February 25, 2012

CB 8: Economy 2012

Economic Scenario till 15 Jan 2012
[a] Agriculture
• According to India’s Ministry of Agriculture Report on Jan 13th, wheat has been
sown in 28.43 mln ha so far versus 28.35 mln ha a year ago. Higher coverage has
been reported from Madhya Pradesh, Rajasthan, Jharkhand, Chhattisgarh & Bihar.
• Rice transplanting is in progress in Andhra Pradesh, Karnataka and Odisha. The
total area under rice is 6,61,000 ha against 6,35,000 ha during the corresponding
period of last year.
• Pulses have been sown in 14.06 mln ha as against 14.24 mln ha last year. The area
under gram which is a dominant pulse crop of rabi season has been reported at 8.72
mln ha against 9.28 mln ha during the corresponding period last year.
• Total area under oilseeds cultivation is reported to be 8.10 mln ha against 8.55 mln
ha last year.
• Area sown under coarse cereals has also shrunk from the last year’s 6.02 mln ha to
this year’s 5.75 mln ha.
• In short, acreage in most rabi crops, including pulses, oilseeds and coarse cereals continued
to lag on y-o-y basis. The primary reason for the shortfall is poor post-monsoon rainfall.

[b] Global economic briefs this week
• Global regulators vowed on Sunday (Jan 8) to press ahead with new liquidity rules for banks
from 2015, but in a move to head off opposition from industry, also said that lenders can tap into safety buffers in times of stress.
• Data released on Jan 10th showed that China’s exports & imports grew at their slowest pace
in more than two years in Dec’11 as foreign and domestic demand ebbed, bolstering
the case for Beijing to further relax monetary policy to support growth.
• China’s inflation rate eased to a 15-month low of 4.1% in Dec, 2011, which also reinforces
the market view that its central bank is poised to ease monetary policy.
• U.S. consumer credit surged 10.0% in Nov’11, its biggest jump in a decade – giving a
positive signal for the economy as consumers tapped their credit cards and the
government doled out more student loans.
• According to Economics Nobel Laureate – Thomas Sargent, a fresh bout of stimulus by the
US Fed would largely be a sideshow for the US economy, with more important fiscal &
regulatory issues out of the central bank’s hands. While Sargent sees a slightly
better recovery for the US now than was expected a couple of months back, he
expects financial institutions and the US labour market to continue to struggle.
• A study by Indiana University (released on Jan 11) shows that nearly 10 mln more
Americans have fallen into poverty since the 2007-2009 U.S. recession began, and the
number is expected to increase due to the slow pace of economic recovery. Poverty
is defined in the US as income below US$ 22,113 a year for a family of four.
• The ECB held interest rates steady on Jan 12th, after two straight cuts as some signs of
respite from the sovereign debt crisis gave it scope to pause. ECB policymakers’ meeting
in Frankfurt kept the benchmark interest rate at a record low of 1.0%.
• Both Italy and Spain witnessed some new-year cheer this week in their bond markets, as
increased demand from institutions pushed down rates on their short-term debt. The ECB
claimed some credit, attributing much of the fall in debt costs to its low-interest loan
of nearly 490 bln euros to banks at the end of 2011.
• The BOE also left its benchmark interest rate steady on Jan 12th, while keeping a status
quo on its quantitative easing programme.

[c] Indian economic and policy highlights this week
• Freight traffic handled by major ports in India during Apr-Dec, FY12 rose just 0.4% (y-o-y)
to 418.18 mln tns. The lackluster growth in freight traffic is mainly on account of a
sharp decline in iron ore handled by the ports. Iron ore exports from India have
been falling ever since Karnataka, the second-largest producer of the ore in the
country, stopped issuing transport permits to miners last year.
• India’s finished steel production in Apr-Dec, FY12 rose at a slow pace of 7.5% (y-o-y), as
real consumption trailed way behind by growing at just 4.4%.
• However, car sales in India rose at 8.5% (y-o-y) in Dec’11—the second consecutive
monthly rise as the industry continued to rebound from record falls in sales in late
• Fitch ratings has defined a stable outlook for the Indian automobile industry in 2012, as it
expects the credit metrics of most companies to continue to be in line with values
expected during a cyclical downturn.
• According to Indian Ministry of Finance’s press release (Jan 10), Moody’s Investor Service
has upgraded the short-term ceiling on foreign currency bank deposits to P-3 from NP. Last
month, the rating agency had unified India’s local and foreign currency bond
ratings to Baa3 and said the outlook on ratings was stable.
• India formally eliminated restrictions on foreign investment in its single-brand retail sector
on Jan 10th. Apart from improving consumer choices, the change will help to make
Indian enterprises more efficient by improving access to global designs,
technologies and management practices. This move, however, may not hasten a
policy change in the supermarket sector, known locally as multi-brand.
• India’s industrial output rose at a better-than-expected 5.9% (y-o-y) in Nov, 2011,
rebounding from an annual contraction of 4.7% (revised from -5.1%) supported by a revival
in consumer goods & basic goods. Our projection for IIP growth was 2.9% for Nov,
2011. While the November IIP data is strong, there are serious concerns about its
sustainability given the volatility seen in the new IIP series and consistent
slowdown in investment expenditure. The RBI’s policy stance will be governed by
the upcoming figures for non-food manufacturing inflation (a proxy for core
inflation). We do not expect any policy rate cuts or the CRR cut before end-March, 2012.
• According to the RBI study on the performance of 2,643 select non-government,
non-financial listed companies during H1, FY12, the sales of these sample companies
grew by 20.8% (y-o-y) in H1, FY12 while operating profit margin contracted by 200 bps
largely on account of higher input costs and significant increase in interest
• Indian Banking Industry’s Non-Food Credit grew by Rs 4.03 trln over end-March’11
until Dec 30th, reflecting a y-o-y growth of 15.7%. During the same period, its
Aggregate Deposits grew by Rs 6.20 trln with a y-o-y growth of 16.9%.
• With this, Indian banking industry’s Credit-Deposit ratio stood at 74.91%.
• The Broad Money Supply, i.e., M3 grew by 15.6% (y-o-y) as on Dec 30th – slightly
below its growth of 16.0% at end-March, 2011. The money supply growth at present is
very close to the projected trajectory of 15.5% set for the year.
• With a decline of US$ 3,147.30 mln in the latest reported week, India’s Foreign
Exchange Reserves (FER) stood at US$ 298.50 bln as on Jan 6, 2012. According to the
RBI data released on Jan 12th, it sold US$ 2.92 bln in Nov, 2011 – highest since Mar, 2009
when dollar sales had stood at US$ 3.39 bln, as the rupee suffered its worst monthly fall in
16 years.

[d] India’s food inflation at (-) 2.90% for the week ended Dec 31, 2011
• India’s food inflation rate for the week to Dec 31, although in negative territory, was
marginally higher at (-) 2.90% from (-) 3.36% a week ago.
• On week-on-week basis, the prices of food articles like pulses, milk, eggs, meat, fish
and vegetables increased further.
• All corroborative evidence shows that manufactured product price inflation
continues to remain high and manufacturers are able to pass on the impact of costly
imports to final consumers to a large extent.
• Our projection for monthly inflation (WPI) for Dec, 2011 is 7.47% (Index at 156.9). We
expect moderation in inflation on account of substantial easing of food prices and statistical
high base. However, we perceive non-food manufactured product price inflation (a proxy for
core inflation) to have remained firm in Dec, 2011 on account of costlier imports and
inelastic demand. Our projection for non-food manufactured product price inflation during
Dec, 2011 is 7.41%.

[e] Positive sentiment to continue in the G-sec market next week
• India’s 10-year bond yield declined just by 3 bps this week to 8.19%.
• Sentiment in the G-sec market was positive throughout this week due to the RBI’s
OMOs, FIIs’ buying interest and expectations about much lower inflation readings
for Dec, 2011.
• We expect sentiment in the G-sec market to improve further on Monday (Jan 16) after the
Dec, 2011 inflation data gets released. Also, traders may buy gilts expecting the RBI to
purchase bonds through OMOs next week as systemic liquidity is tight. The yield on 10-
year benchmark GOI is expected in the band of 8.17% to 8.19% next week.

[f] Rupee not likely to sustain this week’s gains next week
• Indian rupee rose to a five-week high of 51.29 per USD on the last trading day of
the week (Jan 13) before closing at 51.53.
• On week-on-week basis, the currency appreciated by a solid 2.3%, propelled by
dollar flows into local debt and equities as a rebound in industrial production in
the month of Nov, 2011 improved the market sentiment.
• However, many forex experts feel that rupee is unlikely to strengthen beyond Rs
49 per USD in the year 2012 due to India’s wide current account and budget
• The euro is likely to fall next week after it dropped on Jan 13th to its lowest against
the USD in nearly 17 months and tumbled to an 11-year low versus the yen
following a downgrade in credit ratings of nine euro zone countries by the
Standard & Poor’s. According to the analysts, another serious blow to euro came
from the breakdown in talk between Greece and its creditor banks to slash the
country’s huge debt.
• We expect rupee to depreciate further in line with the euro next week and trade between
51.55 & 52.05 per USD next week. The downfall in rupee will be capped by positive
sentiment for Indian equities.

[g] Positive sentiment expected to prevail in Indian stocks next week
• Indian stocks rose to their highest weekly close in five weeks on Friday (Jan 13) on
hopes that some renewed policy action from the government and moderation in
headline inflation would give a much needed boost to the country’s slowing
• Earlier this week, India formally eliminated restrictions on foreign investment in its
single-brand retail sector, opening the door to the likes of Swedish furniture giant
IKEA to open stores in Asia’s third-largest economy. The government is also
drawing up plans to allow foreign airlines to invest in its hard-pressed airline
• Banks were among the top gainers this week. While the Sensex gained 1.8% this
week, the Bankex added 5.8%. The BOB stock too gained 3.2% on BSE this week.
• We expect stocks to extend gains next week, on improved investor sentiment for Indian
equities, likely lower level of headline inflation and the Oct-Dec earnings results throughout
the week.

[h] Crude price at US$ 99 per bbl in New York on Jan 13, 2012
• Crude oil prices in New York dropped to US$ 99 per barrel on the last trading day
of this week, with worries over Iran on the back burner.
• Brent February crude also fell 82 cents to settle at $110.44 a barrel this week. Brent posted a weekly loss of 2.32%, after jumping 5.28% the previous week.
• According to the energy experts, “A range of issues is helping weaken the Brent calendar spread including the February contract’s expiry on Jan 16th, Libyan oil returning, North Sea output is better after maintenance and then the uncertainty about Iran and Nigeria going forward”.

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