recommends investors sell the euro against the forint on bets the rate difference will help the Hungarian currency gain around 10 percent over the next three months (rising to 260 from around 285 to the euro when they wrote). Investors should also sell the dollar against the Turkish lira and buy the ruble against the dollar-euro basket, according to their recommendations.<br /><br />And it isn't only Deutsche Bank who are actively promoting the trade at the moment, at the start of April Goldman Sachs also recommended investors to use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles. John Normand, head of global currency strategy at JPMorgan, is forecasting a strong surge in long term carry trading as the recovery gains traction. Long trading, he says, is decidedly "underweight" at this point. Long carry trade positions held by Japanese margin traders, betting on gains in the higher-yielding currencies, peaked at $60 billion last July, according to Normand. They were liquidated completely by February, and have subsequently increased to around one third of the previous value (or $20 billion). “Only Japanese margin traders and dedicated currency managers appear to have reinstated longs in carry,” Normand says. “Their exposures are only near long-term averages.”<br /><br />And Barclays joined the pack this week stating that Brazil’s real, South Africa’s rand and Turkey’s lira offer the “largest upside” for investors returning to the carry trade. A global pickup in investor demand for higher-yielding assets and signs the worst of the global recession is over “bode very well for the comeback of the emerging-market carry trade,” according to analyst Anfrea Kiguel in a recent report from New York. In part as a result of the surge in carry activity the US dollar declined beyond $1.40 against the euro on Friday for the first time since January. Evidently the USD may now be headed down a path which is already well-trodden by the Japanese yen.<br /><br /><br /><strong>India on The Up and Up.</strong><br /><br /><br />But some of these trades are much riskier than others. Many of the countries in Eastern Europe who currently offer the highest yields are also subject to IMF bailout programmes, so they are with good reason called "risky assets". But others look a lot safer. Take India for example. As Reserve Bank of Indian Governor Duvvuri Subbarao stressed only last week, India’s “modest” dependence on exports will certainly help the economy weather the current global recession and even stage a modest recovery later this year. Of course, "modest" is a relative term, since even during the depths of the crisis India managed to maintain a year on year growth rate of 5.3 percent (Q4 2008), and indeed as Duvvuri stresses, apart from the limited export dependence, India's financial system had virtually no exposure to any kind of "toxic asset".<br /><br />As mentioned above, the rupee rose 4.9 percent this week to 47.125 per dollar in Mumbai, its biggest weekly advance since March 1996, while the Sensex index rallied 14 percent for its biggest weekly gain since 1992.<br /><br />And, just to add to the collective joy, even as Indian Prime Minister Manmohan Singh began his second term, and stock markets soared, analysts were busy rubbing their hands with enthusiasm at the prospect that the new government might set a record for selling off state assets, and thus begin to address what everyone is agreed is now India's outsanding challenge: reducing the fiscal deficit.<br /><br />Singh, it seems, could sell-off anything up to $20 billion of state assets over the next five years as he tries to reduce the central govenment budget shortfall which is currently running at more than double the government target - it reached 6 percent of gross domestic product in the year ended March 31, well beyond the 2.5 percent government target. The prospect of a wider budget gap prompted Standard & Poor’s to say in February that India’s spending plans were “not sustainable” and threaten that the country's credit rating could be cut again if finances worsen. But just by raising 100 billion rupees from share sales and initial public offerings in the current financial year would reduce the fiscal deficit by an estimated quarter-point, at the stroke of a pen, as it were. And there is evidently plenty more to come from this department.<br /><br />As a result of the changed perception that the new Indian government will now - and especially with the elections and the worst of the global crisis behind it - seriously start to address the fiscal deficit situation, both S&P and Moody’s Investors Service, have busied themselves emphasising just how the outcome gives India's government a chance to improve its fiscal situation. The poll result gives the government more “political space” to sell stakes in state-run companies and improve revenue, according to Moody’s senior analyst Aninda Mitra, while S&P’s director of sovereign ratings Takahira Ogawa commented that the result means “there is a possibility for the government to implement various measures to reform for further expansion of the economy and for the fiscal consolidation.”<br /><br />So off and up we go, towards that ever so virtuous circle of better credit ratings, lower interest rates, rising currency values, and ever higher headline GDP growth, which of course helps bring down the fiscal deficit, which helps improve the credit rateing outlook, which helps... oh, well, you know.<br /><br />And it isn't only India which is exciting investors at the moment. Brazil's central bank President Henrique Meirelles went so far as to warn this week against an “excess of euphoria” in the currency market, implicitly suggesting the bank may engage in renewed dollar purchases to try to slow down the latest three-month rally in the real. The central bank began buying dollars on May 8, and Meirelles’s latest are evidently upping the level of verbal intervention. The real has now climbed 20.5 percent since March 2, the biggest advance among the six most-traded currencies in Latin America, as prices on the country’s commodity exports rebounded and investor demand for emerging-market assets has grown. The currency is up 14 percent this year, more than any other of the 16 major currencies except for South Africa’s rand, reversing the 33 percent drop in the last five months of 2008.<br /><br /><strong>Carry Me Home</strong><br /><br />Despite a number of outsanding worries about the emerging economies in Eastern Europe, the general idea that countries like India, Brazil, Turkey, Chile, Peru etc are firmly at the top of the list of the economies where current growth conditions are generally favorable seems essentially sound. Additionally, if this sort of argument has any validity at all it is bound to have implications for what is sure to be one of the key problems we will face during the next global upturn: what to do with the financial architecture which we have inherited from the original Bretton Woods agreement (or Bretton Woods II as some like to call it).<br /><br />The limitations of the current financial architecture have become only too apparent during the present recession, since with both the Eurozone and the US economies contracting at the same time, the currency see-saw between the dollar and the euro has failed to provide any adequate form of automatic stabiliser. And since Japan's economy is in an even more parlous state -deep in recession, and desperate for exports - having to live with a yen-dollar parity which is at levels not seen since the mid 1990s can hardly be fun. This has lead some analysts to start to talk of a new and enhanced role for China's currency, the yuan, in any architectural reform we may initiate. But obviously, beyond the yuan we should also be thinking about the real and the rupee. However,I would like to suggest the problem we now face is a much broader one than simply deciding which currencies should be in the central bank reserve basket, and it concerns the central issue of how to conduct monetary policy in an age of global capital flows. During the last boom, comparatively small open economies like Iceland and New Zealand were on this receiving end, but this time round we face the truly daunting prospect of having global giants thrust into the same position, while the USD gets pinned to the floor, just as the Japanese yen was previously.<br /><br />The problem is evidenty a structural one. The euro hit 1:40 to the USD on Friday (at a time when Europe's economies are in deeper recession than the US one is), while - as I said - the Brazilian central bank President felt the need to come out and warn against an “excess of euphoria” in the local currency market following an 18% rise in the real over 3 months. Officially, the euro surged as a result of news that the US might receive a downgrade on its AAA credit rating, but this justification hardly bears examination, given that around half of the eurozone economies could be in the same situation. Obviously currency traders live in a world where the most important thing is to "best guess" what the guy next to you is liable to do next, and in this sense the rumour could have played its part, but the real underlying reason for the sudden shift in parities is the return in sentiment we have been seeing since early May, and the massive and cheap liquidity which is on offer in New York.<br /><br />Of course, the impact spreads far beyond Delhi and Rio. Turkey’s lira is also well up - and has now advanced 10 percent over the last three months - while South Africa’s rand is up 22 percent, making it the best performing emerging-market currency during the same period.<br /><br />All good "carry" punts these, with Turkey’s benchmark interest rate standing at 9.25 percent, and Brazil’s rate of 10.25 percent. Even the ruble is up sharply, just as Russia's economy struggles to handle the rapidly growing loan default rates. The currency climbed to a four-month high against the dollar on Friday, making for its longest run of weekly gains in almost two years, hitting 31.0887 per dollar at one point, its strongest level since Jan. 12. The ruble was up 3.2 percent on the week - closing with its sixth weekly advance and extending its longest rally since September 2007 - and has risen 16 percent since the end of January. Russia's central bank has cut base interest rates twice since April 24 in an attempt to revive the economy, but the refinancing rate is still 12 percent - well above rates in the EU, the U.S., Japan and even quite attractive in comparison with those on offer in other emerging markets. The basic point here is that carry trade players can leverage interest rate differentials <strong>and</strong> benefit from the changes in currency valuation that these very trades (along with those made by other participants) produce. So all of this is truly win-win for those who play the game, until, that is, it isn't.<br /><br />Not all of this is preoccupying - far from it, since the issues arising are in many ways related to the problem I started this article with: namely, who it is who will run the trade and current account deficits and do the necessary consuming, to make all those export-lead recoveries (even in China, please note) possible. Evidently the core problem generated during the last business cycle was associated with the size of the imbalances it threw up, and the impact on liquidity and asset prices that these imbalances had. If I am right in the analysis presented here, then we are all on the point of generating a further, and certainly much larger, set of such imbalances as we let the process rip in the uncordinated and unrestrained fashion we are doing. As you set the problem up, so it will fall. Floating Brazil and India is a very attractive and very desireable proposition. Consumers in those countries can certainly take on and sustain more leveraging. The two countries can even to some extent support external deficits as they develop. But they need to do this in a balanced way, an they do not need distortions. The world does not need more Latvias, Estonias, Irelands or Spains (let alone Icelands, and let alone of the size of a Brazil or an India). So policy decisions are now urgently needed to impose measures and structures which help avoid a repeat of the same in what is now a very imminent future. And despite all the talk of reform, very little has been done in practice. Talk of "tax havens" and the like sounds nice, and is attractive to voters, but all this is on the margin of things. What we need is global architectural reform, and policy coordination at the central bank, and bank regulation level, not to stop the capital flows, but to find a more sophistocated way of managing them.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-5783794.post-55532026913469169192009-05-18T19:01:00.001+02:002009-05-18T19:04:45.252+02:00India's 2009 General Election Delivers A Surprise OutcomeGuest Post by Manuel Alvarez-Rivera, <a href="http://electionresources.org/">Electoral Resources On The Internet</a><br /><br />Contrary to exit poll findings and widespread expectations of a closely fought race, India's ruling Congress Party - formally the Indian National Congress - and its allies won a clear victory in the general election held in April and May of this year, emerging well ahead of the right-wing, Hindu nationalist Bharatiya Janata Party (BJP). In all, the Congress-led United Progressive Alliance (UPA) won 261 of 543 seats in the Lok Sabha - the lower house of India's bicameral Parliament - and came within eleven seats of an absolute parliamentary majority, while the BJP-headed National Democratic Alliance (NDA) secured only 157 and the Third Front - composed of leftist and regional parties - captured 80 seats. Meanwhile, the new Fourth Front also fared poorly, obtaining just 27 seats, while the remaining 18 seats went to other parties.<br /><br />The Election Commission of India has 2009 parliamentary election results available <A HREF="http://eciresults.nic.in/">here</A>.<br /><br />Members of the Lok Sabha are elected in single-member constituencies by the first-past-the-post system used in parliamentary elections in the U.K., India's erstwhile colonial ruler. However, unlike in Britain, no single party has won an overall parliamentary majority in a general election in India since 1984, when Congress - which at the time had ruled India for all but three years since the attainment of independence in 1947 - won a record landslide victory, following the assassination of then-Prime Minister Indira Gandhi; since 1989, Congress has been in and out of office, while BJP has emerged as a formidable rival to the Congress Party. In the meantime, India, which previously had a multi-party system with one dominant party - namely Congress - developed a highly fractious party system characterized by a proliferation of regional parties, which stands in stark contrast with the two-party (or at least two-party dominant) systems of other countries with first-past-the-post electoral systems, such as the U.K., the U.S. and (to a lesser degree) Canada.<br /><br />Nonetheless, the outcome of this year's election, in which Congress won 206 seats (up from 145 in 2004) constitutes the best showing of any party since 1991, when a wave of sympathy following the assassination of then-Congress leader Rajiv Gandhi (Indira's son) in the middle of a general election allowed the party to capture 232 seats in the Lok Sabha. Conversely, BJP had its worst result since 1991, although the party remains by far the second largest in India.<br /><br />The election was also a major defeat for the Third Front: the Communist Party of India (Marxist; CPM) suffered a crushing defeat in its traditional stronghold of West Bengal, while the Bahujan Samaj Party (BSP) of Mayawati Kumari, the Chief Minister of Uttar Pradesh - India's most populous state - failed to make an impact outside its home base. Moreover, Congress made a major comeback in Uttar Pradesh, capturing 21 of the state's 80 Lok Sabha seats, up from just nine in 2004 and one more than the twenty won by BSP, which seeks to represent the lower-caste Dalits, previously known as the "untouchables;" Congress' gains in Uttar Pradesh came largely at the expense of the Samajwadi Party (SP) - the Fourth Front's largest party - which lost twelve of its thirty-five seats in the northern state.<br /><br />The UPA has held power since 2004, when Congress narrowly prevailed over BJP, which had been in office since 1999. After Congress Party president Sonia Gandhi - the Italian-born widow of Rajiv Gandhi - declined an offer to become India's head of government, Manmohan Singh formed a minority coalition government with outside support from leftist parties. Singh had previously served as finance minister in the 1991-96 Congress Party government of P.V. Narasimha Rao, implementing a number of measures that liberalized India's economy (until then tightly controlled by the state) and paved the way for its subsequent rapid growth. Despite the global economic crisis, India has the world's second-fastest growing economy; however, widespread poverty remains a major problem.<br /><br />Although UPA remains just short of an absolute majority in the Lok Sabha, it is expected that Congress and its allies will remain in office, in light of their unexpectedly strong election showing.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-30908342422747525552009-05-18T18:56:00.003+02:002009-05-19T10:41:11.597+02:00Is The Indian Economy Heading For Its Finest Hour?<blockquote>"For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving,on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to."<br /><a href="http://krugman.blogs.nytimes.com/2009/04/27/japans-recovery-again/">Paul Krugman </a><br /><br /></blockquote><blockquote>With results still coming in, projections show the United Progressive Alliance is likely to win about 250 seats, making it a shoo-in to form the next government and provide continuity, a stable administration and progress on key economic and corporate reforms.<br /><a href="http://online.wsj.com/article/SB124247401653426893.html">Wall Street Journal</a>, May 16 2009</blockquote><br /><blockquote>Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty.....Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third largest economy.<br /><a href="http://www.bloomberg.com/apps/news?pid=20601091&sid=akuJ.QBgbLaw&refer=india">Bloomberg</a>, May 18 2009</blockquote><p><br />Many are called, but few are chosen, as the saying goes. But could it just be that this time around, and on a one-off, never to be repeated basis, India might find itself right there in the midst of things, with a 50-50 opportunity to add its name to that select and noble band, the chosen few. After all, someone has to lead the next global charge? The majority of the developed economies are either bogged down in the substantial quantities of debt that they desperately need to pay off, or weighted down by those elderly populations who are weakening consumption growth and leading to export dependence (Germany, Japan...). And as Krugman humorously points out, someone will have to add the extra demand which will allow global trade to start to grow again, so why should India not supply a significant part of this new demand, after all we are more likely to find consumers in India than we are on Mars.<br /><br /><br />In fact, I may not be the only person around who believes this, since India's Sensitive stock index, or Sensex, surged 2,099.21 points to 14,272.63 first thing this (Monday) morning, posting a record 17 percent gain in a brief period of trading following the news of the election outcome, before the surge prompted exchanges to halt trading at 9:55 am, Mumbai time. Markets closed initially for 2 hours but the decision was then extended to include the rest of the trading day, the first time ever that this has happened to the Sensex. The stock index had previously climbed 23 percent so far this year while the Nifty Index was up by 24 percent. climbed 47 percent In fact since hitting "bottom" and closing at a three-year low on March 9, the Sensex had already risen by 47 percent while the rupee was up 4.4 percent in the same period.<br /><br />The rupee also powered up again toady, and jumped the most in two decades while bonds also rose. The reason for the surge is not a feeling of deep-seated admiration for the Singh government itself, but rather a sense of optimisim that it will give India the continuity and stability it needs to grasp the challenge before it with both hands.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/ShBgX6_fAII/AAAAAAAAN9k/LlhEmBTFveM/s1600-h/india+two.png"><img alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/ShBgX6_fAII/AAAAAAAAN9k/LlhEmBTFveM/s400/india+two.png" border="0" /></a><br /><br />The rupee strengthened 3.1 percent, the most for a single day since March 1986, and closed at 47.92 per dollar at 5 p.m. in Mumbai. That took its gains this month to 4.5 percent, the best among the 10 most-active Asian currencies outside Japan. This contrasts sharply with today's performance by currencies in the more export dependent economies, with the Korean won falling 0.2 percent, Malaysia’s ringgit dropping 0.7 percent to 3.5750, and the Singapore dollar weakening by 0.2 percent. The reason for today's general fall was negative investor sentiment towards riskier assets following the Eurostat report last Friday that the EU economies contracted the most in at least 13 years in Q1.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/Sg_-umEN--I/AAAAAAAAN80/MrHsQSdqG68/s1600-h/rupee+rates.png"><img alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sg_-umEN--I/AAAAAAAAN80/MrHsQSdqG68/s400/rupee+rates.png" border="0" /></a><br /><br /><strong>From "Hindu Growth" To A Global Powerhouse</strong><br /><br />But why so much enthusiasm now? Certainly India's post independence growth record has been notoriously uneven, with growth rates up to the 1980s low and extremely volatile. But then, in the 1980s and 1990s things started to change, economic reform began to get off the ground, tentatively at first, and more substantially later, while Inda's demographic profile started to improve, as the country faced the prospect of a steadily growing, healthier and better educated workforce. Post 2000 growth really started to take off - and has averaged around 7 percent since then. In 2007 the Indian economy maintained an impressive 9 per cent growth rate, despite the arrival of the sub-prime crisis (although not a few were talking of overheating, and "bubbles"), only then to drop back to a 7.3 percent rate in 2008, with the IMF are currently forecasting growth of 4.5 percent in 2009.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/ShAO8r_zXjI/AAAAAAAAN9U/MisOvFchyeo/s1600-h/INDIA+long+term+GDP.png"><img alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAO8r_zXjI/AAAAAAAAN9U/MisOvFchyeo/s400/INDIA+long+term+GDP.png" border="0" /></a><br /><br />Evidence of the recent slowdown in the Indian economy is now - like the ubiquitous IT technician - everywhere, but this, it should be stressed, is a "slowdown" and not an outright crisis of the kind we are seeing in many other countries. GDP growth slowed in Q4 2008 to 5.3 percent (from 7.6 percent in Q3), a serious development, but not an outright disaster.<br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/Sg_Xin_WTaI/AAAAAAAAN8s/LPglwvy_DSQ/s1600-h/india+GDP.png"></a></p><p><img alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sg_Xin_WTaI/AAAAAAAAN8s/LPglwvy_DSQ/s400/india+GDP.png" border="0" /><br /><br />Industrial output also fell year on year by about 1 percent during the first three months of 2009, which compared to the 8.7 percent rise in the first quarter of 2008 was disturbing, eespecially since this is the first time we have seen a quarterly contraction in many years. Money supply has remained rather more constant, and M3 growth to mid February 2009 was an annual 19.9 percent as compared to 21.6 percent growth last year, so the rate of increase has only eased marginally. And in the meantime the annual rate of wholesale price inflation has fallen back strongly, hitting an estimated 0.48 percent at the start of May. But then, since money supply growth hasn't slackened that much, there has evidently been a significant weakening in internal demand (alongside the obvious fall in commodity prices). </p><p>A number of fiscal stimulus packages have been put in place, and as a result the fiscal deficit from April 2008 to January 2009 was 174.3 per cent above that for the corresponding period a year earlier. The revenue deficit was up by 278 percent higher, indicating very strong pressures on the fiscal deficit and a significant departure from the The Fiscal Responsibility and Budget Management Act (FRBM). This surge in the fiscal deficit has been widely criticised, and Standard and Poor's reduced India’s rating outlook to negative from stable in February, citing the danger that “continued loose fiscal policy would result in a downgrade” in the country’s credit rating. In the meantime it affirmed India’s BBB- long-term credit rating, the lowest investment grade level. </p><p>But there are reasons for optimism. As Duvvuri Subbarao (Governor of the Reserve Bank of India) argued in a speech - ‘India, Managing the Impact of the Global Financial Crisis’ - delivered to the Conference of Indian Industries on 26 March this year, the Indian economy has been spared the worst of the blast from the present crisis for two reasons. The Indian economy is still not sufficiently "open" to take a direct hit - only 15 percent of the Indian economy is export oriented - and Indian banks and financial corporations were relatively free of contamination from "toxic" instruments. </p><p><strong>Why Should We Expect A Ressurgence In Indian Growth?</strong></p><p>In order to understand what may happen next, perhaps the most import thing to grasp is what it was that just happened. In some ways a quick look at look at the Reuters/Jeffries CRB commodities index (see chart below) says it all. The chart - which shows the evolution of this index from the mid 1990s to date - immediately makes a number of important details about what has been going on incredibly clear. In the first place we can see how, after long languising idly around some sort of mean, a secular rise in commodity prices starts up around 2002 and last for around four years, eventually flattening out from between 2006 to mid 2007. After this there was a further strong surge forward in the autumn of 2007 which lead to a sharp spike upwards. Basically, you could say (with the benefit of hindsight) that this period from August 2007 to July 2008 was the "overheating" period, as the growth crisis in the developed economies which followed the initial wave of "financial turbulence" in the US lead to massive inflows of funds into the BRIC and other emerging economies. This produced a sharp spike in commodity price inflation, and monetary tightening in one emerging economy after another. A desperate attempt to avoid the inevitable correction in the global economy which would follow the sub-prime "blow out" was "forcing" growth in the emerging economies at a rate they could not withstand (given global resource constraints), and the thing inevitably had to burst. Commodities peaked in July 2008, but the correction in the real economy only set in following the aftermath of the collapse of Lehman Brothers in October. </p><p>The Reuters Jeffries index hit an all-time series high of 473.518 on 2 July 2008, but was still stuck in the low 200s as we entered May 2009.<br /></p><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/ShBgnp7roVI/AAAAAAAAN98/1TOl0TpTYQI/s1600-h/india+five.png"><img alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShBgnp7roVI/AAAAAAAAN98/1TOl0TpTYQI/s400/india+five.png" border="0" /></a> </p><p>So the real point I want to make about India's current growth slowdown is that it does not have "made in Delhi" written all over it, it is <strong>not</strong> the result of any inherent problem with the Indian economy as such. It is rather the local reflection of much more general problems at the global level, whereby the Indian economy was first accelerated and then half crashed. And this is precisely why I personally think the recent (and highly controversial) US bank stress tests were so important, not because of their significance from a US banking point ofview (which is what all the fuss was about), but because of the reassurance they can give market participants that we are not going to see another financial explosion in the United States (as opposed to a protracted recession, and slow recovery). Uncle Ben is thus underwriting the recovery in emergent economies like India and Brazil by offering the reassurance that investors need that there will not be another violent bout of instability. What India and Brazil now most need is for Ben Benanke to commit to mainaining US interest rates near zero for a sustained period of time, so that people can practice "carry" with a certain degree of confidence that things won't unwind, then, I think, we are up, up and away. So, on behalf of everyone concerned, thank you Ben.</p><p><br /><strong>Here Come The Opportunities<br /></strong><br />India’s inflation rate stayed under one percent for a ninth consecutive week at the start of May, giving the central bank a much needed margin to keep the current record-low interest rates in place and offering the outlook of inflation free economic growth for some time to come. With so much slack in the global economy, a sudden surge in commodity prices like the one we saw in the autumn of 2008 is most unlikely, and so, as they say, while the cat is away the mice can well and truly play.</p><p>Wholesale prices rose a mere 0.48 percent year on year in the week to May 2 following a 0.70 percent increase in the previous week. </p><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/Sg8l1DOdUpI/AAAAAAAAN8c/FcnO-F4LbzM/s1600-h/india+CPI.png"><img alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sg8l1DOdUpI/AAAAAAAAN8c/FcnO-F4LbzM/s400/india+CPI.png" border="0" /></a> </p><p>Not everyone is convinced the outlook is so benign, and Reserve Bank of India Governor Duvvuri Subbarao said only last week policy makers need to begin to think about when they will begin reversing their expansionary steps. The current RBI forecast is for inflation to climb back towards 4 percent by March 31 as the economy gradually revives. Some evidence to support Subbarao's fears can be garnered from the evolution of consumer prices paid by industrial workers, which rose 9.63 percent in February from a year earlier, after gaining 10.45 percent the previous month, according to government data. Consumer-price inflation for farm workers was 10.79 percent. India, in fact, has four consumer-price indices and as a result tends to rely on the wholesale price index as benchmark because since it is felt the consumer price indices don’t adequately capture the aggregate price. However, the disconnect between wholesale and consumer prices that we can see at this point can be more a reflection of the fall in commodity prices and the presence of excess capacity on the supply side, so the evolution of these indices needs to be carefully monitored.<br /><br />The RBI has now slashed borrowing costs six times in the past seven months, with the reverse repurchase rate being cut by a quarter-point to 3.25 percent as recently as April 21.<br />This means the bank has now lowered the benchmark by 275 basis points since last October, while the repurchase rate has been reduced by 425 basis points over the same period to its current 4.75 percent level.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/ShAGUFnxgcI/AAAAAAAAN88/C5BPSNG6qqE/s1600-h/bank+of+india+rates.png"><img alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAGUFnxgcI/AAAAAAAAN88/C5BPSNG6qqE/s400/bank+of+india+rates.png" border="0" /></a><br /></p><p>As I say governor Subbarao is rightly cautious about reducing interest rates further as Indian consumer price gains remain high, suggesting that local demand hasn’t been completely dented even as the rest of the world remains mired in a recession. Cheaper loans are helping stoke consumer spending. “The fiscal and monetary stimulus measures initiated coupled with lower commodity prices could cushion the downturn in the growth momentum” over 2009 to 2010, the central bank said recently. “Notwithstanding the contraction of global demand, growth prospects in India continue to remain favorable compared to most countries.” </p><p>And between now and September, the central bank is set to inject another 1.2 trillion rupees ($23.8 billion) into the banking system by purchasing government bonds via auctions and buying back market stabilization bonds, which were sold in the past four years to drain money from the economy. The injection is estimated to be the equivalent of a 3 percentage point reduction in the cash reserve ratio, according to the Reserve Bank. </p><p>Subbarao’s optimism is also based on forecasts for this year’s monsoon rains - which look set to be normal. If this expectation is confirmed it will help sustain the unprecedented 4.3 percent average annual farm production growth recorded since 2005, boosting incomes for the three-fifths of India’s 1.2 billion people who depend on agriculture for their livelihood while keeping price inflation modest to feed to consumption of India's urban workforce.</p><p>Sibbarao is also aware that India is much less vulnerable to the global economic slump than most of its neighbors since exports only constitute about a quarter of the economy, as compared with around a half for developing Asia as a whole. So India is less open, and while in general terms this would not be an advantage, during the current slump in world trade it is an evident plus.</p><p><strong>Industrial Output Falls Sharply In Q1 2009<br /></strong><br />India’s industrial production fell the most in 16 years in March as the worst global recession since World War II hit demand for the country’s exports. Output at factories, utilities and mines declined 2.3 percent from a year earlier after a revised 0.7 percent drop in February. Production was dragged down in March by an 8.2 percent drop in capital-goods output (which does not bode well for short term investment), with all other categories showing improvement from February. Consumer durables production jumped 8.3 percent from a year earlier, the biggest increase in six months. </p><p><a href="http://1.bp.blogspot.com/_ngczZkrw340/Sg8lC6Fs7AI/AAAAAAAAN8U/adP7984loMQ/s1600-h/india+IP.png"><img alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sg8lC6Fs7AI/AAAAAAAAN8U/adP7984loMQ/s400/india+IP.png" border="0" /></a><br /><br />In fact the (non seasonally corrected) output index was up in March over February, and substantially up from the lows registered in the last quarter of 2008. This impression is confirmed by the purchasing managers index, which in April gave the highest reading for the Indian headline manufacturing PMI in seven months. In fact the output index registered 53.3, a level above the 50 critical one separating growth from contraction. In fact the index has now steadily risen after hitting a trough of 44.4 in December. </p><p><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/Sf7O4-gHKTI/AAAAAAAANp8/Py4mXlvfHlc/s1600-h/india+pmi.png"><img alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sf7O4-gHKTI/AAAAAAAANp8/Py4mXlvfHlc/s400/india+pmi.png" border="0" /></a><br /><br />Just as encouraging, the new orders index rose to 54.9 from 49.5 in March. The return to growth was primarily driven by an improvement in domestic demand, according to the accompanying report. "Although the rise in new business came principally from the home market, there was also some, albeit slight, improvement in foreign demand for Indian manufactures," ABN Amro Bank said in the official release.<br /><br />Also worthy of note is the fact that along with the expansion Indian manufacturers noted renewed input price inflationary pressures. A combination of increased prices for some commodities and unfavourable exchange rates led to a moderate rise in input costs during April. This is the first time that input price inflation has been recorded in India's manufacturing sector since October last year. However continuing competitive pressures meant that manufacturers did not pass on their cost pressures on to customers, and factory gate prices were cut for the sixth straight month. However, the latest drop in average prices was the weakest in the current period of falling output prices.<br /><br />Employment levels across India’s manufacturing economy were little-changed during April with increased production requirements leading to recruitment on the one hand, while cost-cutting pressures produced job losses on the other. </p><blockquote>"The April PMI gives a very clear indication that business conditions in the manufacturing sector have improved significantly after a period of sharp contraction and gradual stabilisation. The headline PMI at 53.3 has signaled expansion in activity for the first time since October 2008. Moreover, the April reading is the strongest since October 2008," according to Gaurav Kapur, Senior Economist, India, with ABN Amro. "Survey data suggests that production was ramped up during April in order to cater to a pick-up demand and to build inventories. The output index printed at 55.7 for April compared to 49.3 in March, as new incoming business expanded during the month. The domestic orientation of the improvement in demand is clearly visible from the new orders index rising well above 50, even though external demand also improved modestly. New orders index printed at 54.9 as against 49.5 in March. This is critical as it suggests that domestic demand conditions are now strong and supportive for growth in the sector,"<br /></blockquote><p>Car sales and the production of cement, electricity and refined petroleum are also showing signs of recovery. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data. But exports still remain weak, with shipments declining 33 percent in March from a year earlier, the biggest fall since at least April 1995.Goods exports dropped 33 percent from a year earlier to $11.5 billion last month, the government said in New Delhi today. That was the biggest fall since at least April 1995. Exports slid 21.7 percent in February.<br /><br /></p><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/ShAL6cssZyI/AAAAAAAAN9E/AwpEci3xQ1w/s1600-h/india+exports.png"><img alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAL6cssZyI/AAAAAAAAN9E/AwpEci3xQ1w/s400/india+exports.png" border="0" /></a> <p><br /><br /><strong>Exports Fall, But Without Heavy "Export Dependency" Exposure</strong><br /><br /><br />India’s exports, which account for about 15 percent of the economy, have been falling back recently, although they were still up by 3.4 percent (to $168.7 billion) in the fiscal year ended March 31. They did however fall well short of an initial $200 billion target set by the government before the September collapse of Lehman Brothers accelerated the world financial and economic slump. The government now expect exports to total $170 billion in the year that started April 1. The decline in exports is likely to continue until at least September, according to India’s Trade Secretary Gopal K. Pillai, while falling overseas sales may cost India about 10 million jobs, according to estimates from the Federation of Indian Export Organisations.<br /><br />Imports were also down in March - by an annual 34 percent - and as a result the trade deficit narrowed to $4.04 billion from $6.3 billion in March 2008. Oil imports plunged 58 percent to $3.8 billion, while non-oil imports dropped 19 percent to $11.75 billion. </p><p>However, Subbarao argues, the Indian economy has globalized rapidly during the past few years. In terms of openness to international trade the ratio of exports plus imports to GDP increased from by more than 50 per cent in the 10 years from 1997–98 to 2007–08 (from 21.2 per cent of GDP to 34.7 per cent of GDP). Furthermore, the growth of financial integration has been even more rapid. During the same 10 year period (1997–98 to 2007–08) the ratio of total external transactions (gross current account flows plus gross capital account flows to GDP) increased by more than 100 per cent from 46.8 per cent in 1997–98 to 117.4 per cent in 2007–08. Furthermore, corporate borrowing from external sources has also increased significantly. In 2007–08, for example, India received capital inflows to the extent of 9 per cent of GDP as against a current account deficit of 1.5 per cent of GDP. </p><p><strong>Twin Deficits?<br /></strong><br />India has been facing the so-called twin deficit problem for some time now, and the poor fiscal record, together with the continuing high deficit is the main reason why international credit rating agencies have brought the country’s debt close to junk status. The fiscal problem is not an easy one - apart from running a general government fiscal deficit of a estimated 9.9 percent of GDP, the debt to GDP ratio is stubbornly stuck round the 80% level - far, far too high.<br /></p><p><br />Meanwhile, capital flows have continued to be vibrant despite the huge withdrawal of money from the stock market by foreign financial institutions, or FIIs. As a result, while India's foreign exchange reserves fell initially during the crisis, they have since stabilised, and are even now begining to show signs of increasing again (see chart below). At the start of this week India's Securities and Exchange Board of India reported that foreigners bought a net $828 million of local equities on May 13, the most since February 2008. Indeed they report that overseas funds have already bought a net $1.8 billion in Indian equities so far this month, well below the heady levels of 2007, but still a significant turnaround.<br /><br />Equally interesting is the change in the composition of the capital flows. FIIs withdrew an estimated $15.02 billion in 2008-09, according to Reserve Bank of India data. The scale and velocity of the withdrawal in the second half of last year certainly put significant pressure on India's money and foreign exchange markets - and short-term interest rates surged over 20% while the rupee tumbled to an all-time low of 52 against the dollar. But other types of capital inflows remained relatively strong, especially foreign direct investment, or FDI. Overseas Indians, too, sent a lot more money back home, due to the uncertainties created by the turbulence in the the developed economies and the higher interest rates on offer in India.<br /><br /></p><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/Sg8sUtP_moI/AAAAAAAAN8k/B4kfjHIP4_M/s1600-h/india+FX.png"><img alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sg8sUtP_moI/AAAAAAAAN8k/B4kfjHIP4_M/s400/india+FX.png" border="0" /></a><br /><br /><br />Taken together, the measures put in place since mid-September 2008 have ensured that the Indian financial markets continue to function in an orderly manner. The cumulative amount of primary liquidity potentially available to the financial system through these measures is about Rs.390,000 crore (78 billion dollars) or 7 per cent of GDP. This sizeable easing has ensured a comfortable liquidity position starting mid-November 2008 as evidenced by a number of indicators such as the weighted average call money rate, the overnight money market rate and the yield on the 10-year benchmark government security. Commercial banks have responded to policy rate cuts by the Reserve Bank of India by reducing their benchmark prime lending rates. Bank credit has expanded too, but slower than last year. The RBI’s rough calculations show that, on balance, the overall flow of resources to the commercial sector is less than what it was last year indicating that even though bank credit has expanded, it has not fully offset the decline in non-bank flow of resources to the commercial sector.<br /><br />Of course, the present level of fiscal deficit is easy enough to justify, given the need to put a platform under the economy, and a number of stimulus packages have been announced by the Indian Government in response to the global financial crisis. </p><p>Just one such measure - the decision of India's Sixth Pay Commission (which was not a stimulus measure as such, but rather the outcome of the routine policy process, and possibly highly political in view of the impending elections) was widely criticised, although the implementation in the short term may in fact have been timely. </p><p>The Commission recommended across the board increases in salary for central government employees, to be followed in due course by comparable salary increases for state government employees. The payment was to be made in two installments, 40 percent (an estimated Rs. 1.57 trillion or roughly $31.4 billion) during 2008–09, with the remaining 60 percent coming due in 2009–10. The decision is, I say, deeply controversial, given the size of the deficit and accumulated government debt, but under the circumstances may well have served to place some sort of platform under domestic demand during times of global financial crisis.</p><p><br />The stimulus packages per se have also come in two installments, The first one, announced in December 2008, was largely fiscal in its intent, and included additional expenditure of Rs.3 trillion ($60 billion) over four months, a cut of 4 percent in value-added tax, as well as a 2 percent export credit for labour intensive sectors and other export incentive schemes.<br /><br />The second stimulus package - announced in January 2009 - was, in contrast, mainly montary and directed towards credit easing. Among the more important measures an SPV was created to provide liquidity support for investment grade paper to specific Non Banking Finance Companies (NBFCs). The scale of liquidity potentially available was Rs.25,000 crores/$50 billion. Public Sector Banks were to provide a line of credit to NBFCs specifically for purchase of commercial vehicles. Credit targets of Public Sector Banks were revised upward to reflect the needs of the economy. Further the guarantee cover provided under the Credit Guarantee Scheme for loans to micro and small enterprises was increased from Rs 5 million to Rs 10 million with a guarantee cover of 50 per cent. In order to enhance flow of credit to micro enterprises, the government also decided to increase the guarantee cover available under the Credit Guarantee Fund Trust to 85 per cent for credit facilities of up to Rs 0.5 million. This measure should, in principle, benefit around 84 per cent of the total accounts accorded guarantee cover. </p><p>The India Infrastructure Finance Company (IIFCL) was also authorized to raise Rs 10,000 crores ($20 billion) through tax free bonds by 31 March 2009 for refinancing bank lending of longer maturity to eligible infrastructure bid-based PPP projects. This would enable the funding of mainly highway and port projects to the value of about Rs 25,000crore ($50 billion). In addition, in order to provide funding for additional projects worth about Rs 75,000 crore ($150 billion), the IIFCL is now able to access an additional Rs 30,000 crores ($60 billion) via tax free bonds once the current year's allocation of funds has been used up. </p><p>This surge in the fiscal deficit has been widely criticised, and Standard and Poor's reduced India’s rating outlook to negative from stable in February, citing the possibility that “continued loose fiscal policy would result in a downgrade” in the country’s credit rating. In the meantime it affirmed India’s BBB- long-term credit rating, the lowest investment grade level. S&P estimated that India’s national budget deficit, including off-budget items such as oil and fertilizer bonds and state government deficits, may increase to 11.4 percent in the year ending March 31 from 5.7 percent in the previous year.<br /><br />Only last week Fitch Ratings also reiterated that India needs to cut its budget deficit to avoid having its credit rating lowered. “India faces considerable challenges in balancing the need for short-term stimulus measures to counter the economic downturn and the necessity of re-establishing a sustainable medium-term path for the country’s public finances,” according to the agency statement.<br /><br />Fitch, which gives India a BBB- rating, its lowest investment grade, is worried that the new government may step up spending to soften the blow from slowing economic growth. If they do the ratings agency fears this will widen the general budget deficit to more than 10 percent of gross domestic product for the second year in a row in 2009-10.<br /><br />And these ratings matter, since they influence investor decisions as to whether or not to hold rupee denominated assets. It should be noted however, that the ratings agencies generally have responded well to the latest election result. Both S&P and Moody’s Investors Service, were both emphasising yesterday just how the outcome gives India's government a chance to improve its fiscal situation.<br /><br />The poll result gives the government more “political space” to sell stakes in state-run companies and improve revenue, according to Moody’s senior analyst Aninda Mitra, while S&P’s director of sovereign ratings Takahira Ogawa commented that the result means “there is a possibility for the government to implement various measures to reform for further expansion of the economy and for the fiscal consolidation.”<br /><br /><br /><strong>Current Account Blues?<br /></strong><br />As suggested throughout this post, the tailwinds behind the Indian economy are now incredibly favourable. A new government has just been elected which should provide stability to the country, and continuity in the realm of economic policy. The changing age structure of India’s population means that the proportion of the Indian population in the working age group (15–64 age bracket) is set to rise from 60.9 per cent in 2000 , to one which will surpass that if a developed economy like Japan by 2012, and continue to climb steadily to 66 per cent by 2030. But it isn't only quantity which is important here. Quality also matters. The nutritional status of India's population is improving rapidly, with calorie and other macro and micro nutrient deficiency on the decline. According to the 2001 Census, the literacy rate of India's population climbed from 51.54 percent in 1991 to 65.38 per cent in 2001. India will thus, in the years to come, find itself with a younger, healthier, better educated and thus more productive workforce than ever before.</p><p>At the same time, the massive slack which exists in the global economy means that Indian now has a more-or-less unique opportunity to accelerate the development process at non-inflationary growth rates well above those which would have been envisaged only two or three years ago. At the same time, as the age structure has shifted, and the weight of child dependence has reduced, India's savings rate has risen steadily from 23.4 per cent of GDP in 2000–01 to 35.4 per cent in 2007–08. During the same period investment rose from 24 per cent of GDP to 36.3 per cent of GDP, suggesting the need for a slight current account deficit to cover the gap between savings and investment.<br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/ShAO3yYwSKI/AAAAAAAAN9M/87bbre0v-dU/s1600-h/india+CA+deficit.png"><img alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/ShAO3yYwSKI/AAAAAAAAN9M/87bbre0v-dU/s400/india+CA+deficit.png" border="0" /></a><br /><br />And to return to where we started, on where the demand is going to come from to support the current global recovery. The IMF currently forecast a 2.5% of GDP current account deficit for Indian. Given the extent of investment that is needed in capital goods, technology and infrastructure this is a small, even benign, number, and at the end of the day will mean that Indian is once more playing its part in the community of nations, by adding a little extra net demand to the global pot.</p>Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-5783794.post-83428402417183282132008-11-12T11:39:00.006+01:002008-11-12T11:55:22.602+01:00India's Manufacturing Industry Continues To Expand in SeptemberJust following up briefly <a href="http://indiaeconomywatch.blogspot.com/2008/11/as-indias-inflation-continues-to-fall.html">on my last post</a>, as anticipated by the PMI report India's industrial production growth bounced back again in September. Output at factories, utilities and mines rose 4.8 percent from a year earlier after a revised 1.4 percent gain in August, according to data from the Central Statistical Organization today (Wednesday).<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRqzY0xZ-sI/AAAAAAAALdc/GO_-0tBHQJo/s1600-h/india+IP.png"><img id="BLOGGER_PHOTO_ID_5267719953227315906" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 190px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRqzY0xZ-sI/AAAAAAAALdc/GO_-0tBHQJo/s320/india+IP.png" border="0" /></a><br /><br />India's factory output rose 4.9 percent in the six months to September from a year earlier, less than half the 9.5 percent pace recorded in 2007, according to today's report.<br /><br />And the expansion in Indian manufacturing looks set to continue into October according to the latest ABN AMRO Bank purchasing managers' index (PMI) report. The index, which isbased on a survey of 500 companies, slumped to a seasonally adjusted 52.2 in October, its lowest since the survey began in April 2005 and sharply below September's 57.3. A reading above 50 signals expansion while a figure below 50 suggests contraction, and the manufacturing PMIs are interesting, since they do offer us a sort of "real time" snapshot of what is actually happening.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRbOKqZOkvI/AAAAAAAALYc/AEjJFpP9gWM/s1600-h/india+pmi.png"><img alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRbOKqZOkvI/AAAAAAAALYc/AEjJFpP9gWM/s320/india+pmi.png" border="0" /></a>Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-5783794.post-34231637292672344012008-11-07T23:20:00.024+01:002008-11-10T11:37:45.279+01:00As Inflation Continues To Fall Back, Is The Indian Economy About To Take Off Again?Indian inflation fell back again in the last week of October, as energy and commodity prices continued to fall, and the impact of the global financial turmoil and credit crunch ricocheted its way across one country after another. The IMF last week forecast annual growth for India of 6.3% in 2008 while India's manufacturing expansion, which continued to weaken, still held out against the global trend, according to the latest JPMorgan global manufacturing PMI.<br /><br />So, as we enter November, and a number of Indian indicators start to improve, it is certainly worth asking ourselves, has India turned the corner? Will India lead the emerging markets charge during the next global expansion?<br /><br />I am not, I am sure, alone in feeling that this is a distinct possibility, and, indeed, a similar view was expressed only last week by Sharmila Whelan, senior economist at CLSA Asia-Pacific Markets.<br /><blockquote>``We do expect the Indian business cycle to be the first to bottom in Asia. And, it should, in theory, be first to emerge,'' Sharmila Whelan, senior economist at CLSA, said ``The worst will be over by mid-2009 and by 2010 you should be able to see the next investment-led business cycle taking root.'' </blockquote><br /><br />To the two reasons Wehlan offers us as an explanation for why we should expect India to do better than most (and, perhaps of particular nore here, better than China) - the fact that Indian trade constitutes only about 32.5% percent of gross domestic product (only about half the China figure - thus India is better protected from fluctuations in global trade) and the fact that India (unlike say Russia or Brazil) will be a large net beneficiary from falling commodity prices - I would add a third, India's very favourable demographic profile, which will mean that over the next decade India can continue to draw on the benefits of a young and rapidly growing labour force at just the time when 30 years of once child per family policy starts to bite really hard on the new labour market entrant cohorts in China (for example).<br /><br /><strong>Inflation Screeches To A Halt</strong><br /><br />India's inflation held near a five- month low at the end of October, seemingly validating the central bank decision to reduce interest rates to bolster economic growth. Wholesale prices were up 10.72 percent in the week to Oct. 25 from a year earlier after gaining 10.68 percent in the previous week, according to the latest data from the commerce ministry.<br /><br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRXnSyWOgeI/AAAAAAAALXc/N11V2JyyFHk/s1600-h/India+Inflation.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRXnSyWOgeI/AAAAAAAALXc/N11V2JyyFHk/s320/India+Inflation.png" border="0" /></a> Of equal importance is the fact that the weekly rate of inflation (week on week) recently turned negative, as energy and commodity prices drop back, and as a result the wholesale price index has now been dropping for eight consecutive weeks after peaking in the August 30 week.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SRbDVYPhDTI/AAAAAAAALYM/cnkgSUc9MQI/s1600-h/india+CPI+index.png"><img style="center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SRbDVYPhDTI/AAAAAAAALYM/cnkgSUc9MQI/s320/india+CPI+index.png" border="0" /></a><br /><br />One of the reasons inflation is weakening is of course the fact that Indian GDP growth has been slowing, and the current growth rate is clearly significantly below the 7.9 per cent rate registered in the second quarter (2008 calendar year) a rate which was already notably lower than the 8.8 per cent one reported for the January to March quarter. But with countries from the US to Germany, to Russia and maybe even China (who knows at this point) falling into or near to negative growth, then even a 7% rate looks decidedly healthy to me. What was it they were saying not so long ago about "Hindu growth"? Better a tortoise than a hare in some contexts, but then again, a 7% tortoise is certainly no mean one.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SLgIxEtorXI/AAAAAAAAHlE/lxVw5CBWhyk/s1600-h/india+GDP.jpg"><img style="center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SLgIxEtorXI/AAAAAAAAHlE/lxVw5CBWhyk/s320/india+GDP.jpg" border="0" /></a><br /><br /><br />It is interesting to note in passing that the IMF - in revising their forecast down to 6.3% for 2008 - stated that they consider this level to be considerably below India's potential growth. For the time being, it seems, <a href="http://indianeconomy.org/2007/12/19/the-economist-on-india/">the old "overheating" debate</a> has become a thing of the past. These days <a href="http://www.economist.com/displayStory.cfm?story_id=12411151">we all love India</a>, now don't we?<br /><br /><br /><br /><blockquote>Ironically, the current global situation is also making India's measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government's reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.<br />The Economist</blockquote><br /><br /><br /><br /><br /><blockquote>“For India we have marked our forecast down to 6.3% of 2009 calendar year. That is considerably below what we consider to be India’s potential growth,” IMF deputy director for Asia Pacific region, Kalpana Kochhar said. “There is a specific meaning to “potential” - it is the rate at which you can grow without causing inflation. And for India we estimate that to be 7.5% to 8%. Our forecast of 6.3% would put it quite a bit below the potential,”.</blockquote><br /><br />Obviously there are still varying forecasts, with the RBI and the central government being rather more optimistic than most, although India's central bank did reduce its growth forecast on October 24 down to 7.5 percent from 8 percent for the year to March 31. This prediction, if fulfilled, would mean the 2008/09 expansion would be the slowest in four years, but then in the midst of the largest global recession since the 1930s that doesn't sound so bad, now does it?<br /><br /><br /><strong>Interest Rates Coming Down and Monetary System Stabilising</strong><br /><br />The Reserve Bank of India cut its benchmark rate on Nov. 1 for the second time in two weeks, joining policymakers across Asia in lowering borrowing costs to shield their economies from the global financial crisis. For the first time since 1997, India's central bank on Nov. 1 deployed all three of its main tools to shore up growth after inter-bank lending rates climbed to as much as 21 percent. The move seems to have substantially improved liquidity in the financial system, and overnight call rates fell sharply.<br /><br />The Reserve Bank of India lowered its benchmark repurchase rate to 7.5 percent from 8 percent. At the same time the central bank also reduced the cash reserve ratio to 5.5 percent from 6.5 percent, and and cut the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRbn_Jhg1VI/AAAAAAAALYk/ZFtW-gQkSO0/s1600-h/india+interest+rates.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRbn_Jhg1VI/AAAAAAAALYk/ZFtW-gQkSO0/s320/india+interest+rates.png" border="0" /></a><br /><br />The RBI is also considering giving an additional 100 billion rupees ($2.1 billion) each as lines of credit to National Housing Bank and Small Industries Development Bank of India, according to Finance Minister Palaniappan Chidambaram speaking during last week. The idea here would be to increase cash flows for mortgages and for small companies.<br /><br /><br /><strong>Rupee Rises Slightly</strong><br /><br /><br /><br />The rupee climbed 3.8 percent last week to close at 47.66 a dollar at the 5 p.m. in Mumbai on Friday. The increase represents the biggest weekly gain since March 1996, making the rupee currently the best performer among Asia's 10 most-active currencies outside Japan.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRXkjbTwfrI/AAAAAAAALXU/vZFaz0-g9_M/s1600-h/india+rupee.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRXkjbTwfrI/AAAAAAAALXU/vZFaz0-g9_M/s320/india+rupee.png" border="0" /></a><br /><br />In addition on the foreign currency front, the Japanese Yen is also dropping back slowly against USD, which means that yen "carry" may be slowly starting to recover. A surge in USD-Yen (and hence yen carry) would be another clear sign some key emerging markets we about to start moving, in my view. As we can see from the chart - unless we have more "turmoil" to cope with moving forward - October 24 seems like it represents some kind of turning point.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SRbwaRJ6foI/AAAAAAAALYs/ta3-_hPX768/s1600-h/japan+carry.png"><img style="center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SRbwaRJ6foI/AAAAAAAALYs/ta3-_hPX768/s320/japan+carry.png" border="0" /></a><br /><br /><br /><strong>Stocks Start To Tick Up Again</strong><br /><br /><br />The Bombay Stock Exchange Sensitive Index has also rebounded, and is up 17 percent since the bottom on Oct. 27. The index added 2.4 percent on Friday. The MSCI core index for India is also up 6.74% so far this month. After all that falling over the last twelve months, it is that little upturn since the start of November (see chart below) that we would like to see consolidate and continue. Of course, this may be yet another false start, and there may be another shoe to drop, but perhaps there are reasons for just a little more optimism at this point.<br /><br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SRbxq44ivMI/AAAAAAAALY0/_I75xkx_T74/s1600-h/msci+one.png"><img style="center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SRbxq44ivMI/AAAAAAAALY0/_I75xkx_T74/s320/msci+one.png" border="0" /></a><br /><br />And the general MSCI Emerging Markets Index also looks as if it may well have turned.<br /><br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRXu5HjNJ1I/AAAAAAAALX0/SKPa44-6hTM/s1600-h/msci+two.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRXu5HjNJ1I/AAAAAAAALX0/SKPa44-6hTM/s320/msci+two.png" border="0" /></a><br /><br /><br /><strong>Emerging Bonds Start To Rebound Too</strong><br /><br /><br />Emerging market bonds have also started to recover, if we look at the JPMorgan EMBI+ chart, we can see what appears to be quite a robust "bounce back". Of course for some countries (Eastern Europe, Argentina etc) the worst is still not over, but India may well be relatively insulated from too much fall-out here.<br /><br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SRXqCwuAgKI/AAAAAAAALXk/76Lb8dyDWHQ/s1600-h/jpmorgan.png"><img style="center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SRXqCwuAgKI/AAAAAAAALXk/76Lb8dyDWHQ/s320/jpmorgan.png" border="0" /></a><br /><br /><br /><strong>Not Much Sign Of A Rebound In Commodities Yet</strong><br /><br />On the other hand, with growth in the OECD countries likely to be bordering on negative in 2009, and Russia and China both likely to have substantial slowdowns, there are not too many signs at this point of any recovery in commodities, if we look at the Reuters-Jefferies chart.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRXrZ_gajeI/AAAAAAAALXs/zOeX9bTHM7k/s1600-h/reuters+J+2.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRXrZ_gajeI/AAAAAAAALXs/zOeX9bTHM7k/s320/reuters+J+2.png" border="0" /></a><br /><br /><br />But since India is a large net commodities importer, this is hardly bad news. Oil prices were sedentary Friday following a large scale sell-off during the week, - and this despite a forecast from the International Energy Agency that put the price of crude at $200 per barrel by 2030. Light, sweet crude for December delivery rose 27 cents to settle at $61.04 a barrel on the New York Mercantile Exchange, although the contract had dropped below $60 in earlier overnight electronic trading for the first time 19 months. This is all now a far cry from June, when oil was trading at $147.<br /><br /><strong>India's Foreign Exchange Reserves Continue to Fall</strong><br /><br />India's foreign exchange reserves declined again at the end of October - for the sixth consecutive week - and fell by $5.532 billion to reach $252.883 billion for the week ended October 31. India's reserves have fallen by more than $31 billion in the past one month alone, and are now well below their $318 billion April peak. But on the other had they are still substantial and not far different from what they were 12 months ago, following a very substantial rise over the previous nine months. So if they do not fall too much further, then it isn't evident that there is any real problem at this point.<br /><br />Sustained dollar selling by the Reserve Bank of India in the forex markets, huge amounts of FII outflow from the domestic equity markets, and the revaluation of the reserves have been the main factors pressurising India's reserves, but all these factors are symptomatic of the general pressure which has come to bear on "higher risk" emerging market economies as a whole as the financial turmoil and associated uncertainty have raged in the United States and Europe, and there is little real evidence of "India specific" factors at work here, indeed Indian exceptionalism would rather be in the fact that - absent commodity export dependence - India's reserves have not been taking the same sort of pounding Russia and Brazil's have.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRXkL5nCvkI/AAAAAAAALXM/Z6JpnuUr7iA/s1600-h/india+fx+reserves.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRXkL5nCvkI/AAAAAAAALXM/Z6JpnuUr7iA/s320/india+fx+reserves.png" border="0" /></a><br /><br /><br />The Reserve Bank of India (RBI) also said on Friday that it will lend foreign exchange - via foreign excahnge swaps - to banks with overseas operations to help them meet their lending requirements, a move that many Indian banks had been asking for, and which should help ensure adequate funding for their foreign subsidiaries. Following the central bank’s announcement, banks will buy dollars from RBI at the reference rate plus three-month forward premium and will return dollars to RBI after three months, in case of three month swaps. <br /><br />Additionally, the central bank has also extended a lifeline to banks for funding the swaps by allowing them to borrow through its regular liquidity adjustment facility (LAF). The LAF is the window through which it lends to or accepts money from banks, for the corresponding period at the prevailing policy rate. <br /><br />Banks borrow through the LAF window by pledging government bonds. They are required to invest at least 24% of their lendable funds in government bonds; this portion of their deposits is called the statutory liquidity ratio, or SLR. In view of the tight liquidity conditions, RBI reduced the SLR by 1% to 24% on 1 November. RBI also said on Friday that if a bank did not hold enough government securities to pledge, it would consider relaxing the SLR requirement if the bank approached it.<br /><br />The use of swaps helps banks obtain cheaper funds for buying dollars because they can now borrow from the central bank repo window at 7.5%. Previously banks needed to convert their rupee deposits - raised at a rather costlier 10.5-11% - into dollars.<br /><br /><br /><strong>India's Industry Resists The Global Slowdown</strong><br /><br /><br />Despite the fact that India's industrial output plummeted to a 1.3% year on year rate in August, there are some signs that the situation may be improving. The first of these are the September performance indicators for the coal and cement sectors, the rise in which pushed up the growth in output in the core infrastructure industries to 5.1% in September. According to government data made public on Friday, coal production was up by 10.7% in September 2008 while cement production rose by 7.9%.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRbCJd1XEGI/AAAAAAAALYE/B5uttJt62U8/s1600-h/indian+IP.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRbCJd1XEGI/AAAAAAAALYE/B5uttJt62U8/s320/indian+IP.png" border="0" /></a><br /><br />Core sector growth in August was just 2.3% - and the six core industries have a weight of 26.7% in the index of industrial production (IIP). On the other hand growth in electricity generation remained weakish - at 4.4% - in September. If compared with the growth rate in August this year, electricity generation was the worst performer among the six sectors, with an abysmal growth of 0.8% in August 2008. Of the six core industries (crude oil, petroleum refinery products, coal, electricity, cement and finished carbon steel), only coal and cement really registered strong growth rates in September 2008. So I guess we have to wait till mid-week now to see the complete September figures.<br /><br />However, despite what may well turn out to be an improvement in September IP over the August number, it does looks very much as if activity at Indian factories fell to its lowest level in three and a half years in October as the global financial crisis and slowing export demand hit the country's manufacturing sector. The ABN AMRO Bank purchasing managers' index (PMI), based on a survey of 500 companies, slumped to a seasonally adjusted 52.2 in October, its lowest since the survey began in April 2005 and sharply below September's 57.3. A reading above 50 signals expansion while a figure below 50 suggests contraction, and the manufacturing PMIs are interesting, since they do offer us a sort of "real time" snapshot of what is actually happening.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRbOKqZOkvI/AAAAAAAALYc/AEjJFpP9gWM/s1600-h/india+pmi.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRbOKqZOkvI/AAAAAAAALYc/AEjJFpP9gWM/s320/india+pmi.png" border="0" /></a><br /><br /><blockquote>"The outlook for the manufacturing sector appears to be bleaker in the backdrop of tough local and global economic conditions," said ABN AMRO Bank N.V. senior economist Gaurav Kapur.</blockquote><br /><br /><br />So the point here would not be that Indian industry is in absolutely perfect condition (it is obvious that it isn't), but rather that, at a time when global manufacturing generally is taking a huge beating, Indian industry is hanging on in, by its fingernails, but it is hanging on in.<br /><br />In comparison, the JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SRbNs8pRwOI/AAAAAAAALYU/cgYHmSczd34/s1600-h/jp+morgan+global+pmi.png"><img style="center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SRbNs8pRwOI/AAAAAAAALYU/cgYHmSczd34/s320/jp+morgan+global+pmi.png" border="0" /></a><br /><br /><blockquote>Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. <strong>With the exception of India</strong>, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.</blockquote><br /><br /><br /><blockquote>"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."<br />David Hensley, Director of Global Economics Coordination at JPMorgan</blockquote><br /><br />Returning finally to India, perhaps somewhat significantly the export order index in the PMI survey contracted for the first time in the survey's history, coming in at 49.7 in October, compared with 53 in September. Manufacturers blamed poor global financial and economic conditions for the result. But this should not surprise us too much either, since India's exports grew at their slowest pace in 18 months in September. Overseas shipments, which constitute about 15 percent of the Indian economy, were up 10.4 percent (to $13.7 billion) from a year earlier, following a 27 percent gain in August. Imports also increased - by 43.3 percent to $24.4 billion, with the result that the trade deficit widened to $10.6 billion.<br /><br /><blockquote>``The global financial and economic headwinds adversely affected foreign demand for Indian manufactured goods,'' said Gaurav Kapur, an economist at ABN Amro Bank in Mumbai. ``The growth of total incoming new work to the Indian manufacturing economy lost considerable momentum.''</blockquote><br /><br /><br />So, in conclusion, I am not saying that everything in the Indian garden is simply perfect, rather I am simply pointing out that during times which are hard for everyone, India has some advantages to lean back on, and looks set to have a lot less serious downturn than many other emerging economies may experience. So to end, almost where I started, with CLSA'a Sharmla Whelan, I do expect the Indian business cycle to be the first to bottom in Asia, and I would most certainly agree that "it should, in theory, be first to emerge".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-43706076099934587802008-10-18T21:15:00.018+02:002008-10-20T14:46:42.103+02:00Credit Tightening Continues as Inflation Falls Back SteadilyInflation is no loger the greatest threat to the short term health of the Indian economy. The global credit crunch has now taken over poll position on the list of worries which are likely to determine the evolution of policy over at the Reserve Bank of India. India's inflation continues to slow and hit a four-month low at the start of October, giving the central bank room to keep injecting cash into the financial system without fanning prices.<br /><br />Wholesale prices rose 11.44 percent in the week to Oct. 4 from a year earlier after gaining 11.8 percent in the previous week, according to data from the commerce ministry last week.<br /><br /><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/SPpLZLYnj5I/AAAAAAAALGY/xl1yqovJD6s/s1600-h/india+inflation.png"><img id="BLOGGER_PHOTO_ID_5258598410833334162" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SPpLZLYnj5I/AAAAAAAALGY/xl1yqovJD6s/s320/india+inflation.png" border="0" /></a><br /><br /><br />Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. The Reserve Bank of India on Thursday lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000. The central bank reduced its cash reserve ratio to 6.5 percent from 7.5 percent, a move which will add 400 billion rupees ($8.2 billion) to the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee from near a record low. Until the reduction in the cash reserve ratio which started just over a week ago now the Reserve Bank had increased its repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006. The central bank's next monetary policy statement is due to be released in Mumbai on Oct. 24.<br /><br />India thus joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch, this is viewed to be a less riskier route at this point than intrioducing interest rate-cuts, and it is hoped it may also prove to be a more effective way of getting liquidity quickly through to the corporate sector.<br /><br />India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent hit on Oct. 10.<br /><br />Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low. </p><p>The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries fell 17 basis points to 6.06 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The yield on bonds rises, as the value of the underlying bond falls.</p><p><a href="http://1.bp.blogspot.com/_ngczZkrw340/SPs_5oYlbWI/AAAAAAAALHI/V1iAsX7bA7k/s1600-h/india+JP+morgan.png"><img id="BLOGGER_PHOTO_ID_5258867249210813794" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SPs_5oYlbWI/AAAAAAAALHI/V1iAsX7bA7k/s320/india+JP+morgan.png" border="0" /></a><br /><br /><strong>Oil and Commodities Continue To Fall<br /></strong><br />Oil prices recovered some ground Friday, rallying above $71 a barrel on speculation that OPEC could slash output in an effort to stop crude's downward spiral. Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel. Despite Friday's modest rally, oil is still down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.<br /><br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SPtA9K4LDII/AAAAAAAALHQ/uR3TNgi1Ww8/s1600-h/india+nymex.png"><img id="BLOGGER_PHOTO_ID_5258868409521343618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SPtA9K4LDII/AAAAAAAALHQ/uR3TNgi1Ww8/s320/india+nymex.png" border="0" /></a><br /><br />Commodity prices fell during a volatile week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - engulfed gold , which ended yesterday at a one-month low of $775 a troy ounce,<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SPs_GDQ9MpI/AAAAAAAALHA/drhyjnYzGz8/s1600-h/india+RJ.png"><img id="BLOGGER_PHOTO_ID_5258866363073376914" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SPs_GDQ9MpI/AAAAAAAALHA/drhyjnYzGz8/s320/india+RJ.png" border="0" /></a><br /><br />Steel prices as also falling rapidly, as industrial and construction demand drops sharply. Tata Steel Ltd., India's biggest steelmaker, has announced itwon't raise prices for six months or cut output if the government imposes an import tax and scraps levies on exports of the metal.<br /><br />Companies are seeking 15 percent import duty and scraping of the export levy as demand weakens, Minister Ram Vilas Paswan told reporters after meeting executives in New Delhi today. They also want excise tax to be lowered to 8 percent from 14.4 percent.<br /><br />Slowing demand from manufacturers and builders is driving down steel prices and forcing producers including ArcelorMittal, and Corus, the U.K. unit of Tata, to consider output cuts. Global steel production and consumption may slump 5 percent in 2009, Research & Consulting Group AG said Oct 9.<br /><br /><strong>Foreign Exchange Reserves</strong><br /><br /><br />India's foreign exchange reserves fell $9.94 billion during the week ending October 10, 2008 to $274 billion mainly because the Reserve Bank of India continued to sell dollars to try to contain the steep depreciation of the rupee.Forex reserves fell by another $9.93 billion (to $274 billion) during the tumultous week ended October 10, 2008 following the $7.8 billion fall of the previous week. .<br /><br />India — the fourth largest holder of foreign exchange reserves in Asia after China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since hitting a peak of $316.17 billion during the week ending May 23 this year, reserves have dropped by $42.17 billion. , forcing policymakers to unveil measures such as higher investment limit for foreign institutional investors (FIIs) in corporate debt and allowing banks to offer higher rates on NRI deposits to boost inflows. The situation now stands in stark contrast to the same period a year ago, when reserves rose by $57 billion.<br /><br /><br />The revaluation of the foreign currency assets also contributed to the steepest-ever weekly fall. In the previous week foreign exchange reserves had declined by $7.8 billion, which was also a weekly record. Overall, reserves have fallen by nearly $18 billion in a fortnight.<br /><br /><br />In rupee terms, India's foreign exchange reserves, however, rose by Rs 2,258 crore during the week ending October 10 to Rs 13,33,424 crore. In the financial year, the increase is to the tune of Rs 95,459 crore. India's merchandise exports, which were estimated at $250 billion in 2007-08 are, for the time being, well covered.<br /><br />In recent months, foreign institutional investors (FIIs), which are facing financial pressures at home , have been selling in the Indian markets and repatriating money. In calendar 2008 so far, FIIs have been net sellers of $10.83 billion in the equity market. FII sales have put pressure on the rupee, which has dropped 22.96 per cent against the dollar since January. This has prompted RBI to intervene heavily in the forex markets.<br /><br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SPpPy51G6WI/AAAAAAAALGo/4g5-e9nb9vI/s1600-h/fx+reserves.png"><img id="BLOGGER_PHOTO_ID_5258603250844100962" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SPpPy51G6WI/AAAAAAAALGo/4g5-e9nb9vI/s320/fx+reserves.png" border="0" /></a><br /><br /><br /><strong>Stocks Fall</strong><br /><br />Indian stocks fell, with the benchmark Sensitive Index declining to its lowest in more than two years on speculation that overseas funds faced with redemptions are selling the nation's equities. Reliance Industries Ltd. tumbled 6.2 percent to its lowest since March 16, 2007. Infosys Technologies Ltd., the software developer that gets more than half its revenue from the U.S., fell 4.8 percent to its lowest in three years.<br /><br />The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 606.14, or 5.7 percent, to 9,975.35, its lowest since June 20, 2006. The benchmark posted its fourth weekly decline, falling 5.3 percent. All 30 stocks in the index dropped. The S&P CNX Nifty Index on the National Stock Exchange dropped 194.95, or 6 percent, to 3,074.35. The BSE 200 Index lost 5.1 percent to 1,201.95.<br /><br />India's MCSI Core Stock Index was down 4.45% on the day on Friday, after falling 26.7% so far this month, and 63.44% so far this year. But India is far from alone here, since the MSCI Emerging Markets Index plunged by 28 percent this month, with Russia's Micex Index alone falling 42 percent.<br /><br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SPtEbkpKp-I/AAAAAAAALHY/iRS_-7rMnRE/s1600-h/india+MSCI.png"><img id="BLOGGER_PHOTO_ID_5258872230368684002" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SPtEbkpKp-I/AAAAAAAALHY/iRS_-7rMnRE/s320/india+MSCI.png" border="0" /></a><br /><br /><br />Overseas investors sold a net 8.41 billion rupees ($172 million) of Indian equities on Oct. 15, increasing the outflow this year from stocks to a record $11.1 billion, according to India's stock market regulator.<br /><br /><br /><strong>The Rupee</strong><br /><br /><br />India's rupee fell to a six-year low as the benchmark equity index slid below 10,000 for the first time since June 2006, stoking concern capital outflows will quicken. The currency completed a 10th weekly loss. The rupee in part dropped on concern measures taken by global central banks and governments won't be enough to stave off the credit crisis. </p><p>The currency fell back0.8 percent this week to 48.8825 a dollar at the 5 p.m. close in Mumbai. That is the lowest since June 2002. The currency's 10-week losing streak is the longest since December 2005. The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out almost two-thirds of the record $17.2 billion they invested in Indian equities in 2007.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SPpPLc1x8nI/AAAAAAAALGg/XUP2IeumILE/s1600-h/rupee.png"><img id="BLOGGER_PHOTO_ID_5258602573047394930" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SPpPLc1x8nI/AAAAAAAALGg/XUP2IeumILE/s320/rupee.png" border="0" /></a><br /><br />Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at <a href="http://globaleconomydoesmatter.blogspot.com/index.html" target="_blank">Global Economy Matters</a> and is a featured analyst at <a href="http://www.emerginvest.com/" target="_blank">Emerginvest</a>. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.<br /><br /><br /><br /><br /><br /><br /></p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-5783794.post-3596276916667837442008-10-05T16:11:00.007+02:002008-10-07T17:10:37.404+02:00India's Ship IS Battered By The Global Storm, But She Will Survive!by Edward Hugh: Barcelona<br /><br />India is in the middle of a storm at the moment, there can be no doubt about that. But the important point to note is that this storm is not of India's making. The financial turmoil in a number of key developed economies, and above all the United States, is sending shock waves across the global economy, and as is normal, when the earth trembles, it is the most fragile who notice it most. India's economy may be fragile in the sense that it is very vulnerable to what is colloqially known as global risk sentiment, but it is not fragile in terms of being susceptible to having its growth trajectory knocked completely off course. India may be shaken, but her economy will not be broken.<br /><br /><strong>Emerging Market Bonds</strong><br /><br />Emerging-market bonds had their worst week in four years this week as the deepening credit crisis raised global recession concerns and slammed the brakes on demand for higher-yielding securities. The extra yield investors demand to own developing-nation bonds rather than U.S. Treasuries surged 62 basis points, or 0.62 of a percentage point, this week to 4.41 percentage points, according to data derived from the JPMorgan Chase EMBI+ index. The increase is the biggest since May 2004 and leaves the so-called spread at its widest since June of that year. The spread has now swelled 1.42 percentage points since the end of August.<br /><br /><p><a href="http://2.bp.blogspot.com/_ngczZkrw340/SOeF-5-hTZI/AAAAAAAAK-I/slQhMEwnAFQ/s1600-h/jp+morgan2.png"><img id="BLOGGER_PHOTO_ID_5253314806112406930" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SOeF-5-hTZI/AAAAAAAAK-I/slQhMEwnAFQ/s320/jp+morgan2.png" border="0" /></a><br /><br />Investors remained wary of emerging-market debt as evidence mounted that most of the major major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession. This realisation has triggered a major exit from commodities, which are a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.<br /><br /><br />Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. But at the same time, we might ask ourselves, at theis moment in time if they don't invest in India and Brazil, then where are they going to invest? The problem is that in the present global environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. Of course, the situation is also confused since people are no longer clear what constitutes "risky" and what doesn't - the German government, for example, yesterday found itself forced to offer a blanket guarantee of all domestic bank deposits to head off any risk of flight from German bank accounts. <p>One result of all this nervousness is that the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.<br /><br /><br /><strong>Emerging Market Stocks</strong><br /><br />Emerging-market stocks also fell substantially last week, experiencing their the biggest weekly decline in seven years, led by the banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SOeJMbeM4zI/AAAAAAAAK-Q/qUb9e8aW-IE/s1600-h/MSCI2.png"><img id="BLOGGER_PHOTO_ID_5253318336976839474" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SOeJMbeM4zI/AAAAAAAAK-Q/qUb9e8aW-IE/s320/MSCI2.png" border="0" /></a><br />Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.<br /><br /><strong>Inflation Falls</strong><br /><br />But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.<br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SOeLgg4yv0I/AAAAAAAAK-Y/I0ypF9PmDKs/s1600-h/india+inflation.png"><img id="BLOGGER_PHOTO_ID_5253320881051189058" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SOeLgg4yv0I/AAAAAAAAK-Y/I0ypF9PmDKs/s320/india+inflation.png" border="0" /></a><br /><br />Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since, given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the back of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary (rather than inflationary) headwinds as capacity levels exceed demand across the whole global economy and commodity prices tumble, as <a href="http://www.rgemonitor.com/emergingmarkets-monitor/253856/the_global_economy_and_her_financial_markets__is_deflation_the_next_macro_story">Claus Vistesen explains in this excellent and timely post</a>. <p>The Indian central bank had been busy tightening, and had raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent during the period between December 2006 and July 2008 in an ongoing battle to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24, but we can be pretty sure that the "bias" will now have shifted towards loosening liquidity conditions rather than tightening them, as the priorities have changed, and the big priority now is to avoid any systemic bank problems, to keep the cost of borrowing for Indian companies down, and to prevent consumer credit slowing too dramatically. </p><p>The Indian banking system has been under increasing strain in recent days, and one symptom of this is that the rate at which Indian banks lend to each other reached an 18-month high of 17.5 percent on Oct. 1. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.<br /><br /><br /><strong>Commodities Down</strong><br /><br />Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.<br /><br /></p><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/SOeEMtA__oI/AAAAAAAAK-A/G4HKG-PuiFo/s1600-h/reuters2.png"><img id="BLOGGER_PHOTO_ID_5253312844128059010" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SOeEMtA__oI/AAAAAAAAK-A/G4HKG-PuiFo/s320/reuters2.png" border="0" /></a><br /><br />Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week. </p><p>Such downward movement in commodity prices has a double-edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development. Really this is a situation which will sort the "men" from the "boys", since those emerging economies which are really going to emerge will be in a position to switch the driving force of growth from commodity and agricultural dependence to industrialisation and domestic investment and consumer demand. It is my firm belief that India is now decidedly inside the group which is in the process of making this transition.<br /><br /><br /><strong>Stocks Down</strong><br /><br />Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.<br /><br /><br />Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.<br /><br /><br /><strong>Forex Reserves</strong><br /><br />India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.<br /><br /></p><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/SOeOy1ti8MI/AAAAAAAAK-o/9xcUHlG7ee4/s1600-h/India+Fx.png"><img id="BLOGGER_PHOTO_ID_5253324494413689026" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SOeOy1ti8MI/AAAAAAAAK-o/9xcUHlG7ee4/s320/India+Fx.png" border="0" /></a><br /><br /><br /><strong>Rupee</strong><br /><br />India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week. </p><p><br /></p><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/SOeN9-KnOfI/AAAAAAAAK-g/An3iwx9gUhg/s1600-h/rupee.png"><img id="BLOGGER_PHOTO_ID_5253323586150021618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SOeN9-KnOfI/AAAAAAAAK-g/An3iwx9gUhg/s320/rupee.png" border="0" /></a><br /><br /><br /><br /><strong>September Global Manufacturing PMI Shows Sharp Contraction</strong><br /><br />September seems to have been the ultimate "mensis horribilis" for industrial output internationally - and thus it is only natural to assume that Indian industry was also adversly affected - with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the <a href="http://www.ism.ws/ISMReport/content.cfm?ItemNumber=18594">JP Morgan Global Manufacturing PMI</a>, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).<br /><br /><br />According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.<br /></p><p>The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.<br /></p><p>At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.<br /><br />Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.<br /><br /><br /><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/SORxT5yx5OI/AAAAAAAAIBk/5bkoOr8XzAQ/s1600-h/russia+manufacturing.png"><img id="BLOGGER_PHOTO_ID_5252447652166100194" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SORxT5yx5OI/AAAAAAAAIBk/5bkoOr8XzAQ/s320/russia+manufacturing.png" border="0" /></a><br /><br /><br />Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SOklWJTTwRI/AAAAAAAALAY/gTVSVV4JoKY/s1600-h/china+PMI.png"><img id="BLOGGER_PHOTO_ID_5253771502688649490" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SOklWJTTwRI/AAAAAAAALAY/gTVSVV4JoKY/s320/china+PMI.png" border="0" /></a><br /><br /><br />Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.<br /><br /><br /></p><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/SOkn-3DAZsI/AAAAAAAALAg/dyZ5ENeIllQ/s1600-h/brazil+industrial+output.png"><img id="BLOGGER_PHOTO_ID_5253774401186326210" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SOkn-3DAZsI/AAAAAAAALAg/dyZ5ENeIllQ/s320/brazil+industrial+output.png" border="0" /></a></p><p>And the situation seems to have deteriorated further in September, since the headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) registered a 25-month low of 50.4, down from 51.1 in August.<br /><br />So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.<br /><br /><strong>India's Industrial Output Weakens Too</strong><br /><br />India's industrial output growth bounced back again in July (the last month for which we have official data), reaching a five-month year on year expansion rate high of 7.1%. This follows a noted slowdown where output only rose by 5.4 percent gain in June, and 4.1% in May, according to data from the Central Statistical Organisation.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMprbPaY1xI/AAAAAAAAH1M/9wx_GldKlg4/s1600-h/india+ip.jpg"><img id="BLOGGER_PHOTO_ID_5245122831764215570" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SMprbPaY1xI/AAAAAAAAH1M/9wx_GldKlg4/s320/india+ip.jpg" border="0" /></a> But if we come to look at the manufacturing PMI we will see that India's manufacturing output has also slowed somewhat, and expanded at its slowest pace in 14 months in September according to the ABN AMRO Bank purchasing managers' index. The PMI reading - which is based on a survey of 500 companies operating in India - fell to a seasonally adjusted 57.3 in September from 57.9 in August. This reading was the lowest since July 2007. Still 57.3 still suggests Indian industry continues to grow quite vigoursly, although the report did highlight the fact that the drop in the index was mainly the result of a decline in growth of new orders, and implied a deterioration in demand conditions, both locally as well as in export markets.<br /><br /><br /><strong>Current Account and Trade Deficit</strong><br /><br />The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit rocketed to $10.7 billion in the three months from April to June, up from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week. </p><p>India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion. </p><p>A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India's case the 35 percent drop in oil prices we have seen since July has been partially offset by the decline in the rupee to a five-year low. </p><p>India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier. Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.</p><p><strong>India and Brazil Critical Weathervanes</strong><br /></p><p>What I have been arguing in this post is not that everything about India's economy is perfect - far from it, but neither is it the "perfect storm" disaster which current knee jerk reactions among international investors would seem to suggest. The problems which are hitting the Indian economy at the moment, from the rapid rise in inflation to the sudden withdrawal of sentiment have a common origin: the dynamics of the global economy, and it is to these we must now look if we are to be able to sort the wood from the trees about what happens next. Basically, when the dust settles, I think it will be apparent that there are few economies left sufficiently well standing (not Russia certainly, and probably not China, given the export dependence on the developed economies) and with sufficient energy to bounce back. Many may be sceptical that Brazil and India are going to lead the coming charge (this recession cannot, after all, last forever), but I ask you, if it isn't Brazil and India, who is it going to be?<br /><br /><strong>JP Morgan Global Manufacturing PMI Methodology</strong><br /><br /><br />The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.<br /><br />The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).<br /><br />United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.<br /><br /><strong>Disclosure Statement</strong>: Edward Hugh is a macroeconomist who maintains a premier set of blogs at <a href="http://globaleconomydoesmatter.blogspot.com/index.html" target="_blank">Global Economy Matters</a> and is a featured analyst at <a href="http://www.emerginvest.com/" target="_blank">Emerginvest</a>. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-5783794.post-29912892795100632982008-09-28T14:49:00.002+02:002008-09-28T22:16:39.210+02:00Indian Inflation Doesn't Budge While Forex Reserves Rise and the Rupee FallsIndia's inflation held steady in the week to September 13, rising 12.14 percent from a year earlier, thus maintaining the same pace as in the previous week. The rate has now been trending slightly down from the recent peak of 12.63 percent hit on the 9 August. If this trend continues it should give the central bank the necessary room to hold borrowing costs unchanged and thus avoid placing funding pressures on a banking system which is struggling in the wake of the most recent bout of financial turmoil in the United States.<br /><br /><br /><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/SN4t_LhLldI/AAAAAAAAH_M/3jpMPUhAq0U/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5250684779007546834" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SN4t_LhLldI/AAAAAAAAH_M/3jpMPUhAq0U/s320/india+inflation.jpg" border="0" /></a><br /><br />India's financial system is evidently showing signs of strain as the impact of both local policy tightening and the global credit crunch steadily take hold. The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings and the U.S. government takeover of American International Group. As a result the Indian finance ministry responded by allowing companies building roads, ports, utilities and other infrastructure projects to borrow more overseas - thus giving them access to cheaper funds - while the central bank announced measures to boost cash in India's financial system.<br /><br />Indian banks have borrowed an average 642.8 billion rupees from the central bank in the last two weeks, more than five times the average 113 billion rupees in the previous fortnight, further indicating a shortage of funds in the banking system.<br /><br /><strong>Foreign Exchange Reserves Rise Slightly</strong><br /><br />India’s foreign-exchange reserves rose by the most in five months in the week ended September 19, according to the latest data from the Reserve Bank of India. The rise has surprised many observers, but it should be borne in mind that it coincided with the rise in the dollar against a number of other currencies (and in particular the euro, which the RBI also holds in reserves) on the back of the euphoria about the possible bailout of the US financial system.<br /><br />Total foreign-exchange reserves rose by $2.51 billion to $292 billion in the week ended Sept 19, while foreign-currency assets - which form the lions share of the reserves -climbed $2.5 billion to $282.8 billion during the week. As we can see from the chart (below) the value of foreign exchange reserves has stabilised since mid-August, so the rot, it would seem, has definitely stopped. I think it is significant that we saw a positive initial response across the key emerging markets to the proposed US bailout, and while we are now seeing considerable volatility as people become nervous about whether it will, finally, arrive.I think when the package is introduced the key emerging market economies will be the principal beneficiaries, as the so called "risk appetite" will bounce back, especially given that the aftermath of the package will be a lower growth period in the OECD economies as the cost of the bailout has to be assimilated.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SN4xotuVhvI/AAAAAAAAH_U/NDYcBu0d2IM/s1600-h/india+forex.jpg"><img id="BLOGGER_PHOTO_ID_5250688791099049714" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SN4xotuVhvI/AAAAAAAAH_U/NDYcBu0d2IM/s320/india+forex.jpg" border="0" /></a><br /><br /><br />Even given the recent decline, it is important to bear in mind that India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $56.1 billion in the past year.<br /><br /><strong>Money Supply Continues To Grow</strong><br /><br />Meanwhile, money supply in India grew year on year by 21 % in the two weeks ended Sept. 12, same rate as in the previous fortnight, according to data from the RBI. M3 - which largely consists of currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 42,26,143 crore as on September 12.<br /><br />M3 has been rising at an average rate of 21% since the current fiscal year began on April 1, and has been consistently above the central bank’s target of 16.5% to 17% for the fiscal year ending March. At the same time, total bank loans rose by Rs 32,914 crore in the two weeks ended Sept 12, the biggest fortnightly increase since March. Outstanding bank credit was up by 26.1% year on year and reached Rs 24, 91,248 crore. Food credit was up by Rs 847 crore to Rs 45,190 crore, while non-food credit increased by Rs 32,067 crore to Rs24,46,058 crore. Total bank deposits rose by 22.5%, or Rs 6, 25,282 crore, in the same period to Rs reach 34, 05,377 crore.<br /><br /><br /><strong>The Rupee Weakens Again<br /></strong><br /><br />The rupee has declined almost 17 percent so far this year and is the second-worst performer among the ten most-active Asian currencies excluding the yen. This week it declined for the seventh consecutive week, the longest run in more than 2 1/2 years. The rupee was down 5.6 percent in September, and is thus headed for its worst month since the Asian financial crisis in 1997.<br /></p><p><a href="http://1.bp.blogspot.com/_ngczZkrw340/SN42rWSTHZI/AAAAAAAAH_c/BBrQKBflkJY/s1600-h/rupee.jpg"><img id="BLOGGER_PHOTO_ID_5250694333905182098" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SN42rWSTHZI/AAAAAAAAH_c/BBrQKBflkJY/s320/rupee.jpg" border="0" /></a><br />Foreign investors were net sellers of Indian stocks for a fifth straight month in September, and have offloaded $9 billion so far this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year. Indian stocks fell, with the benchmark posting its biggest weekly drop in six months, after talks on a U.S. credit market rescue plan stalled and Washington Mutual Inc. became the biggest bank failure in American history.<br /><br /><br /><br />The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 445, or 3.3 percent, to 13,102.18. The index had its biggest weekly drop since the week ended March 7. The S&P CNX Nifty Index on the National Stock Exchange slid 125.30, or 3.1 percent, to 3,985.25. The BSE 200 Index declined 3.2 percent to 1,590.58. Nifty futures for October delivery fell 3.9 percent to 3,995.<br /><br />Standard & Poor's 500 Index futures slid 1.7 percent when negotiations on a $700 billion bailout plan for U.S. credit markets were thrown into doubt by a group of House Republicans who said the plan drawn up by Treasury Secretary Henry Paulson wouldn't work.<br /><br />The decline in Indian stocks is more a reflection of global sentiment towards emerging market stocks and bonds than it is an indicator of any specific local issue. The MSCI Emerging Markets Index of stocks has been falling since last May - as can be seen in the chart below - and dropped 1.74% percent on Friday to 823.694, its lowest level since Sept. 15. The index is now down 13.6% so far this month, and 33.87% so far this year. But if you look carefully you can see that it peaked up again after 20th September, as speculation increased that there would be a major bailout of the US banking and insurance sector. This bounce back unwound towards the end of last week, as uncertainty grew about the arrival of the package.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SN_QnO-O6EI/AAAAAAAAH_k/k9GbijxhlCI/s1600-h/msci+em.jpg"><img id="BLOGGER_PHOTO_ID_5251145062989883458" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SN_QnO-O6EI/AAAAAAAAH_k/k9GbijxhlCI/s320/msci+em.jpg" border="0" /></a><br />A similar picture can be seen of the JPMorgan EMBI+ emerging bonds index (see below), which has been down significantly since the end of August. Since the US package seems now about to be approved for the US congress, as a result we should see sentiment improve significantly, and India may well be one of the principal beneficiaries of this change in sentiment. The coming weeks should clear all this up quite quickly.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SN_bQ-PUNnI/AAAAAAAAH_s/VlRSAOB9qs4/s1600-h/embi+plus.jpg"><img id="BLOGGER_PHOTO_ID_5251156775168915058" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SN_bQ-PUNnI/AAAAAAAAH_s/VlRSAOB9qs4/s320/embi+plus.jpg" border="0" /></a></p><p></p><p></p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-5783794.post-83203786682893374732008-09-19T23:25:00.006+02:002008-09-22T18:39:22.179+02:00Inflation Holds Steady Again, Forex Reserves Up SlightlyIndia's inflation held steady at the start of September, making it more likely that the Indian central bank will adopt a wait and see approach before adding to its three interest-rate increases since June. Wholesale prices were up an annual 12.14 percent in the week to Sept. 6 according to the commerce ministry in New Delhi. This follows a 12.1 percent rise in the previous week. <br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SNfC_uf8fsI/AAAAAAAAH70/ASdlko6TxKM/s1600-h/india+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://4.bp.blogspot.com/_ngczZkrw340/SNfC_uf8fsI/AAAAAAAAH70/ASdlko6TxKM/s320/india+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5248878290793168578" /></a><br /><br />The inflation news follows a very turbulent week in the financial system, and the Reserve Bank of India announced on Sept. 16 a battery of measures to boost cash in India's financial system and sooth concern that the global credit crisis will worsen and have a negative impact on the Indian economy. the central bank said it would sell U.S. dollars and increase interest rates on some foreign-currency deposits to bolster the rupee, which fell the most in a decade during the week. Banks can now get more funds through an additional daily repurchase auction and via a temporary reclassification of eligibility to access funds through the repurchase auction. <br /><br /><br /><strong>Foreign Exchange Reserves Rise Slightly</strong><br /><br />India's foreign reserves jumped by 650 million to $ 289.461 billion for the week ended September 12 from $ 288.811 billion in the previous week. However it is not clear at this point which way reserves will now move. The global financial markets seem to be in a state of shock following the announcement of the proposed rescue plan for US banks, since few seem to really have any sort of clear idea of what the actual implications are likely to be.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SNfFbJR5dMI/AAAAAAAAH78/IDYVvqYXiVQ/s1600-h/indian+fx.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SNfFbJR5dMI/AAAAAAAAH78/IDYVvqYXiVQ/s320/indian+fx.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5248880960861729986" /></a><br /><br /><br />Emerging-market stocks, bonds and currencies gained, extending last Friday's record rally this morning. The MSCI Emerging Markets Index of stocks was up 1.6 percent at 10:10 p.m. in New York, following a 10 percent gain on Sept. 19. The extra yield investors demand to own developing- nation debt instead of U.S. Treasuries shrank 11 basis points to 3.44 percentage points after narrowing 64 basis points on Sept. 19, according to JPMorgan Chase & Co. But US stocks are off again this afternoon, and it isn't really clear which way all this is now going to move.<br /><br />The Rupee<br /><br />On the other hand the rupee headed for its biggest two-day advance in a decade on optimism investors will return to emerging markets. The rupee rose 0.8 percent to 45.4525 per dollar at today's 5 p.m. close in Mumbai, adding to the 1.4 percent gain on last Friday. This constitutes a 2.23 percent advance since Sept. 18 and is the biggest two-day gain since January 1998. Eleven of the 15 most-active Asian currencies strengthened today. <br /><br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SNfKFCde-1I/AAAAAAAAH8E/6r8G2jk6ukk/s1600-h/rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://4.bp.blogspot.com/_ngczZkrw340/SNfKFCde-1I/AAAAAAAAH8E/6r8G2jk6ukk/s320/rupee.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5248886078632295250" /></a><br /><br />The optimism reflected in this most recent rise is in part based on an assesment that the rupee had been declining largely on concerns that the credit-market turmoil in the U.S. would prompt overseas funds to cut holdings of emerging-market assets. The Indian currency had previously been Asia's second-worst performer in 2008, second only to South Korea's won, and had accumulated a 15.4 percent loss.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-88745082697380898612008-09-12T15:15:00.009+02:002008-09-12T16:14:38.730+02:00Indian Industrial Production Bounces Back As Inflation Continues To EaseIndia's industrial output growth bounced back again in July, reaching a five-month high of 7.1% year on year growth. This follows a 5.4 percent gain in June, and 4.1% in May, according to data out today from the Central Statistical Organisation. The result is not entirely unexpected if we look at the very healthy year on year increase in exports registered in July (31.2% year on year), on the back of a much weaker rupee. The important thing now is to be inflation back under tight control as agricultural and crude oil prices drop back.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMprbPaY1xI/AAAAAAAAH1M/9wx_GldKlg4/s1600-h/india+ip.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SMprbPaY1xI/AAAAAAAAH1M/9wx_GldKlg4/s320/india+ip.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5245122831764215570" /></a><br /><br />Indian manufacturing, which accounts for about 80 percent of production, gained 7.5 percent in July from 6.1 percent in June, today's report showed. Electricity output rose 4.5 percent in July from 2.6 percent, mining grew 5 percent and consumer-goods production increased 7.3 percent. Capital goods production rose 21.9 percent in the month, compared with 12.3 percent in June. This suggests that strong underlying investment activity is ongoing.<br /><br /><span style="font-weight:bold;">Inflation Eases Back Again Slightly</span><br /><br />Indian wholesale prices rose 12.1 percent in the week to Aug. 30 from a year earlier, making for the third consecutive week in which inflation has nudged down slightly. Prices were up by 12.34% the week earlier, according to the latest data from the commerce ministry.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMpu9e-fF1I/AAAAAAAAH1U/w_oKStCIJ-U/s1600-h/india+wholesale.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SMpu9e-fF1I/AAAAAAAAH1U/w_oKStCIJ-U/s320/india+wholesale.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5245126718592587602" /></a><br /><br /><br />Still, wholesale prices are still rising at more than double the central bank's targeted 5 percent pace, and have been doing so since June. So we should expect no easing of the central bank inflation vigilance at this point.<br /><br />Declining oil and commodity prices are obviously helping cool inflation across Asia and easing pressure on the region's central banks to keep increasing interest rates. Consumer prices in China rose 4.9 percent in August from a year earlier, the smallest gain since June 2007. Crude has fallen about 30 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduced demand for fuels.<br /><br />Prices of rice, corn, onions, potatoes, spices and edible oils were all down in the week to Aug. 30. Manufactured products price inflation, which has a 64 percent weight in the inflation basket, was up 11.07 percent on the week, down from the 11.28 percent gain in the previous week.<br /><br /><span style="font-weight:bold;">India's Foreign Exchange Reserves Continue To Fall</span><br /><br /><br />India's foreign exchange reserves fell again in the week ended 5 September, to $288.8 billion dollars, down $6.5 billion on the previous week, and down $27.36 billion from the May 23 high of $316.2 billion.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_ngczZkrw340/SMpyI04_B_I/AAAAAAAAH1c/sO900QUyYko/s1600-h/india+FX.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SMpyI04_B_I/AAAAAAAAH1c/sO900QUyYko/s320/india+FX.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5245130211988539378" /></a><br /><br /><br /><br /><span style="font-weight:bold;">As Does The Rupee</span><br /><br /><br />The rupee declined gain this week, making it the fifth consecutive week of decline, and the longest losing stretch since May, as global funds shunned emerging-market assets on concern the economic downturn is spreading from the U.S. to Europe and Japan. This is not an entirely logical result in the case of India, as I have been trying to argue. But for the moment, and given the current investor mindset, this is how things are.<br /><br />The rupee fell to its lowest level in almost two years, and the data show that overseas investors sold more Indian shares than they bought on five of the seven trading days in September. Ironically though the underlying fundamentals - as we are seeing in the industrial output and inflation data may be starting to improve. Falling oil prices will help domestic deflation, and a slightly weaker rupee, and stronger dollar, may well benefit exports.<br /><br /><br />The rupee was down 2.35 percent on the week to 45.71 to the dollar at the 5 p.m. close in Mumbai on Friday, its lowest level since Oct. 10, 2007.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMpzxo-WNII/AAAAAAAAH1k/xoAp-mR4YEE/s1600-h/india+rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SMpzxo-WNII/AAAAAAAAH1k/xoAp-mR4YEE/s320/india+rupee.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5245132012676068482" /></a><br /><br />If we look at the above chart, the deterioration in the value of the rupee against the dollar since the end of July is evident, and this forms part of a global trend. Since India is not a major oil or commodities producer, and since as I say underlying fundamentals (leaving aside the tricky fiscal deficit issue) are more likely to improve than deteriorate, it is not clear what the real justification for this - other than knee-jerking - actually is.<br /><br />Foreign investors were net sellers of Indian stocks for a fifth straight month in August, and have sold a net $7.6 billion so far this year, according to data from the Securities and Exchange Board of India. They bought a record $19.5 billion in stocks and bonds last year, helping the rupee rally 12.2 percent, the biggest annual advance in more than three decades. The currency has since erased all of those gains.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-5783794.post-56142946691043035262008-09-06T21:02:00.026+02:002008-09-11T19:28:34.611+02:00India's Inflation Holds Steady, Exports and the Trade Deficit Rise, While The Rupee and FX Reserves FallIndia's inflation remained well above the central bank's comfort level for the sixth straight month towards the end of August, increasing the likelihood that incoming Governor Duvvuri Subbarao will continue to raise interest rates. Wholesale prices were up by an annual 12.34 percent in the week ended August 23, according to the latest data from the Indian commerce ministry said in New Delhi. That compared with a 12.4 percent gain in the previous week.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMLWAtSyBRI/AAAAAAAAHxc/IwMF__luDmU/s1600-h/india+wholesale+prices.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SMLWAtSyBRI/AAAAAAAAHxc/IwMF__luDmU/s320/india+wholesale+prices.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5242988223859393810" /></a><br /><br />Subbarao, whose three-year term at the Reserve Bank of India starts this weekend is under some pressure to show that he is independent and no less concerned about inflation than his predecessor, and is quoted as saying that the "obvious" answer to surging prices is tighter monetary policy. Outgoing Governor Yaga Venugopal Reddy increased the central bank's benchmark rate three times between June and the end of August, giving a higher priority in the short term to the battle against inflation rather than to economic growth. In the mid-term these both amount to the same thing, since unless India gets inflation under control a whole battery of other macro economic indicators will become misaligned, and then it will be near impossible for India to realise its full growth potential, which I personally consider to be a couple of percentage points higher then consensus opinion would have it.<br /><br /><br />The Reserve Bank on July 29 raised its benchmark interest rate by a half point to a seven-year high of 9 percent. The central bank's next policy announcement is due Oct. 24.<br /><br />Elevated energy, commodity and food prices remain the main concern, and these forced the central bank in July to raise its inflation forecast for the year to March 31 2009 to 7 percent from a previous target of between 5 percent and 5.5 percent. At the same time India's economy grew at "only" 7.9 percent in the three months to June 30, the weakest since the last quarter of 2004, according to data from the government statistics office last week.<br /><br /><br /><br />Consumer-price inflation for agricultural and rural workers accelerated to 9.41 percent in July, compared with 8.77 percent for farm workers and 8.75 percent for rural workers in June, according to government data. India releases separate indexes for consumer prices paid by industrial, agricultural and rural workers, and as we can see, these come out with a significant time lag, hence the most widely tracked measure of inflation in the Indian context is the wholesale-price index.<br /><br />But there are indications already that the tide may be turning. Prices of fruits, spices, sugar, tea and eggs continued to rise in the week to August 23, but prices of vegetables, pulses, edible oil and cereals fell. Manufactured price inflation on the other hand continued to move up, rising 11.28 percent, compared with 11.02 percent in the previous week.<br /><br />A big part of the issue is what happens to agricultural output this year. The June-September monsoon season, which accounts for four-fifths of India's annual rainfall, has been more or less "normal" this year, according to <a href="http://www.imd.ernet.in/section/hydro/dynamic/seasonal-rainfall.htm">data up to the 3 September supplied by the India Meteorological Department</a> (the chart really is worth a look).<br /><br />Most sources seem mildly optimistic on the agriculture front. India, which is the world's biggest producer of rice after China, partly lifted a six-month old ban on the export of some premium quality grain as the country looks set to harvest a bumper crop for a second year running. Overseas sales of Pusa-1121, a strain of rice grown in north Indian states, will be permitted as of October 15, the trade ministry said during the week. Global rice prices now have fallen 25 percent from their April high as Thailand and Vietnam, the leading global suppliers, lifted export forecasts after farmers increased plantings. Vijay Setia, president of the New Delhi-based All India Rice Exporters Association estimates that India may export most of the 1.4 million ton output of Pusa-1121 variety forecast for this year. Sowing of paddy in India is up by 5 percent to 34.5 million hectares as of August 28, according to the Indian ministry of agriculture. Setia estimates that output may be some 10% above last year's record of 96.43 million tons, and Mangala Rai, director general of the Indian Council of Agricultural Research, holds a similar view.<br /><br />Farmers in India, which is the world's second-biggest wheat producer, may also increase planting starting October because of favourable rainfall, possibly helping India garner a record harvest for a second year. Wheat, which is the country's biggest winter food grain, is planted from October through December. Harvesting starts in March and continues through April. Again the agriculture ministry estimates that India harvested a record 78.4 million metric tons of wheat in the year ended June 30, up 3.4 percent from the year to June 2007.<br /><br />A bigger harvest will obviously help reduce the problems of food shortages that have stoked inflation and lead India to import 1.79 million tons of wheat since July 2007 to build up stockpiles. These imports from India are among the factors which helped fuel last year's 77 percent gain in wheat prices on the Chicago Board of Trade index.<br /><br /><br />Energy prices also seem to be easing, and rapidly. Oil prices fell to their lowest level in five months last Friday as investors worried that an economic slowdown could chip away at the demand for energy. Light, sweet crude for October delivery closed down $1.66 to $106.23, capping off a week of declines that totaled $9.23. It was the lowest settlement price since April 3, when crude settled at $103.83 a barrel.Oil prices have fallen more than $40 from the record high of $147.27 a barrel on July 11, two months ago, as a struggling global economy has cut into demand for energy. The US is leading the way in the decline in demand for oil, and the US Energy Information Administration reported Thursday that imports of crude in August were 200,000 barrels a day below the same four-week period last year. This pattern is repeated to some degree or another in economy after economy across the globe.<br /><br />Now all this will evidently have a floor, but where exactly does that lie? My own view is that the decline will continue, but that we may see a floor around $80, since at some point the inflation situation will ease back, and growth will rebound, and then of course the price will head up again.<br /><br />My feeling is also that we could then see quite a quick turnaround in inflation in emerging economies like India (from 13% to say 7%) and this will then mean the negative lose lose dynamic of rising inflation, rising trade deficits, rising interest rates, falling currencies and falling growth can transform itself into the win-win dynamic of falling inflation, falling trade deficits, slightly lower (but still very yield differential attractive) interest rates, rising currencies and rising growth.<br /><br />The interesting question is when will we hit the inflection point? Well, if we look at the NYMEX chart below, we will see that oil prices really started to take off in October 2007, and that at current rates of decline in oil prices the two curves should cross (ie 2008 prices should be below 2007 ones) sometime between October and November. Now this will be quite an important event in the emerging market economies, since given the weight which has been attached to energy and food rises in the total inflation picture, once these (for so called base effect reasons) start to clock negative readings, headline inflation should start to sink back.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_ngczZkrw340/SMOlTqK8IFI/AAAAAAAAHx0/9G75A-2UBvo/s1600-h/oil+futures.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://4.bp.blogspot.com/_ngczZkrw340/SMOlTqK8IFI/AAAAAAAAHx0/9G75A-2UBvo/s320/oil+futures.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5243216148345659474" /></a><br /><br />Within six months of this cross-over we should see the Indian economy really start to pick up speed again, and in particular we should see a strong rebound in industrial output. India, remember, is still growing at a 7.5% annual rate, but this could easily change as the Indian economy starts to "break sweat" and heads upwards again towards 10% (and even beyond). Depending on the future evolution in energy prices I see trend growth in India in the 2010 - 2015 window of between 10% and 12%.<br /><br /><br /><br /><span style="font-weight:bold;">Foreign Exchange Reserves Fall Again</span><br /><br />India's foreign exchange reserves dropped back again in the week to 29 August, falling by $1.98 billion (Rs8,791 crore) to $295.3 billion, according to Reserve Bank of India data. Foreign currency assets declined $932 million to $286.11 billion during the week, while gold reserves dropped by $1.04 billion to $8.7 billion,and reserves with the International Monetary Fund (IMF) decreased $2 million to $496 million. India’s special drawing rights with IMF were unchanged at $4 million.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_ngczZkrw340/SMLXJq0HCQI/AAAAAAAAHxk/S2rHLFt-lAI/s1600-h/fx+reserves.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://2.bp.blogspot.com/_ngczZkrw340/SMLXJq0HCQI/AAAAAAAAHxk/S2rHLFt-lAI/s320/fx+reserves.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5242989477324327170" /></a><br /><br />There are various explanations for this continuing fall. One of them is the purchase of dollars by India's oil importers, another is intervention by the Reserve Bank of India (to stop the weakening in the rupee, which to some extent is welcome as it helps exporters, but beyond a certain point becomes most damaging as it only adds more wood to the domestic inflation bonfire) and a third is the selling of Indian equities by overseas investment funds.<br /><br />All three of these could reverse as oil prices drop and inflation comes under control, since importers will need less dollars, the RBI will not need to intervene since the rupee will be rising, and both of these factors will make India's stock markets once more an attractive proposition for the overseas funds. This is what I mean by "win-win".<br /><br /><br /><span style="font-weight:bold;">Rupee</span><br /><br />In the meantime, the rupee slumped back for a fourth successive week on speculation economic slowdown in the U.S. and Europe will prompt global funds to shun emerging-market assets. The rupee dropped to a 21-month low versus the dollar, sliding in tandem with currencies across Asia, as regional stocks tumbled. In this context I very much agree with the view expressed in a recent research note by Kotak Institutional Equities:<br /><br />"The current USD rally was prompted by technical factors and fears that the US slowdown would lower growth globally sparking flight to dollar as a perceived safe heaven. We feel this argument is overstretched. 1QCY08 COEFER data reveals continued slow movement away from USD and into Euro in reserves. Share of EUR in reserves has increased to 27% in 2008 from 18% in 2000, while that of the USD has dropped to 63% from 71%. We consider it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.......... In real terms, returns on USD assets continue to be negative, making the current USD rally unsustainable"<br /><br />Basically, the move into the US and Japan as safe havens, seems to be more of a "herd like" knee-jerk response, especially when looked at over a weekend where the US government may well move in and temporarily take over FannyMae and FreddyMac, and as Japan seems to be sliding steadily downwards into its next recession. I also agree with Kotak that the weakening in the rupee is now starting to look decidedly overdone and may well move into reverse gear in the not too distant future.<br /><br />But this possibility, for now, lies out in the future, and in the present the rupee fell a further 1.7 percent against the dollar this week reaching 44.66 per dollar as of the 5 p.m. close in Mumbai: This was the lowest level since Dec. 20, 2006, and the rupee is now down 11.8 percent against the dollar so far this year as equity sales by global investors exceeded their purchases by $7.1 billion.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_ngczZkrw340/SMLYZz01euI/AAAAAAAAHxs/VJMRwHNWI0c/s1600-h/rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SMLYZz01euI/AAAAAAAAHxs/VJMRwHNWI0c/s320/rupee.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5242990854132824802" /></a><br /><br /><br /><br />Heavy demand for dollars from corporates, and especially oil companies, coupled with anticipated losses in the local equity market had a significant effect on market sentiment. The currency fell to a low of 44.75 at one point — its lowest in over 20 months, before the central bank intervened to halt the fall.<br /><br />If the central bank had not stepped in, then the rupee could even have breached the psychologically important 45 threshold already on Friday. In the view of some market participants, sentiment for the rupee is extremely bearish at the moment, over concerns over capital outflows, the falling stock market and a rising fiscal deficit. The latter of these is important, but I do think the first two are being overdone, and reflect a rather old fashioned mindset, since as Kotak point out, it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.<br /><br /><br /><span style="font-weight:bold;">External Borrowing</span><br /><br />India’s external debt went up sharply - by over $50 billion, according to Finance Ministry data - during the financial year ended March 2008, the highest year-on-year increase ever. A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies seem to be the main reasons for the increase. External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year.<br /><br />External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, were up more than 40 per cent, and reached $70.6 billion in 2007-08, as compared to $48.52 billion a year earlier. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.<br /><br /><br /><br />Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation. The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”. As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt as measured in rupees increases. In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.<br /><br />Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting the higher share of private borrowings. Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08. For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.<br /><br />Because of larger borrowing by corporates, government’s debt as a proportion of total external debt declined from 28.4% to 25.6%. As a percentage of gross domestic product (GDP), sovereign debt dropped from 5.3% to 4.8%.<br /><br />The ratio of short-term debt to foreign exchange reserves stood at 14.3% at the end of the year against 13.2% at the end of March 2007. The ratio of short-term debt to total external debt was 20% at the end of March this year against 15.5% in the year before.<br /><br /><br /><span style="font-weight:bold;">Trade Deficit Rises In July</span><br /><br /><br />India’s trade deficit widened to $10.79 billion in July, up 83 per cent from $5.87 billion in the year-ago month, as the growth in imports far outstripped exports. But perhaps the big news here is the growth in exports, which in July were up a very healthy 31.2 per cent year on year to reach $16.34 billion. Imports registered an even sharper annual rise of 48 per cent to $27.14 billion, mainly due, of course, to the increase in the value of crude oil imports, the price of which touched an all-time high in July. Oil imports expanded 70 per cent and stood at $9.5 billion as against $5.6 billion in July 2007. Non-oil imports in July stood at $17.66 billion, which is still an increase of 38.7 per cent over the $12.73 billion registered the year before.<br /><br />Of course the oil factor isn't entirely a one way street, and high crude oil prices also mean that domestic refiners like Reliance Industries sell their products at a higher rate in overseas markets, adding to the export increase, and, with a 40 per cent increase in steel prices, the value of engineering goods’ exports also increased accordingly.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-4065574404947068512008-09-01T04:48:00.000+02:002008-09-01T12:14:38.288+02:00Indian Inflation Eases Back Slightly In Mid AugustIndia's inflation held near a 16- year high as floods in half the country damaged crops and disrupted food supplies. Wholesale prices rose 12.40 percent in the week to Aug. 16, after increasing 12.63 percent in the previous week, the commerce ministry said in New Delhi today. <br /><br /> <a href="http://2.bp.blogspot.com/_ngczZkrw340/SLgMtAonodI/AAAAAAAAHlM/oY1yJCaX73I/s1600-h/india+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://2.bp.blogspot.com/_ngczZkrw340/SLgMtAonodI/AAAAAAAAHlM/oY1yJCaX73I/s320/india+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5239952133849588178" /></a><br /><br /> The annual June-September monsoon season, which accounts for four-fifths of India's annual rainfall, has this year caused flash floods which have already displaced 12.6 million people and killed 18,859 animals, according to the national disaster management office. <br /><br />Bonds rose, pushing yields to the lowest levels in almost two months. The yield on the benchmark 8.24 percent note due April 2018 slid 11 basis points to 8.77 percent as of 5:30 p.m. in Mumbai, the lowest level since July 1, according to the central bank's trading system. <br /><br />The Reserve Bank last month raised its benchmark interest rate by a half point to a seven-year high of 9 percent. The reserve requirement for commercial lenders was also lifted to 9 percent from 8.75 percent. <br /><br />Prices of pulses, fruits, spices, sugar and textiles rose in the week to August 16, while prices of vegetables, meat and edible oils declined, today's report showed. Manufactured price inflation rose 11.02 percent, compared with 10.91 percent in the previous week. <br /><br />India's central bank, having raised interest rates to the highest in seven years, will continue to take steps to curb inflation that's risen beyond ``tolerable levels,'' imperiling economic growth. <br /><br />``Inflation risks have increased sharply and appear to be persistent,'' the Reserve Bank of India said in its report for the year ending June. ``An overriding priority for monetary policy would be to eschew any further intensification of inflationary pressures.'' <br /><br />The Reserve Bank raised borrowing costs three times in as many months to curb inflation that's more than double its target. Rising fuel and food prices may further depress Asia's third-largest economy after growth slowed to the weakest since 2004, a report today showed. <br /><br /><br /><strong>Foreign Exchange Reserves Edge Up Slighly</strong><br /><br />During the week ended August 22, forex reserves rose by $1.08 billion to $297.29 billion. Foreign exchange reserves rose above the $300-billion mark in February this year and touched an all-time high of $316.17 billion in the week ended May 23. However, in week ending 15 August they broke the threshold in a dwonward direction.<br /><br />Reserves have now declined in six of the last seven weeks. <br /><br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SLgOZcwjxFI/AAAAAAAAHlU/XhzjZ4qx9aw/s1600-h/india+fx.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SLgOZcwjxFI/AAAAAAAAHlU/XhzjZ4qx9aw/s320/india+fx.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5239953996824953938" /></a><br /><br /><br /><strong>The Rupee Continues Its Decline Against USD</strong><br /><br />India's rupee declined in August, maily on speculation oil importers exchanged the currency for dollars to pay end of month bills. The currency closed at 43.935 against the dollar as of the 5 p.m. in Mumbai on Friday - its lowest level in more than 17 months - on concern slowing economic growth and inflation near a 16-year high will prompt overseas investors to offload more local shares. That puts the rupee down 3.1% on the month.<br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SLgPfNinboI/AAAAAAAAHlc/nIZPTU5Tjdw/s1600-h/rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://2.bp.blogspot.com/_ngczZkrw340/SLgPfNinboI/AAAAAAAAHlc/nIZPTU5Tjdw/s320/rupee.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5239955195330784898" /></a><br /><br />Overseas investors has sold $7.2 billion more local shares than they bought this year as the benchmark stock index slumped 28 percent. They were net sellers of Indian stocks on all but six of the 17 trading days up to Aug. 27. <br /><br />The National Stock Exchange of India Ltd. last week started trading in currency futures, the country's first, to help investors hedge their foreign-exchange risk. The total traded volume on the first day was $65.8 million.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-68971842556604425322008-08-29T14:18:00.004+02:002008-08-29T16:41:21.550+02:00India's Growth Rate Slows Further In Q2 2008In the second quarter of 2008 (the first quarter of the financial year) India’s economy grew at it slowest rate in three years, as the Reserve Bank of India struggles to control record high inflation by applying tight credit conditions. Annual growth slowed to 7.9 per cent in the quarter of 2008 which ended on June 30, significantly lower than the 8.8 per cent rate reported for the January to March quarter. <br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SLgIxEtorXI/AAAAAAAAHlE/lxVw5CBWhyk/s1600-h/india+GDP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SLgIxEtorXI/AAAAAAAAHlE/lxVw5CBWhyk/s320/india+GDP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5239947805617335666" /></a><br /><br />Growth momentum has obviously been slowing on tighter monetary policy and the adverse global environment. Higher interest rates, slower bank credit growth and higher oil and commodity prices are evidently now having a marked effect on activity levels in the Indian economy. However, in spite of the slowdown, the growth rate of Asia’s third largest economy remains strong, and there are very positive signs of resilience in the face of what is now a global economic slowdown. China’s economic growth also slowed in the second quarter dropping to a 10.1 per cent year on year rate, from 10.6 per cent in the first quarter. <br /><br />Despite this slowing growth the Reserve Bank of India is very likely to maintain its tight policy stance until it succeeds in bringing inflation down significantly from the current double digits level. Inflation fell back slightly in mid-August but it may well tick up again before the year is out.<br /><br />Growth in the services sector, which includes banking, transport and leisure, and the construction sector remained strong at 10 and 11.4 per cent respectively. The manufacturing sector suffered the sharpest fall as it grew only 5.8 per cent compared to 10.9 per cent in the same period in 2007.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-75388990260480161492008-08-22T13:41:00.007+02:002008-08-23T09:44:47.215+02:00India's Inflation Up Again At The Start Of AugustIndia’s inflation rate shot up to its highest level in more than 16 years this month, increasing the chances of the fourth rise in interest rates in Asia’s third-largest economy since June. Wholesale prices rose 12.63 percent in the week to Aug. 9, after increasing 12.44 percent in the previous week, according to data from the commerce ministry in New Delhi today. <br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SK6mwTE_6rI/AAAAAAAAHj8/Jh1aGLmkmQE/s1600-h/india+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://1.bp.blogspot.com/_ngczZkrw340/SK6mwTE_6rI/AAAAAAAAHj8/Jh1aGLmkmQE/s320/india+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5237306765363636914" /></a><br /><br /><br />And inflation may climb even higher following a decision last week by Prime Minister Manmohan Singh's cabinet to approve an average 21 percent pay rise for 5 million civil servants, ahead of elections due by May. <br /><br /><br /><br />Indian stocks declined after the news was released on concern faster inflation and higher interest rates will crimp consumer spending and slow the pace of economic growth even further. Bonds also declined with the yield on the benchmark 8.24 percent note due April 28 up 7 basis points to 9.21 percent. <br /><br />India's central bank last month raised its inflation forecast for the year to March 31 to 7 percent from a previous target of between 5 percent and 5.5 percent. The bank's next policy announcement is due Oct. 24. <br /><br />Inflation in India in the week to August 9 accelerated because of a rise in the cost of pulses, cement, vegetables, sugar and textiles. Manufactured price inflation rose 10.91 percent, compared with 10.75 percent in the previous week, today's report showed. <br /><br /><strong>Foreign Exchange Reserves Fall Again </strong><br /><br /><br />There was a further fall in India's foreign exchange reserves in mid August with the level dropping back for the fifth consecutive week to below the USD 300-billion mark. Reserves dropped by USD 3.8 billion to USD 296.21 billion during the week ended August 15 from USD 300.01 billion in the previous week, according to the Reserve Bank of India's latest statistical bulletin. <br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SK6n05hXVCI/AAAAAAAAHkE/gRZmh5xip_g/s1600-h/india+fx+reserves.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SK6n05hXVCI/AAAAAAAAHkE/gRZmh5xip_g/s320/india+fx+reserves.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5237307943914263586" /></a><br /><br />One item which has emerged in the last week is the extent to which the RBI has been offloading US treasuries. According to US Treasury data Indian institutional holdings of US treasuries dropped $3.3 billion in June following the launch of special market operations by the Reserve Bank of India to extend support to public sector oil company efforts to keep their liqidity afloat in the face of rising crude prices. India’s holdings were down to $11.7 billion in June vs June 2007, the sharpest drop ever on a year-on-year basis. Among Indian institutions that hold US Treasuries are the RBI, the General Insurance Corporation of India, the foreign branches/subsidiaries of domestic banks and domestic mutual funds that are permitted to invest in foreign securities.<br /><br />A large part of the drop in dollar treasury holdings came from the treasury operations by the RBI and the consequent Special Market Operations (SMOs). SMOs were introduced in June to meet the needs of refinery funding operations. The operations involved purchase of subsidy bonds from the refining companies and advance of dollar to them for meeting crude oil payment obligations.<br /><br />The SMOs were in part a response to the low earnings which accrued from dollar treasuries. Most of RBI’s holdings of US treasuries are in the form of short-term securities. The yields on dollar treasuries ranged between 1.6 per cent for 30 days and 2.36 per cent for one year. Assuming the cost of sterilisation at around 6 per cent, which is the reverse repo rate, the spread was negative by at least 4 per cent. This negative spread implied that such additions to India's foreign exchange reserves were imposing excessively high on-costs.<br /><br />Oil bonds were acquired by the RBI at yields which were in the region of 8.75 to 9.5 per cent. Oil bonds are sovereign securities issued by the Indian Government against outstanding payments to the refining companies. Most of the oil bonds purchaes were in the form of long-term securities. By mid August the RBI had purchased about Rs 20,000 crore ($4.5 billion) of oil bonds from the refineries.<br /><br />The RBI has also moved an unknown portion of its holdings out of USD assets and into other currencies, particularly the euro and the pound sterling, in view of the ongoing dollar depreciation, as well as the low yields on offer. <br /><br />The other principal cause of the recent downward movement in the reserves has been the sale by foreign institutional investors. Overseas funds sold more equities than they bought on eight of the twelve trading days in August. Such funds have thus sold $7.1 billion more Indian shares this year than they have bought, according to data from the Securities and Exchange Board of India. In 2007 they bought a net $17.2 billion last year, which was a record, and both added to reserve accumulation and helped the rupee complete its best year since at least 1974. <br /><br />These outflows are to some extent offset by inflows from Non Resident Indians for equity investments. Such investments were running at $2.2 billion in the first quarter of this financial year (ie April to June) and are treated as part of foreign direct investments. However the FDI component in India's BoP is also showing signs of slowing down, with NRI investment flows for share acquisition in June - at around $398 million - being at their lowest level in some time. <br /><br /><strong>The Rupee</strong><br /><br />The rupee fell for the second consecutive week last week as declines in the stock markets spurred fund outflows. The currency fell to its lowest in 17 months as the rebound in crude oil prices from a 15-week low spurred demand for the dollars needed to pay for imports, and the high level of inflation encouraged overseas funds to sell stocks. Despite the fact that the Bombay Stock Exchange's Sensitive Index, or Sensex, rose 157.76, or 1.1 percent, to 14,401.49, on Friday - the most since Aug. 11 - the index in fact posted its second weekly decline, falling 2.2 percent. The rupee was down 0.9 percent on the week to 43.425 per dollar at the 5 p.m. close in Mumbai. On August 20 alone overseas investors sold a net 2.85 billion rupees ($70.8 million) of Indian stocks.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SK6pHDc23JI/AAAAAAAAHkM/OOWGNIlUJuQ/s1600-h/rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SK6pHDc23JI/AAAAAAAAHkM/OOWGNIlUJuQ/s320/rupee.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5237309355328986258" /></a>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-5783794.post-35061649422001754972008-08-15T07:42:00.006+02:002008-08-16T10:15:00.552+02:00India's Inflation Accelerates Again At The Start Of AugustIndia's inflation shot up again at the start of August and hit a 16-year high of 12.44% in the week to Ausust 2, following a 12.01% increase in the previous week, according to data from the Commerce Ministry. Concerns have also been raised that inflation may accelerate further after the government approved sizeable wage increases (in the region of 21%) for civil servants.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SKUXW2IwcqI/AAAAAAAAHY4/4mk2UR4VhJs/s1600-h/india+CPI.jpg"><img id="BLOGGER_PHOTO_ID_5234615823144874658" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SKUXW2IwcqI/AAAAAAAAHY4/4mk2UR4VhJs/s320/india+CPI.jpg" border="0" /></a><br /><br />The Indian cabinet yesterday approved an average 21 per cent pay rise for 5m federal employees and military personnel. This is effectively the first revision of government salary scales for 12 years. P. Chidambaram, finance minister, said on Thursday that the civil servants’ pay rise, to be backdated to January 1 2006, would cost Indian taxpayers $3.6bn (€2.4bn, £1.9bn) this fiscal year, including part of the arrears from 2006. Separately, Indian Railways will have to pay $1.5bn to its employees.<br /><br />Basically the problem here would seem to be the timing of this decision. The majority of the civil servants in question here are hardly going to be well paid, although many of them may well be doing tasks of questionable value, either economically or socially. However this decision is likely to complicate the inflation battle significantly, and raises the level of concern on the fiscal deficit front.<br /><br />The real issues here are associated with the burden represented by subsidies for fuel and other necessities, which are now estimated to exceed 5 per cent of gross domestic product. The pay rises, by way of comparison, are estimated to represent a costof 0.4 - 0.5 per cent of GDP. India's Finance Minister Palaniappan Chidambaram has said the salary rise had been factored into the government budget for the current fiscal year and will not affect the budget deficit target of 2.5 per cent of GDP, but the issue is really that the subsidies are effectively not included in this calculation, since they are off balance sheet. Indeed, only yesterday the prime minister’s Economic Advisory Council warned that the government’s fiscal situation “no longer looks stable or sustainable” as a result of the growing subsidy bill.<br /><br />The Reserve Bank of India last month raised its benchmark rate by a half point to a seven-year high of 9 percent. The reserve requirement for commercial lenders was also lifted to 9 percent from 8.75 percent. Governor Yaga Venugopal Reddy, who is targeting inflation of 7 percent in the year to March, has said he is ready to act again if necessary, and it now seems almost certain that he will need to.<br /><br /><br /><strong>Foreign Exchange Reserves</strong><br /><br />India's foreign exchange reserves fell by US$ 5.464 billion to US$ 300.010 billion during the week ended August 8 from US$ 305.474 billion during the previous week. The country thus registered a fall in its foreign reserves for the fourth consecutive week. One part of the explanation for this weeks rather large drop may well be that the Reserve Bank of India has been selling dollars to keep a cap on the value of the rupee. <br /><br />So, after some years of buying dollars in the forex markets, the RBI has now started selling dollars. Strong portfolio inflows continue, and the central bank continues to mop up what it perceives to be excess liquidity coming from this quarter. However oil importer demand for dollars has been up sharply in recent weeks forcing the central bank to be net sellers of the dollar. As result, total reserve with the central bank has dipped almost $10 billion since the beginning of this fiscal year in April. Nonethless a 5.5 billion USD drop in one week is quite sharp. <br /><br /><br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SKW3PSJrORI/AAAAAAAAHaI/aXulMJ8vsMw/s1600-h/russia+FX.jpg"><img id="BLOGGER_PHOTO_ID_5234791615086410002" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SKW3PSJrORI/AAAAAAAAHaI/aXulMJ8vsMw/s320/russia+FX.jpg" border="0" /></a><br /><br /><br />Despite tighter monetary policy from the RBI the supply of credit continues to expand, and grew by 25.8 per cent during the year up to August 1, 2008, compared with 23.3 per cent growth registered a year earlier. Outstanding bank credit stood at Rs 24,27,592 crore on 1 August. Banks have extended credit worth Rs 65,678 crore since April 2008. Advances declined by Rs 1,787 crore in April-July 2007. The central bank has projected a 20 per cent growth for adjusted non-food credit in 2008-09.<br /><br />Deposit expansion on the other hand has failed to keep pace, and deposits only grew by 20.9 per cent in the year to 1 August 2008 against a 24.4 per cent rise in the same period last year.<br /><br />On the other hand the drop in foreign exchange reserves does seem to be having an impact on the rate of growth in the money supply (since of course dollar sales mean less rupees going the rounds), and money supply growth has dropped back, for the first time this fiscal year, to within the banks comfort zone of below 20%. As per the latest RBI data, the Y-o-Y growth in money supply slipped to 19.6% as on August 1, from a high of close to 23% a few months ago. The total stock of money in the system amounted to Rs 41,79, 900 crore as on August 1, up Rs 32,479 crore over the previous fortnight’s levels. <br /><br /><strong>Rupee</strong><br /><br />India's rupee declined on Thursday by the most in three months on speculation global stock losses will spur investors to pare riskier emerging-market assets. A 27 percent drop in India's benchmark stock index has prompted global funds to exit the market as it heads for the first annual loss since 2001. The rupee fell 1 percent to 43.055 per dollar at the 5 p.m. close, the lowest since July 16<br /><br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SKW8hnZd8LI/AAAAAAAAHaQ/kN5QcnuZiBQ/s1600-h/rupee.jpg"><img id="BLOGGER_PHOTO_ID_5234797427585577138" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SKW8hnZd8LI/AAAAAAAAHaQ/kN5QcnuZiBQ/s320/rupee.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-36263658301276604882008-08-12T10:51:00.000+02:002008-08-15T11:00:30.051+02:00India's Industrial Output Still Sluggish In JuneIndia's industrial output growth accelerated slightly in June. Output at factories, utilities and mines rose 5.4 percent from a year earlier after a revised 4.1 percent gain in May, according to data fromthe Central Statistical Organisation. <br /><br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SKVEcR6bkiI/AAAAAAAAHZI/I0QQYv8thvA/s1600-h/india+IP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://4.bp.blogspot.com/_ngczZkrw340/SKVEcR6bkiI/AAAAAAAAHZI/I0QQYv8thvA/s320/india+IP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5234665394523574818" /></a><br /><br />What this means is thatIndia's industrial production grew 5.2 percent in the quarter ended June 30, almost half the 10.3 percent pace in the same period a year earlier, and this will almost certainly be an important negative for Q2 GDP growth. Factory output growth may well slow further in coming months following interest rate and cash reserve increases from the central bank. <br /><br />Manufacturing, which accounts for about 80 percent of Indian production, gained 5.9 percent in June, compared with 9.7 percent in June 2007. Electricity output rose 2.6 percent in June from 6.8 percent in a year-ago, mining grew 2.9 percent from 1.5 percent and consumer-goods production increased 10 percent.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-8317919321362695712008-08-07T21:11:00.012+02:002008-08-07T21:49:55.263+02:00India Outlook August 2008<p>by Edward Hugh: Barcelona</p><p><strong>Executive Summary<br /></strong><br /><br />India’s latest run of strong economic growth and continuing macroeconomic stability is a tribute the important progress made in recent years in macroeconomic management techniques as well as to an earlier generation of structural reforms. India’s economy has now expanded at an average rate of about 8½ percent for four years running, on the back of rising productivity and sustained investment. Inflation after ebbing in the second half of 2007 has now returned in full force and become one of the most pressing macro problems facing the Indian economy. In fact the record capital inflows which have followed the bout of global financial turbulance and a slowing U.S. economy, while in the long run beneficial, have only served to complicate the application of sound monetary policy. The current account deficit, which had remained modest, is now – on the back of high oil prices, heavy external energy dependence and a growing fiscal deficit – in danger of becoming a matter of concern.<br /><br /><strong>India Needs</strong>:<br /><br />- to bring inflation back under control and to within the central bank “comfort zone”.<br />- to reduce the growing fiscal deficit<br />- to extend and substantially upgrade infrastructure</p><br /><br /><p><strong>India's Strong Points</strong>:<br /><br />- solid and sustained economy growth, no likelihood a a major slowdown<br />- significant foreign exchange reserves<br />- proven human capital resources<br />- demographic tailwinds blowing strongly in her favour, and for several decades to come<br /><br /><br /><strong>Economic Background<br /></strong><br />India’s recent macroeconomic performance has been truly impressive, the result of sound macroeconomic policies, steady reforms which have been ongoing since the start of the since 1990s, and increasingly favourable demographic tailwinds. Growth averaged about 8½ percent in the four years through 2007/08, and while it is set to drop to the 7- 8 percent range this year, India will remain one of the world’s fastest-growing economies in 2008. The poverty rate fell from 36 percent in 1993/94 to under 28 percent in 2004/05.<br /><br />India’s productivity growth has also been rapid when compared with that of other countries. The IMFs September 2006 World Economic Outlook found that India’s total factor productivity growth has averaged about 3⅓ percent in recent years, which within Asia is only exceed by China. Other recent growth accounting exercises have found TFP growth for India in the range of 3.2–3.5 percent for the recent period.<br /><br /><strong>It’s the demography</strong></p><p>At the present time some some 31 % of India’s populations are under 15 years of age. Between now and 2015 that proportion isn’t expected to change too much, but after 2015, with fertility nationwide now falling rapidly, the proportion is set to decline continually, with India moving steadily nearer the proportion which is to be found in more developed economies – Ireland, for example currently has some 21% of its population under 15, while in the United Kingdom the equivalent figure is 17%. </p><p>What this means is that India post 2015 will see a steep and sustained decline in its child dependency ratio and a steady increase in the proportion of its population who are of working age. In those Asian economies (the so called “Tigers”) who have previously passed through this demographic transition such steep declines in dependency ratios have been found to boost GDP growth incrementally, and substantially. This boost is known as the “demographic dividend”. The process is not a mechanical one, of course, and to get the increment, jobs have to be created for the new entrants into the labour force, and in India’s case these jobs will be needed at something like a rate of 15 million a year. What is really different about India is that the demographers are forecasting a continuing decline in the dependency ratio for a period of 30 years or so, as India's fertility rate - that is, the average number of children a woman expects to have in her life time – (which was standing at 3.8 in 1990) falls from the present national average of 2.9 to levels which in all probability will be well below replacement level.<br /></p><p>There is another reason why this demographic change is important and that is that we human beings exhibit variable spending and saving activity at different moments in our life cycle. Basically we tend to save most either when we have just started working and are waiting to establish a family home, or during the latter years of our working lives. Whatsmore having children makes it harder to save wherever we are in the life cycle, and thus reducing the proportion of children in a society will tend – other things being equal – to increase the level of saving. </p><p>And, not unexpectedly, India's savings rate as a percentage of GDP has been rising steadily since 2003. It now stands in the region of 33% of GDP – a figure which is comparable to the Asian super-performers, all of whom save at above 30%, with China saving at an astonishing rate of nearly 40%.<br /><br />This recent savings growth has been driven in India by improvements in the government's fiscal health and a sharp rise in corporate savings, but even if these positive factors should gradually disappear, the decline in the dependency ratio should enable India to hold its savings and investment rate above the 30% mark for the next 25 years at least. </p><br /><br /><p><br /><strong>Recent Economic Indicators</strong></p><p>The Indian economy continued to expand strongly in the first quarter of 2008, even though growth has now dropped back somewhat from the 10.1% peak reached in Q3 2006. GDP, however, still grew at a pretty solid y-o-y rate of 8.8% in Q1, and indeed output growth was unchanged from the last quarter of 2007. So while the Indian economy is slowing, it is doing so very gradually indeed.<br /></p><p><a href="http://2.bp.blogspot.com/_ngczZkrw340/SJtKwtJaMFI/AAAAAAAAHQs/IV_AZ52yF_4/s1600-h/india+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5231857592734199890" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SJtKwtJaMFI/AAAAAAAAHQs/IV_AZ52yF_4/s320/india+GDP.jpg" border="0" /></a><br />Private consumption continued to grow rapidly in Q1 2008 (13.5%) but gross fixed capital formation dropped back (from an average of 20% y-o-y in the previous 3 quarters to 15% in Q1). Since construction activity was still running at a strong pace (12.6%, the fastest rate since Q2 2006) it would not be unrealistic to assume that spending on machinery and equipment slowed somewhat. This would also follow from the fact that manufacturing growth (5.8%) showed the slowest expansion in many quarters (well down from the 10% average over the previous 3 quarters). Infrastructure development also lagged behind in terms of electricity, gas and water supply growth, which was only up by 5.6%. Indeed utilities output has only grown by an average of around 6% over the last 8 quarters. On the other hand government spending shot up, growing at an annual rate of 22.4%. Hence here we have two of the key themes which continue to preoccupy observers of India’s economy: the slow growth of manufacturing and infrastructure, and the rapidly increasing fiscal deficit.<br /><br /><br />Both India’s exports and imports were up quite strongly in Q1 (12.7%), and this revival in exports offers some evidence that Indian exporters have now started to benefit from the weaker rupee, which has declined by some 7 percent so far this year. India's export growth accelerated again in June and overseas shipments, which account for about 15 percent of the Indian economy, were up 23.5 percent year on year (reaching a total of $14.66 billion), following a 13 percent gain in May. Imports, however, have been increasing even more quickly, and were up 26 percent (to $24.45 billion) in June, thus widening the trade deficit (as compared to June 2007) to $9.78 billion. The deficit was however down on May's whopping $10.77 billion. India's oil imports in June rose 53.4 percent to $9.03 billion as refiners paid more for crude oil purchased overseas. India relies on imports of oil for three-quarters of its energy needs. Non-oil imports gained 14 percent to $15.4 billion.India has paid an average $8 billion a month for oil imports in the year through June, compared with $5.4 billion in 2007.<br /><br />India's inflation accelerated again in late July, and hit it highest level since 1995, providing additional evidence to support last week's central bank decision to raise borrowing costs for the third time in two months. Wholesale prices were up 12.01 percent in the week to July 26, after rising 11.98 percent in the previous week.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SJtLZyXcDKI/AAAAAAAAHQ0/DW821_HSAws/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5231858298509855906" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SJtLZyXcDKI/AAAAAAAAHQ0/DW821_HSAws/s320/india+inflation.jpg" border="0" /></a><br /><br />The Reserve Bank of India raised its repurchase rate by a half-percentage point to 9 percent on 29 July, giving priority to the inflation fight over India's short term growth rate. Indeed many economists consider that the bank may well increase the benchmark rate again in the next three months. The cash reserve ratio was also raised 8.75 to 9 percent and in the statement which followed the decision the bank said it still had "headroom'' to further tighten monetary policy. The bank also increased this year's inflation forecast to 7 percent from the previous range of 5 percent to 5.5 percent.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SJtLyRGKKZI/AAAAAAAAHQ8/p7C6CNmMK1k/s1600-h/rbi+India.jpg"><img id="BLOGGER_PHOTO_ID_5231858719075740050" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SJtLyRGKKZI/AAAAAAAAHQ8/p7C6CNmMK1k/s320/rbi+India.jpg" border="0" /></a><br /><br />However while the inflation process in India still has some momentum, as the global economy slows – thus reducing pressure on commodity prices - and monetary tightening reins in domestic demand, India’s inflation peak can not now be far away. Despite constant ups and downs oil prices have been generally falling since hitting the record high of US$147.27 a barrel on July 11, and by August 1st they had dropped around 15 per cent in a mere three weeks. If this trend continues then India should eventually obtain some notable relief and this is why it is so important to maintain strict monetary policy and avoid second round inflation effects at this juncture.<br /><br /><br />India's industrial production provides the most evident sign of the economic slowdown, with output growing at the slowest pace in more than six years in May as continuing price rises and tightening credit lead consumers to cut back on purchases of items like cars, fridges and other manufactured goods. Industrial output was up 3.8 percent from a year earlier after gaining 6.2 percent in April. Manufacturing, which accounts for about 80 percent of India's industrial production, was up 3.9 percent. Electricity rose 2 percent, and mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.<br /><br /><a href="http://2.bp.blogspot.com/_ngczZkrw340/SJtMoTnTDrI/AAAAAAAAHRE/R3qgwdKhDIY/s1600-h/india+IP.jpg"><img id="BLOGGER_PHOTO_ID_5231859647464541874" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SJtMoTnTDrI/AAAAAAAAHRE/R3qgwdKhDIY/s320/india+IP.jpg" border="0" /></a><br /><br /><br /><strong>The Ratings Agencies</strong><br /><br />One notable recent development has been the decision by ratings agency Fitch to lower India's local currency credit rating. The decision by Fitch to revise India's local currency outlook to negative from stable was based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.<br /><br />James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.<br /><br />Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.<br /><br />As regards its external balance India is rather different from many other large emerging economies since while the central bank (which has a high level of independence from government) does intervene in the spot market to try to keep a lid on the rupee’s rise and to built up a “war chest” of international reserves the bank has allowed the currency to rise substantially against the US dollar (while the rupee has fallen in 2008, it appreciated by some 12% against the dollar in 2007).<br /><br /><br /><br /><strong>Foreign Exchange Reserves</strong><br /><br />India's foreign exchange reserves fell another $504 million - to reach $306.6 billion - in the week ended July 25. Despite the fact that India’s foreign exchange reserves, have increased by $81.3 billion in the last twelve months they have in fact now been falling since May. It could be however that the increase in interest rates and the falling price of oil could now see a reversal in this trend.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SJtNPTChWGI/AAAAAAAAHRM/jOO_8kTMq9c/s1600-h/india+FX.jpg"><img id="BLOGGER_PHOTO_ID_5231860317325187170" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SJtNPTChWGI/AAAAAAAAHRM/jOO_8kTMq9c/s320/india+FX.jpg" border="0" /></a><br /><br /><br />The big unknown here is the future movement in the oil price. Despite the recent price easing, India still faces an import bill for crude that may reach $120 billion this fiscal year, compared with $69 billion the year before. This extra burden is about 4% of GDP.<br /><br />Add the impact of the fiscal deficit to the oil bill, and it is not hard to see that the external deficit could reach 4% of GDP this fiscal year. The IMF In April were forecasting a 3.1% for 2008. Reducing this gap is now becoming a priority, especially given the comparative strictness of the ratings agencies vis-a-vis India. Any future downgrades in credit will only make funding the gap more expensive, and as we have seen attracting the foreign capital necessary to bridge the gap has been becoming harder in recent weeks.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJtNog5nzrI/AAAAAAAAHRU/LRWx-19UloE/s1600-h/india+CA.jpg"><img id="BLOGGER_PHOTO_ID_5231860750542687922" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJtNog5nzrI/AAAAAAAAHRU/LRWx-19UloE/s320/india+CA.jpg" border="0" /></a><br /><br /><br /><strong>Money Supply and Credit </strong></p><p><strong><br /></strong>Short term cash rates have been pushing the 8.5 to 9% range in India of late as liquidity has been tighter due to the significant increase in the cash reserve ratio required by the Reserve Bank of India. Banks credit remains strong and rose by 25.8% in the 12 months through July 18. Total bank deposits rose by 21%, over the same period. At the same time, money supply in India grew 20% in the two weeks ended July 18 from a year earlier, compared with 20.5% in the prior two weeks.<br /><br />While much of the recent increase in lending is likely to be associated with increased credit needs on the part of the oil companies, it also seems that bank credit to other sectors has been picking up. The Reserve Bank of India is unsurpringly rather concerned about the level of credit growth, especially considering that deposit growth slowed to 21% over the same period.<br /><br /><strong>The Rupee</strong><br /><br />The rupee appreciated significantly during 2007, raising concerns about the competitiveness of Indian industry. In nominal bilateral terms vis-a-vis the dollar, the appreciation has been particularly notable, reaching successive nine-year highs as it rose about 12 percent over the year. Although the increase has been lower in nominal and real effective terms—only about 7–7½ percent—the appreciation of the effective rupee has taken it out of the historical range in which it fluctuated during most of the last decade<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJtOO_A61nI/AAAAAAAAHRc/-zbPjkK71Sc/s1600-h/rupee.jpg"><img id="BLOGGER_PHOTO_ID_5231861411461387890" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJtOO_A61nI/AAAAAAAAHRc/-zbPjkK71Sc/s320/rupee.jpg" border="0" /></a><br /><br /><br /><strong>Growth Prospects</strong><br /><br />On the growth front a large gap has now opened up between the increasingly gloomy views about India’s prospects as seen from abroad, and the relative optimism displayed by a number of internal forecasters. The Centre for Monitoring the Indian Economy (CMIE), in Mumbai, still thinks India will grow by 9.5% this fiscal year, while JPMorgan only anticipates growth somewhere in the region of 7%.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJtOo0mq3NI/AAAAAAAAHRk/Y_RbS3dvhLM/s1600-h/india+long+term+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5231861855343533266" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJtOo0mq3NI/AAAAAAAAHRk/Y_RbS3dvhLM/s320/india+long+term+GDP.jpg" border="0" /></a><br /><br />While the CMIE estimate is undoubtedly unduly high for this (calendar) year, with growth more than likely coming in in the 7.5% to 8% range, their optimism is not totally unjustified looking forward to 2009 and 2010. Trend growth in India is surely higher than many conventional analyses tend to hold, and if inflation can be gotten under control India then India may well start to hit double digit growth come 2010, and once it breaks the 10% ceiling, it may well stay above it for some considerable time. This is simply because India has a very large untapped capacity for growth, and it is not unrealistic to anticipate that this capacity can be unleased, especially if institutional reform continues, and the fiscal deficit concerns are addressed.<br /><br />But things are likely to go down before they bounce back up again, since he tightening in monetary policy will surely achieve the desired effect of slowing aggregate demand and GDP growth further. Also negative global factors are likely to continue to weigh adversely on India’s growth outlook in the short term. Consumption growth has already slowed significantly. Investments growth has also begun to moderate and it is quite probable that the slowdown in the investment cycle will accentuate over the next six months.<br /><br /><br />Everything really now depends on the outlook for inflation and capital inflows. I believe that Inflation should peak in late summer at levels which are not too far above those we are currently seeing. The rate should then start moderating and we could well be back down at 7% - 8% by the end of the financial year. In part this depends on oil prices, and year on year base effects, and oil and food prices, of course, also partly depend on growth in India and the other key emerging economies. Thus we have a kind of "inbuilt stabiliser", since as the major emerging economies slow, commodity prices ease back, and as this happens the central banks can begin once more to loosen monetary policy, providing a kind of win-win feedback effect, until, of course, commodity prices bounce back again, and they need to start tightening once more.<br /><br />The key point to grasp in all this is that it is consumers in the heavy energy consumption OECD economies who are going to do the heavy lifting of bearing the pain here, as resources are effectively transferred from their wallets to those of the oil producers, and it is this process, rather than what happens in the emerging economies which is likely to keep a cap on global growth in the coming years.<br /><br /><br /><br /><strong>Outlook on Key indicators</strong><br /></p><ul><li>Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving orce here will, as ever, be inflation running above the central bank's comfort zone. Here at Emerginvest we see the Reserve Bank of India being rather more prudent at coming meetings, and we feel the current rate hike cycle may possibly peak at 9.5%. Key factors here will be the behaviour of oil prices, and wages and fiscal policy in India itself with election year approaching. </li></ul><p></p><ul><li>The Rupee is likely to continue to be supported by central bank tightening and declining demand for dollars from oil producers as oil prices ease. Also should the Rupee continue to head upwards and inflation start to fall, a win-win process will again be set in motion as investors see the prospect of currency related increasing returns once more opening up. In the great global search for yield there is no better winning strategy than to back a winner. At some point however macroeconomic fundamentals will undoubtedly take over, and as the economy slows and inflation moves down towards the comfort zone (around 5%) the central bank will also move into easing mode pushing the Rupee down in the process. A violent correction however is not expected. </li></ul><p></p><ul><li>Obviously, with the domestic credit induced consumer boom now fading, exports are going to become more important than ever for India's headline GDP growth. India's Trade Minister Kamal Nath recently set the target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. This is a worthy target, and perfectly realiseable, but it will require India to conduct a substantial infrastructural overhaul and to intruce widespread regulatory reform. In the shorter term India is targeting exports of $200 billion in the current fiscal year, up 28 percent from the $155.5 billion achieved in the previous year. This is attainable – exports were up 23.5% y-o-y in June - but with a deteriorating external environment it will be quite hard work.<br /></li><li>GDP growth is expected to moderate in 2008 compared to the levels seen in the last three years but at this point growth projections remain solid (probably 7.5 to 8% in calendar 2008). We certainly see India’s mid term sustainable growth rate as being above the consensus 7%-8% rate once inflation is firmly under control, and expect double digit annual growth rates to be hit in either late 2009 or 2010 depending on the extent to which the global slowdown in 2009 negatively affects India’s GDP growth. </li></ul><p></p><ul><li>We expect India's credit ratings to remain broadly stable even as the nation weathers higher oil prices and slowing economic growth – a view which was endorsed in a statement at the start of August by Moody's Investors Service. Moody's has a Ba2 rating on India's long-term, local currency debt, leaving it two levels below investment grade, although it rates India's foreign-currency debt Baa3, the lowest investment level. The downside risk here obviously comes from fiscal laxity, but the authorities in New Delhi are undoubtedly very aware of this.<br /></li></ul>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-5783794.post-89568193333115190182008-08-07T21:00:00.003+02:002008-08-08T23:41:48.078+02:00India's Inflation Breaks The 12% Barrier At The End of JulyIndia's inflation accelerated to the fastest pace in more than 13 years at the end of last month. Wholesale prices rose 12.01 percent in the week to July 26, after gaining 11.98 percent the previous week, accroding to the commerce ministry in New Delhi this morning.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJtGq-J6e8I/AAAAAAAAHQk/xJlgnsX2YZo/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5231853096173992898" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJtGq-J6e8I/AAAAAAAAHQk/xJlgnsX2YZo/s320/india+inflation.jpg" border="0" /></a><br /><br />The fastest price gains since 1995 have prompted the Reserve Bank of India to raise interest rates three times in two months, squeezing in the process bank liquidity and consumer spending. Pressure will once more be on the RBI to raise rates again soon, but looking at the current evolution in oil prices they may well be tempted to hold fire for a bit. Light, sweet crude for September delivery was dancing around $118.79 a barrel in afternoon trading on the New York Mercantile Exchange today, with prices were alternating between being in positive and negative territory. Crude has now fallen more than $6 over the previous three days, bringing prices $30 lower than its July high above $147 a barrel. Fuel price inflation in India was 17.12 percent in the week ending 26 July, compared with 16.9 percent in the previous week, and this globally driven oil inflation seems to be about to peak in terms of its impact on India.<br /><br /><br /><strong>Foreign Exchange Reserves</strong><br /><br />Foreign exchange reserves fell to $305.474 billion as on August 1, from $306.603 bilion a week earlier, the Reserve Bank of India (RBI) said in its weekly statistical supplement on Friday. Reserves rose to a record $316.171 billion in late May and the decline since then is largely due to dollars given by the RBI to refiners in exchange for their oil bonds and intervention in the currency market to support a falling rupee. RBI ended the special scheme for refiners on July 29.<br /><br /><br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJyxNTRfUTI/AAAAAAAAHUw/ZuV0XurKRFw/s1600-h/india+forex.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SJyxNTRfUTI/AAAAAAAAHUw/ZuV0XurKRFw/s320/india+forex.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5232251709167718706" /></a><br /><br /><br /><strong>The Rupee</strong><br /><br />The rupee advanced again this week on speculation rising stocks will encourage overseas fund managers to buy more of the nation's assets, and touched its highest level in almost three months this on optimism a slump in crude oil prices will reduce import costs. The rupee has now been the second-best performer in the past month among the 10 most-traded currencies in Asia outside Japan as the Bombay Stock Exchange's Sensitive Index, or Sensex, surged more than 13 percent. <br /><br /><br /><br />The rupee gained 0.7 percent on the week and closed at 42.0625 per dollar on Friday in Mumbai, the highest since May 12. The Sensex rose for a fifth week, the longest winning streak in 10 months. <br /><br />Funds based abroad bought $403.7 million more Indian equities than they sold on Aug. 6, the most in two weeks, according to the Securities and Exchange Board of India. They have sold a net $6.5 billion this year, compared with a record net purchase of $17.2 billion in 2007. <br /><br />Foreigners have bought $230 million worth of shares so far in August after selling more than $307 million in July.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-65592071634562594172008-08-02T11:21:00.003+02:002008-12-10T08:19:03.237+01:00Indian Inflation Hits Its Highest Level Since 1995 In Mid JuneIndia's inflation accelerated again in mid July, and hit it highest level since 1995, providing additional evidence to support last week's central bank decision to raise borrowing costs for the third time in two months. Wholesale prices were up 11.98 percent in the week to July 19, after rising 11.89 percent in the previous week, according to data from the commerce ministry released in New Delhi on Friday.<br /><br /><br /><p><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJL_v6KvBVI/AAAAAAAAHDo/bkziZR3hlcE/s1600-h/india+cpi.jpg"><img id="BLOGGER_PHOTO_ID_5229523315863782738" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJL_v6KvBVI/AAAAAAAAHDo/bkziZR3hlcE/s320/india+cpi.jpg" border="0" /></a><br /><br />The Reserve Bank of India raised its repurchase rate by a half-percentage point to 9 percent on 29 July, giving priority to the inflation fight over India's short term growth rate. Indeed many economists consider that the bank may well increase the benchmark rate again in the next three months. The cash reserve ratio was also raised 8.75 to 9 percent and in the statement which followed the decision the bank said it still had "headroom'' to further tighten monetary policy.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SI7LF_LnPmI/AAAAAAAAG8o/tCqYmkfwbeI/s1600-h/rbi+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5228339521143651938" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SI7LF_LnPmI/AAAAAAAAG8o/tCqYmkfwbeI/s320/rbi+interest+rates.jpg" border="0" /></a><br /><br />Inflation accelerated during the week largely because of an increase in the price of pulses, fruits, spices and sugar. Manufactured price inflation was up 10.82 percent in the week ended July 19, compared with a 10.72 percent gain in the previous week.<br /><br />However while the inflation process in India still has some momentum, as the global economy slows - reducing pressure on commodity prices - and monetary tightening reins in domestic demand, the peak can not now be far away. Light, sweet crude for September delivery rose 90 cents, or 0.7 percent, to $124.98 a barrel yesterday (at the 2:30 pm close of floor trading on the New York Mercantile) but prices have been falling generally since hitting the record high of US$147.27 a barrel on July 11. International oil prices have now dropped around 15 per cent over the last three weeks, and if this trend continues then India should obtain some relief. </p><p>This is why it is so important to maintain strict monetary policy and avoid second round effects.<br /><br /><br /><br /><strong>Foreign Exchange Reserves</strong><br /><br /><br />India's foreign exchange reserves fell another $504 million - to reach $306.6 billion - in the week ended July 25 according to data from the Reserve Bank of India weekly statistical supplement.<br /><br />Gold reserves were unchanged at $9.21 billion while reserves with the International Monetary Fund fell $2 million to $515 million. The nation’s special drawing rights with the International Monetary Fund held at $11 million. Despite the fact that India’s foreign exchange reserves, have increased by $81.3 billion in the last twelve months they have in fact now been falling since May. It could be however that the increase in interest rates and the falling price of oil could now see a reversal in this trend.<br /><br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SJMIvG9aXtI/AAAAAAAAHDw/f46RtfwMZyw/s1600-h/india+fx.jpg"><img id="BLOGGER_PHOTO_ID_5229533197722345170" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SJMIvG9aXtI/AAAAAAAAHDw/f46RtfwMZyw/s320/india+fx.jpg" border="0" /></a><br /><br /><br /><strong>Exports Up In June</strong><br /><br />Indian exporters have started to benefit from the weaker rupee, which has now declined by 7.3 percent so far this year. India's export growth accelerated in June and overseas shipments, which account for about 15 percent of the Indian economy, were up 23.5 percent year on year to reach $14.66 billion, following a 13 percent gain in May. Imports increased 26 percent to $24.45 billion, widening the trade deficit (as compared to June 2007) to $9.78 billion. The deficit was however down on May's whopping $10.77 billion. India's oil imports in June rose 53.4 percent to $9.03 billion as refiners paid more for crude oil purchased overseas. India relies on imports of oil for three-quarters of its energy needs. Non-oil imports gained 14 percent to $15.4 billion.<br /><br />India has paid an average $8 billion a month for oil imports in the year through June, compared with $5.4 billion in 2007.<br /><br />Even though oil prices have now moderated from their peak at around US$145, they still remain quite high by historical standards, hence the further widening in the trade deficit. Each US$10 increase in crude oil prices results in an increase of approximately US$7 billion (or 0.6% of GDP) in oil imports and the trade deficit. High non-oil import growth may also cause further widening of the current account deficit at a time when global capital inflows are slowing. Non-oil imports grew at an average of 24.9% during April-May 2008.<br /><br />The big unknown here is the future movement in the oil price. Despite the recent price easing, India still faces an import bill for crude that may reach $120 billion this fiscal year, compared with $69 billion the year before. This extra burden is about 4% of GDP.<br /><br />Add the impact of the fiscal deficit to the oil bill, and it is not hard to see that the external deficit could reach 4% of GDP this fiscal year. Reducing this gap is now becoming a priority, especially given the comparative strictness of the ratings agencies vis-a-vis India. Any future downgrades in credit will only make funding the gap more expensive, and as we have seen attracting the foreign capital necessary to bridge the gap has been becoming harder in recent weeks.<br /><br />Obviously, with the domestic credit induced consumer boom now fading, exports are going to become more important than ever for India's headline GDP growth. India's Trade Minister Kamal Nath recently set the target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. This is a worthy target, and perfectly realiseable, but it will require India to conduct a substantial infrastructural overhaul and to intruce widespread regulatory reform. In the shorter term India is targeting exports of $200 billion in the current fiscal year, up 28 percent from the $155.5 billion achieved in the previous year. This is attainable, but with a deteriorating external environment it will be hard work.<br /><br /><br /><strong>The Rupee</strong><br /><br /><br />India's rupee was up again this week on speculation the demand for foreign currency from oil refiners would reduce following the decline in crude oil prices. The rupee touched its highest in a week on Friday and advanced 0.5 percent to 42.35 a dollar at the 5 p.m. close in Mumbai.<br /><br /><br />The rupee also strengthened on speculation gains in the benchmark stock index will encourage overseas funds to stay invested in the country. The Mumbai Stock Exchange Sensitive Index, or Sensex, climbed for a fourth week, and was up by 1.86% on Friday at the 3:00 pm close, capping its best run in three months.<br /><br />Overseas investors have sold $6.9 billion more Indian equities than they bought this year through July 30, compared with $17.2 billion in net purchases in 2007. Overseas investors bought a net 5.97 billion rupees ($148 million) of Indian equities on July 31, reducing their net outflow this year from stocks to $6.62 billion, according to the India's stock market regulator.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SJMKKZ3wkFI/AAAAAAAAHD4/Kk8Waz1wQSQ/s1600-h/rupee.jpg"><img id="BLOGGER_PHOTO_ID_5229534766167003218" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SJMKKZ3wkFI/AAAAAAAAHD4/Kk8Waz1wQSQ/s320/rupee.jpg" border="0" /></a><br /><br />India's stock markets were given a boost when a senior oil ministry official said the ministry had requested the finance ministry to ask the central bank to restart its foreign exchange operations with oil refiners. The central bank had said earlier in the week that it would stop a two-month old scheme which provided foreign exchange directly to oil refiners in exchange for their oil bonds. Refiners are the biggest buyers of dollars in the currency markets. <br /><br /><br /><strong>Money Supply And Liquidity Conditions</strong><br /><br />Short term cash rates held below 7 per cent in India on Friday due to lower demand for funds on the end of fortnight reporting day, since the banks had already made arrangements to fund their reserve requirements in advance. At 12:30 pm call rates were at 6.50/6.60 per cent, higher than the its previous close of 6.00/6.25 per cent, but much lower than Thursday's weighted average rate of 8.34 per cent.<br /><br />Banks have to report their cash balances to the Reserve Bank of India every second Friday, this has the consequence that demand for fund tends to be lower in the second week of the fortnight as banks generally try to fund most of their requirement in the first week itself. The general impression is that call rates will now climb back towards 9 per cent at the start of a new fortnight next week.<br /><br />Banks loans fell by Rs 720 crore in the two weeks ended July 18, taking outstanding advances to Rs 24,07,860 crore. Credit rose by 25.8%, or by Rs 4, 93,805 crore, in the 12 months through July 18. Total bank deposits rose by 21%, or Rs 5, 72,859 crore. At the same time, money supply in India grew 20% in the two weeks ended July 18 from a year earlier, compared with 20.5% in the prior two weeks.<br /><br />So non-food credit growth stood at 25.8%Y during the fortnight ended July 18, up from the end of 2007 low of 21.9%. While much of the increase is probably due to increased credit needs on the part of the oil companies, it also seems that bank credit to other sectors has been picking up lately. The RBI is particularly concerned about the level of credit growth, considering that deposit growth had already slowed to 21% over the same period. <br /><br />The RBI recently expressed its concern about this situation and stated that "It is noteworthy that the growth in credit during 2008-09 so far has taken the incremental non-food credit-deposit ratio to 82.4%, which appears high, given the prescribed CRR/SLR and banks’ preference for holding excess reserves on a day-to-day basis…In F2009 so far, however, some banks have expanded credit rapidly in relation to the system level growth, with attendant worsening of their credit-deposit ratios. These developments warrant heightened policy concerns in the interest of overall systemic stability and the quality of financial intermediation”. <br /><br />And the bank warns: “If necessary, the Reserve Bank would consider undertaking supervisory review of those select banks which are over-extended in terms of their credit portfolios relative to their sources of funds”.<br /><br /><strong>Fiscal Policy</strong><br /><br />The government has continued its loose fiscal policy in recent months. Apart from a higher oil subsidy, there is the off-budget burden of fertilizer and food subsidies to think about, as well as the farm loan waiver costs. The recent decision to raise wages for government employees will also add to the deficit burden. It is not unrealistic to anticipate the combined central plus state government fiscal deficit (including all off-budget spending) in the region of 7.7% in 2008 rising to 11.5% of GDP in F2009. <br /><br />On the growth front a large gap has now opened up between the increasingly gloomy views of India’s prospects as seen from abroad, and the relative optimism of internal forecasters. The Centre for Monitoring the Indian Economy (CMIE), in Mumbai, still thinks India will grow by 9.5% this fiscal year, while JPMorgan, a foreign bank, anticipates growth in the region of 7%.<br /><br />While the estimate is undoubtedly unduly high for this (calendar) year, with growth more than likely coming in in the 7.5% to 8% range, the optimism is not unjustified looking forward to 2009 and 2010. If inflation can be gotten under control India may start to hit double digit growth come 2010, and once it breaks the 10% ceiling, it may well stay above it for some considerable time. This is simply because India has a very large untapped capacity for growth, and it is not unrealistic to anticipate that this capacity can be unleased, especially if institutional reform continues, and the fiscal deficit concerns are addressed.<br /><br />But things are likely to go down before they bounce back up again, since he tightening in monetary policy will achieve the desired effect of slowing aggregate demand and GDP growth further. Also negative global factors are likely to continue to weigh adversely on India’s growth outlook in the short term. Consumption growth has already slowed significantly. Investments growth has also begun to moderate and it is quite probable that the slowdown in the investment cycle will accentuate over the next six months.<br /><br /><br />Everything really now depends on the outlook for inflation and capital inflows. I believe that Inflation should peak in late summer at levels which are not too far above those we are currently seeing. They should then start moderating and we could well be back down at 7% - 8% by the end of the financial year. In part this depends on oil prices, and year on year base effects, and oil and food prices, of course, also partly depend on growth in India and the other key emerging economies. Thus we have a kind of "inbuilt stabiliser", since as the major emerging economies slow, commodity prices ease back, and as this happens the central banks can begin once more to loosen monetary policy, providing a kind of win-win feedback effect. <br /><br />This wioll then operate until commodity prices rebound once more and the emerging central banks tighten again, etc, etc. The key point to grasp here is that it is consumers in the heavy energy consumption OECD economies who are going to do the heavy lifting of bearing the pain here, as resources are effectively transferred from their wallets to those of the oil producers, and it is this process, rather than what happens in the emerging economies which is likely to keep a cap on global growth in the coming years.<br /><br />Thus the RBI is now unlikely to hike policy rates further unless oil and other commodity prices lift up again from the current levels, and if global growth slows further this is hard to see happening. The second risk to the ‘no further rate hike’ outlook is, of course, any large global financial market shock that triggers major capital outflows from emerging markets generally and from India. In such a case, the RBI would need to hike the policy rate to prevent any major depreciation in the exchange rate and consequent adverse impact on the inflation outlook. I feel however that this scenario is being rather overplayed at the present time. There will almost certainly be some kind of "emerging market correction" (in central and eastern Europe, perhaps, or possibly in China) but if this is the case it is hard to see India being in the direct line of fire, since if the money leaves India, one might well ask where it will be bound? Certainly not to Japan, where yields are still more or less on the floor, and the economy almost certainly in recession. It is also hard to see financial turmoil troubled economies in the US and Europe serving as safe havens this time round, so on balance I would put the risk of major outflows from India at a rather low level, which is not, of course, the same thing as being complacent.<br /><br /><br />More fickle, however, are the foreigners who bet large sums on Indian shares when the stockmarket was in full bloom. They are deserting the country, withdrawing $6.7 billion so far in 2008. The only consolation is that as share prices fall, so does the amount they can repatriate, relieving some of the pressure on the currency.<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-67143677432632194992008-07-29T09:42:00.001+02:002008-12-10T08:19:03.531+01:00India's Central Bank Raises Interest Rates Again in JulyIndia's central bank raised interest rates for the third time in two months today and at the same time raised the cash reserve ratio that banks have to maintain in deposits with them. The Reserve Bank of India increased the benchmark repurchase rate to 9 percent from 8.5 percent, while the cash reserve ratio was increased to 9 percent from 8.75 percent. The bank has now has raised rates by 125 basis points and the cash reserve ratio by three-quarters of a percentage point since the start of June.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SI7LF_LnPmI/AAAAAAAAG8o/tCqYmkfwbeI/s1600-h/rbi+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5228339521143651938" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SI7LF_LnPmI/AAAAAAAAG8o/tCqYmkfwbeI/s320/rbi+interest+rates.jpg" border="0" /></a><br /><br />India's benchmark stock index fell 3 percent on the news to 13,919.01 at 12:05 p.m. in Mumbai, while the yield on the benchmark 10-year bond yield rose to 9.44 percent from 9.07 percent. The rupee gained to 42.545 against the dollar from 42.59 earlier.<br /><br />India has now been joined by a growing list of Asian and Latin American central banks who are tightening monetary policy (and in the process <a href="http://japanjapan.blogspot.com/2008/07/japanese-unemployment-rises-in-june.html">sending Japan's export dependent economy off into recession it seems</a>). The Philippine central bank has raised rates at its last two meetings, while the Bank Indonesia has boosted borrowing costs for three straight months. Thailand raised its benchmark for the first time in two years this month and Pakistan is expected to follow suit later today. Brazil only last week raised rates by three quarters of a percentage point to 13%.<br /><br />India's inflation held near it's fastest pace in more than 13 years in the middle of July. Wholesale prices rose 11.89 percent in the week to July 12, after gaining 11.91 percent in the previous week, the commerce ministry said in New Delhi last Friday.<br /><br /><br /><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/SInSYCDoU_I/AAAAAAAAG7I/W-nJl5ty6Fg/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5226940152850961394" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SInSYCDoU_I/AAAAAAAAG7I/W-nJl5ty6Fg/s320/india+inflation.jpg" border="0" /></a><br /><br />And things may not improve quickly since the June-September monsoon, which accounts for four-fifths of the nation's annual rainfall, was 33 percent below average in the week ended July 23, raising concerns that there is no easing of food price inflation in sight. Rains in July account for a third of the monsoon season and are crucial for the sowing of crops, including corn and soybeans.<br /><br />At the same time the hike in the CRR will also be noticed, since overnight cash rates rose to a fresh six month high in the middle of last week as a result of the tightening of liquidity following the earlier increase in banks' cash reserve ratio. On Wednesday last week call rates hit a high of 9.85 per cent, which is the highest since January 18. They were however back down to the 9.50/9.60 per cent range on Thursday. Obviously the new increase will push these rates up even further.<br /><br />India's economic growth has already slowed somewhat, and held at its weakest pace since 2005 in Q1 2008 as the highest interest rates in six years discouraged consumer spending and investment, while a more complex global environment reduced the possibilities for expanding India's exports. India's economy expanded at a year on year rate of 8.8 percent in the three months to March 31, matching the revised gain of the previous quarter.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SEDqy9IVxnI/AAAAAAAAF38/GzxjSJSgbes/s1600-h/india+GDP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SEDqy9IVxnI/AAAAAAAAF38/GzxjSJSgbes/s320/india+GDP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5206419330364196466" /></a>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-5783794.post-70777876327199708392008-07-27T14:35:00.000+02:002008-12-10T08:19:03.856+01:00India's Inflation Holds Steady In Mid JulyIndia's inflation held near it's fastest pace in more than 13 years in the middle of July, raising the prospect the Reserve Bank of India will once more raise borrowing costs when it meets again next week. Wholesale prices rose 11.89 percent in the week to July 12, after gaining 11.91 percent in the previous week, the commerce ministry said in New Delhi last Friday.<br /><br /><br /><p><a href="http://4.bp.blogspot.com/_ngczZkrw340/SInSYCDoU_I/AAAAAAAAG7I/W-nJl5ty6Fg/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5226940152850961394" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SInSYCDoU_I/AAAAAAAAG7I/W-nJl5ty6Fg/s320/india+inflation.jpg" border="0" /></a><br />India's stubbornly high inflation may well force the Reserve Bank of India to increase interest rates for the third time in less than two months at its next meeting on July 29. The Reserve Bank raised its benchmark interest rate twice in June, to a six-year high of 8.5 percent. It also increased the cash reserve ratio in stages to 8.75 percent, with the last rise coming into effect July 19. Clearly there are issues here of balancing growth needs and inflation fears, but my impression is that the Reserve Bank of India well understands the threat posed by the danger that inflation expectations become engrained and will continue to act with vigilance. In which case we may well see a continuing slowdown in India - but certainly a very soft, not a hard landing - and an early resumption of growth as inflation fades while energy prices will probably settle at what will undoubtedly be a rather high level in historic terms.<br /><br /><strong>Foreign Exchange Reserves</strong><br /><br /><br />India's foreign exchange reserves fell to $307.107 billion as on July 18, from $308.520 billion a week earlier, the central bank said in its weekly statistical supplement on Friday.<br /><br />Reserves rose to a record $316.171 billion in late May and the decline since then is largely due to dollars being given by the central bank to oil refiners in exchange for their oil bonds and intervention in the currency market to support a falling rupee.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SInVlK74III/AAAAAAAAG7Q/fIjH-2utLcA/s1600-h/india+fx.jpg"><img id="BLOGGER_PHOTO_ID_5226943677107544194" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SInVlK74III/AAAAAAAAG7Q/fIjH-2utLcA/s320/india+fx.jpg" border="0" /></a><br /><br />India's build up in foreign exchange seems to have peaked for the time being as a result of a variety of factors. Capital inflows have not been matching importers’ demands (and thus covering the trade deficit) with the consequence that the central bank has had to sell dollars. At the same time foreign investors have been pulling out of India's stock markets and inflows from overseas borrowing has also slowed due to the slowing consumer boom.</p><p><br /><br />India's central bank has increased the ratio of its rising foreign exchange reserves invested in foreign bonds but has cut deposits held with foreign banks, it said in its half-yearly report. The Reserve Bank of India (RBI) invested $36 billion in overseas bonds, three-fifths of its $60 billion increase in its reserves for the six months ended March 2008, according to the central bank's report on foreign exchange reserves. The percentage of its currency reserves invested in sovereign bonds rose to 34.4 percent from 27.9 percent six months earlier. But the amount of reserves it held with foreign commercial banks as deposits and with external asset managers shrunk to $6 billion at end-March 2008 from $35.4 billion six months ago. Deposits with other central banks, the Bank for International Settlements and the International Monetary Fund rose by $52 billion.<br /><br />India's total reserves grew 25 percent in 2007/08, and have remained largely steady since the end of the financial year. India's foreign exchange reserves are the third-largest holdings in Asia behind China and Japan.<br /></p><p>Foreign direct investment rose to $15.5 billion in 2007/08 from $8.5 billion a year earlier, the RBI said.<br /><br /><br /><br /><strong>Money Supply and Liquidity</strong><br /><br /><br />Overnight cash rates rose to a fresh six month high in the middle of last week due to the tightening of liquidity following the increase in banks' cash reserve ratio and as a resukt of treasury bill auctions . On Wednesday call rates hit a high of 9.85 per cent, which is the highest since January 18. They were however back down to the 9.50/9.60 per cent range on Thursday.<br /><br />The Reserve Bank of India increased the banks' cash reserve ratio, or the amount of deposits bank's have to keep with it, by 50 basis points last month. The two stages taken together are expected to have drained about 180 billion rupees from the banking system. The central bank is selling a total of 45-billion-rupees worth of treasury bills later in the day, the outflows towards which will take place on Friday. The central bank infused 474.80 billion rupees into the banking system through its daily money market operation, indicating the extent of cash crunch in the system.<br /><br />Meanwhile M3 money supply grew an annual 20.5 per cent in early July, still way above the central bank's aim of 16.5-17.0 per cent for 2008/09.<br /><strong></strong></p><p><strong>The Rupee</strong><br /><br />The rupee had its best week in four months last week as the decline in crude oil prices reduced demand for dollars from refiners. The rupee was up for a third consecutive week on optimism exporters may have converted their overseas earnings into rupees to guard against further gains. The rupee gained 1.2 percent on the week and closed at 42.265 per dollar at 5 p.m. in Mumbai. Crude oil has now dropped 14 percent from a record $147.27 a barrel on July 11, curbing the demand for dollars in India, which imports a very large part of its energy needs.<br /><br /><br /><br />The rupee also gained on speculation overseas funds will stop selling local shares after Prime Minister Manmohan Singh won a confidence vote in Parliament this week, giving him greater scope to liberalize the economy. Singh, with the help of his newly political ally Amar Singh of the Samajwadi Party won a majority in the lower house at the first confidence vote in a decade on July 22. The Samajwadi Party have indicated they will support legislation to reduce restrictions on foreign companies expanding in the insurance, pension and banking industries.<br /><br />Overseas funds have sold $6.6 billion more Indian shares than they have bought so far this year.<br /><br /></p><a href="http://1.bp.blogspot.com/_ngczZkrw340/SInWwZaMwsI/AAAAAAAAG7Y/LEOx9PeOYf4/s1600-h/rupee.jpg"><img id="BLOGGER_PHOTO_ID_5226944969483010754" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SInWwZaMwsI/AAAAAAAAG7Y/LEOx9PeOYf4/s320/rupee.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-4651977596333108722008-07-18T16:51:00.000+02:002008-12-10T08:19:04.327+01:00Indian Inflation Accelerates Again At The Start Of JuneIndia's inflation accelerated to the fastest pace in more than 13 years at the start of July, putting pressure on the central bank to continue raising interest rates following the two increases made last month. Wholesale prices rose 11.91 percent in the week to July 5, after gaining 11.89 percent in the previous week, according to the commerce ministry in New Delhi on Friday.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SICvFOF9OaI/AAAAAAAAG00/OoVS6jJhAKU/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5224368071967062434" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SICvFOF9OaI/AAAAAAAAG00/OoVS6jJhAKU/s320/india+inflation.jpg" border="0" /></a><br /><br />It now seems very likely indeed that the Reserve Bank of India (RBI) will continue to tighten policy, since one of the major risks facing India now is that inflation becomes entrenched, and to avoid that eventuality the RBI may well need to implement a further significant policy tightening, and this of course will have implications for an Indian economy where growth is already slowing. However, with inflation at nearly 12% and the repurchase rate at 8.5% we shouldn't lose sight of the fact that India still has negative interest rates (minus 2.5% approx) thus monetary policy could be said to be still pretty accommodative, the problem is that with growth at such a fast pace, and inflation expectations rising, and thus the possibility existing of passing on increased prices to consumers, the situation could simply be self-perpetuating with interest rates at the current level. That is high but negative interest rates can, in the right circumstances (and particularly with high liquidity, and M3 money supply growth of 20.5% per annum) simply perpetuate strong price increases, and fuel compensatory wage demands which only serve at the end of the day to send things spinning round and round in an ever more vicious circle<br /><br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SGHqXMqE2GI/AAAAAAAAGOE/4GO5Fn25B-k/s1600-h/india+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5215707527727339618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SGHqXMqE2GI/AAAAAAAAGOE/4GO5Fn25B-k/s320/india+interest+rates.jpg" border="0" /></a><br /><br />The RBI currently expects the Indian economy to grow by 8.5 percent in the current fiscal year, slower than the 9 percent pace of the previous 12 months, but this forecast is now looking to be significantly under threat from the downside.<br /><br />India's economic growth has slowed being slowing and clocked up the weakest pace since 2005 in Q1 2008, as the highest interest rates in six years discouraged consumer spending and investment, while a more complex global environment reduced the opportunities for expanding India's exports. India's economy expanded at a year on year rate of 8.8 percent in the three months to March 31, matching the revised rate of the previous quarter.<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SEDqy9IVxnI/AAAAAAAAF38/GzxjSJSgbes/s1600-h/india+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5206419330364196466" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SEDqy9IVxnI/AAAAAAAAF38/GzxjSJSgbes/s320/india+GDP.jpg" border="0" /></a><br /><br /><br /><br /><strong>Foreign Exchange Reserves</strong><br /><br /><br />India's foreign exchange reserves were up again in the week ended July 11 - by $123 million - according to the latest Reserve Bank of India data. The rise comes following a series of declines induced by changes in relative currency values and the drying up of earlier substantial net inflows. Forex reserves, including gold and SDR (special drawing rights), rose to $308.52 billion. The $123 million rise in the dollar value of the reserves was mirrored by a Rs 14,133 crore dip in the rupee value of funds, which strongly suggests that the increase has more to do with the value of the rupee vis a vis other currencies than any real increase in the inward flow of funds. Looking at the chart (above) it is clear real heavy net inflows came to a halt around the end of March.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SIHYWNwd58I/AAAAAAAAG1M/fmZv4HH15Lk/s1600-h/india+FX.jpg"><img id="BLOGGER_PHOTO_ID_5224694918888155074" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SIHYWNwd58I/AAAAAAAAG1M/fmZv4HH15Lk/s320/india+FX.jpg" border="0" /></a><br /><br />M3 money supply growth slowed to 20.5 per cent during the two weeks ended 4 July - down rom 20.7 per cent two weeks earlier. The loan book at Indian scheduled banks was up by 25.7 per cent y-o-y at the close on July 4, compared with a 24.4 per cent rise a year earlier, ie loan growth is still not slowing significantly, although once you take inflation into account it is, of course, slowing. Deposit growth declined to a 21.7 per cent rate compared with a 24.6 per cent at the same point in 2007.<br /><br />Money supply has now been rising at an average rate of 21.5% since the current fiscal year began on April 1. This is well above the central bank's target of 16.5% to 17% for the fiscal year ending March 2009.<br /><br />Cash in the Indian money market, however, is likely to get scarcer in the near future since banks will have to place an additional part of deposits with the RBI as of July 19, when the revised norms on cash reserve requirements come into force. This tightening comes at a time when Indian banks are already been borrowing close to a daily Rs 30,000 crore from the RBI.<br /><br />The raising of the cash reserve ratio to 8.75% coupled with the rise in the cost of borrowing via the the repo rate rise to 8.5% is thus now producing significant effects on day to day liquidity, and most Indian analysts are talking about a withdrawal of some Rs 16,000 crore of funds from the banking system during the coming week. While the cash reserves hike alone is expected to take Rs 8,000 crore out of the system, the RBI is also planning to issue bonds worth Rs 10,000 crore, which will simply bring cash conditions under further pressure. This move by the RBI would seem to be evidence of a certain conflict of interests between the RBI and the Gingh administration, since it was anticipated that funds from an April bond issue which is due to mature in July would be released into the banking system to ease the current cash crunch. However, since the RBI is expressly trying to create the cash crunch, it immediately announced it was itself going to issue a series of bonds as a market stabilisation measure - and effectively suck these funds straight back out again.<br /><br />Analysts expect banks to be borrowing up to Rs 45,000 crore from the central bank at the daily repo window next week while borrowing rates in the inter-bank call money market are expected to rise to 9.5%. Thus the Indian banking system has been experiencing tight cash conditions for over a month now, and these conditions are likely to continue.<br /><br /><strong>The Rupee</strong><br /><br />India's rupee gained for a second week last week as the largest weekly drop in crude oil prices ever spurred speculation import costs will decline. The rupee climbed to its highest level in more than three weeks on Friday as light, sweet crude for August delivery fell 41 cents to settle at $128.88 on the New York Mercantile Exchange — well below its trading record of more than $147 a week earlier. India depends on imports to meet three-quarters of its annual energy needs. The rupee also advanced on speculation gains in local equities will attract global funds.<br /><br />The rupee gained 0.2 percent on the week to 42.785 per dollar at the 5 p.m. close of trading in Mumbai, the highest since June 26. It had risen as high as 42.66 earlier the day. The currency has now rebounded 1.6 percent from a 15-month low of 43.475 on July 1.<br /><br />The 37 percent rise in crude oil prices so far this year has boosted the average cost of India's monthly oil imports by 43 percent, and oil imports have averaged $7.8 billion a month so far this year, compared with $5.45 billion in 2007.<br /><br />An additional factor in the upward pressure on the rupee - apart, of course, from the yield advantage which would derive from the anticipated hike in rates following this weeks inflation data - is the fact that the benchmark Sensex share index climbed for a second week, raising optimism overseas investors will scale back sales of local assets. Funds based outside India have sold $7.13 billion more Indian equities than they have bought so far this year, compared with a net purchase of $17.2 billion in 2007, according to the Securities and Exchange Board of India. <br /><br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SIHXMG99i6I/AAAAAAAAG1E/vGYpXljnjTs/s1600-h/india+rupee.jpg"><img id="BLOGGER_PHOTO_ID_5224693645755386786" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SIHXMG99i6I/AAAAAAAAG1E/vGYpXljnjTs/s320/india+rupee.jpg" border="0" /></a><br /><br /><strong>Fitch Downgrade</strong><br /><br />India's Finance Minister Palaniappan Chidambaram has been busy in recent days, trying to downplay the decision by global rating agency Fitch to lower India's local currency credit rating. Chidambaram said the decision was not a cause for concern since the country's economic fundamentals were strong, and stressed that India would grow by around 8 per cent this year. "We must look at fundamentals, which I believe are still strong, but facing difficulties. I do not think we should worry about the outlook,". <p></p><p>While Chidambaram is evidently right here in big picture terms, it is important not to underplay the seriousness of the problem which is being posed by inflation at the present time, nor should he try to deny the significance of the deteriorating fiscal outlook in India, since, as he is indicating, India is far from being in recession, or even in danger of a serious slowdown, so it is important that these twin problems of fiscal deficit and spiralling inflation be gotten under control now.<br /><br />The decision by Fitch to revise India's local currency outlook to negative from stable is based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.<br /><br />James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.<br /><br />Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.<br /><br />India's total central government deficit - including the subsidies to oil companies - may surpass 6.5% of GDP in the current financial. Even the budgeted deficit could rise to 4.5% of GDP from the projected 2.8% of GDP due to higher on-budget subsidies, together with rising interest payments and public sector wages. In addition to this, Fitch argue that bonds issued to oil and fertilizer companies may well reach 2% of GDP in 2008-09.<br /><br />Higher oil prices have raised India's oil import bill dramatically in last three years, and the goods trade deficit was equivalent to 7.7% of GDP in 2007-08. The current account deficit, however, was much smaller at around 1.5% of GDP, due to high services exports and the strong remittances inflow (estimated by the World Bank at 2.8% of GDP in 2006).<br /><br /><a href="http://3.bp.blogspot.com/_ngczZkrw340/SIMAzfz4j7I/AAAAAAAAG2M/_GfpeRp81JQ/s1600-h/india+remittances.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://3.bp.blogspot.com/_ngczZkrw340/SIMAzfz4j7I/AAAAAAAAG2M/_GfpeRp81JQ/s320/india+remittances.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5225020877392351154" /></a><br /><br /><br /> Fitch forecast that the trade deficit will widen further in 2008-09 to 8.2% of GDP, although they suggest the current account deficit may remain broadly unchanged at 1.5%. The IMF do not seem to be so sanguine on this as Fitch, however, (although please note they are using calender and not financial year data) since the April World Economic Outlook forecast was for a CA deficit 2008 of 3% of GDP (they are also forecasting 7.9% GDP growth WY 2008). As can be seen in the chart (below), whichever way you look at it India's external position is certainly deteriorating.<br /><br /><a href="http://4.bp.blogspot.com/_ngczZkrw340/SIL9xc8eJZI/AAAAAAAAG2E/9ZMhF7Ow4-Q/s1600-h/india+ca+deficit.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="http://4.bp.blogspot.com/_ngczZkrw340/SIL9xc8eJZI/AAAAAAAAG2E/9ZMhF7Ow4-Q/s320/india+ca+deficit.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5225017543728440722" /></a><br /><br /><br />So their is a slight disconnect here, with a deteriorating fiscal side and a comparatively strong external position, which is what is being reflected in the credit rating differential between local and foreign currency.<br /><br />In the past four years, the three rating agencies have raised India to investment grade on the back of its positive external financial ratios, improving budget deficit and robust GDP growth. The external position remains strong, but analysts are worried that domestic problems and a flight of capital could combine to bring down the country's credit standing.<br /><br />Earlier this month, Standard and Poor's said the rising cost of subsidies, debt write-offs and public sector wage rises had increased the risk of a downgrade of the BBB-minus domestic debt rating - the lowest investment-grade rating - they assign to India.<br /><br />While Standard and Poor's, like Fitch, rates both India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating. Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. Any further downgrade will only serve to speed this outflow.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-5783794.post-68095120353742041822008-07-11T14:45:00.000+02:002008-12-10T08:19:04.826+01:00Price Inflation Up Industrial Output Down As Fiscal Concerns ContinueIndia's inflation accelerated again at the end of June, reaching the fastest rate since 1995, raising the posibility that the central bank will need to increase borrowing costs for a third time this year as early as its next meeting. Wholesale prices rose 11.89 percent in the week to June 28, after gaining 11.63 percent in the previous week.<br /><br /><br /><p><a href="http://1.bp.blogspot.com/_ngczZkrw340/SHdadIvra2I/AAAAAAAAGqg/BaojAsemGdM/s1600-h/india+wholesale+prices.jpg"><img id="BLOGGER_PHOTO_ID_5221741749569547106" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SHdadIvra2I/AAAAAAAAGqg/BaojAsemGdM/s320/india+wholesale+prices.jpg" border="0" /></a><br /><br /><br />India's central bank next meets to review monetary policy on July 29. Last month the bank raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, in an attempt to slow the rate of increase in the money supply.<br /><br />In a sign that the tightening may in fact be working liquidity seems to have been under pressure all week in the Indian banking system as banks had to make additional deposits with the Reserve Bank of India (RBI) to meet stricter cash reserve requirements from Saturday. Some Indian comentaters were jokingly saying that money seemed to have disappeared down black holes in the inter-bank market. From a position of surplus funds last week, several banks have run out of headroom this weel to borrow from the Reserve Bank of India (RBI) after collectively raising Rs 30,000 crore from the central bank.<br /><br />As a result, interest rates for overnight money have breached the higher end of borrowing and lending rates targeted by the RBI and are running at over 9 per cent. Bankers attribute the cash shortage to three factors. One, banks have been asked to maintain higher cash balances with RBI. Second, the central bank has been selling dollars which results in a dip in rupee funds. And third, the government is sitting on funds worth over Rs 16,613 crore raised by way of taxes.<br /><br /><strong>Industrial Output</strong></p><p><br /><br />India's industrial production grew at its slowest pace in more than six years in May as spiraling prices and tightening credit prompted consumers to cut back on purchases of cars, fridges and other manufactured goods. Production at factories, utilities and mines was up 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, accodring to the statistics office in New Delhi today. Manufacturing, which accounts for about 80 percent of India's industrial production, was up 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SHdbPSZCMZI/AAAAAAAAGqo/6C2nZ2VUxVo/s1600-h/india+indsutrial+output.jpg"><img id="BLOGGER_PHOTO_ID_5221742611152384402" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SHdbPSZCMZI/AAAAAAAAGqo/6C2nZ2VUxVo/s320/india+indsutrial+output.jpg" border="0" /></a><br /><br /><strong>Credit Downgrade Looming?</strong><br /><br />India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election lead to further deterioration in the budget deficit, Standard & Poor's said today.<br /><br />India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place India on par with Indonesia, El Salvador and Guatemala. According to the S&P statement:<br /><br /><blockquote>``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages...Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''</blockquote><br /><br />This threat of a downgrade comes just 18 months after India was raised to the investment category by S&P for the first time since 2002. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, inevitably slowing economic growth.<br /><br /><br /><strong>Foreign Exchange Reserves Fall</strong><br /><br />India's foreign exchange reserves fell to $308.397 billion as on July 4, from $311.790 billion a week earlier, the central bank said in its weekly statistical supplement today. Reserves rose to a record $316.171 billion in late May and the decline since then is as much due to dollar sales by the central bank in the currency market (to prop up the rupee) and supply foreign exchange to oil companies to meet their import payments than ahything else. Foreign currency assets, expressed in dollar terms, included the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen, and thus the value of the reserves is also a reflection of movements in the various currencies.<br /><br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SHdgAhfBLuI/AAAAAAAAGqw/4OBt_qhiz6U/s1600-h/india+foreign+exchange+reserves.jpg"><img id="BLOGGER_PHOTO_ID_5221747855064116962" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SHdgAhfBLuI/AAAAAAAAGqw/4OBt_qhiz6U/s320/india+foreign+exchange+reserves.jpg" border="0" /></a><br /><br /><br /><br /><strong>The Rupee</strong><br /><br />The rupee had its best week in more than three months this week on speculation Japan's third- biggest drugmaker brought in funds to pay for the acquisition of a local pharmaceuticals company. The rupee climbed for a fourth day following the decision by Daiichi Sankyo Co. to convert part of the $4.6 billion it agreed to pay last month for a controlling stake in Ranbaxy Laboratories Ltd into rupees. The rupee also gained on speculation exporters bought the currency following its drop to a 15-month low last week, betting further declines will be limited.<br /><br />The rupee rose 0.7 percent to 42.8725 a dollar as of the 5 p.m. close in Mumbai. That's the biggest advance since the week ended March 28. The rupee has now rebounded 1 percent from a 15-month low of 43.475 touched on July 1.<br /><br /><a href="http://1.bp.blogspot.com/_ngczZkrw340/SHdkd8JgedI/AAAAAAAAGq4/xTtJ8dC39SY/s1600-h/india+rupee.jpg"><img id="BLOGGER_PHOTO_ID_5221752758484367826" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SHdkd8JgedI/AAAAAAAAGq4/xTtJ8dC39SY/s320/india+rupee.jpg" border="0" /></a></p>Unknownnoreply@blogger.com0