Food prices on fire, I see some actions coming from the RBI

At a time when most economies in the world are reeling under deflationary pressure, India stands isolated with intimidating inflationary pressure. And believe me it’s a very dangerous situation when it comes to food inflation in India. I have actually seen my kitchen bill rising like anything every month. I was shocked to see my kitchen bill in Nov 09; it has swollen by around 75% as compared to Mar 09 figures. This is my own experience with mounting inflation in my country. Let’s see what the government’s estimates talk about inflation.

 Primary articles inflation up. For the week ended 28th Nov ’09, the annual rate of inflation for primary articles stood at 13.9% (yoy) against 12.5% for the previous week and 11.6% during the corresponding week last year.

 Food inflation at a decadal high. Inflation for the primary food surged to 19.1%, the highest level in a decade. Food inflation has reached the same level of Dec ’98 when the then ruling National Democratic Alliance (NDA) had lost power at the centre because of high food prices. Therefore, there will be huge pressure on the current government to tame the mounting inflation.

 What’s the outcome? We expect the government to take some measures to rein in high food inflation. But the irony is that the government does not have many options to control food prices. Even if it opts for imports, it is not going to help because international prices of most of the food items are either higher or at par with the domestic prices. It also can not offer highly subsidized food due to tight fiscal situation. Nonetheless, to avoid the political pressure the government should be seen doing something to tackle the high food prices. Thus, we would not be surprised to see some actions coming from the Reserve Bank of India (RBI) earlier than expected. A hike of 50 bps in the cash reserve ratio (CRR) seems imminent. Moreover, the probability of a hike in the repo/reverse repo in the current fiscal has also increased.

Hey Readers 9 Oct '09

Here I am with my views and expectations on the Indian economy once again. This post is coming after a really long time. Well I guess rather than wasting time in this let me get down! (I mean) to writing about the economy.

Macroeconomic indicators show further improvement:

As I have mentioned in my previous posts, the outlook for the Indian economy continue to improve further. And the latest data releases on industrial production, manufacturing PMI and trade come as an eye witness to that. Industrial production has rebounded strongly, as shown in the last two data releases. The IIP recorded healthy growth of 6.8% in Jul ’09, after recording a stellar growth of 8.2% in Jun ’09. The next industrial production data will be released soon on 12 Sep09. I expect the IP growth to be ~ 8% for Aug09 month.

Exports still negative but… Exports growth has been in the negative territory for past nine months on weak global demand. But if we look at the actual levels, foreign trade has already bottomed out in Feb09 as seen in the following graph. On an annual basis also my projections say that positive exports growth is very much in the offing. (Possibly in Sep09)

Agriculture growth remains a cause of concern … but there is a silver lining here also. This year India recorded the worst monsoon season in terms of rain deficiency since 1972, with 24% less rainfall than average. The poor rainfall is going to have an adverse impact on the ‘Kharif ’ crop (summer crop ex. paddy). However, post-monsoon rains could improve the prospects of a better ‘Rabi’ crop (winter crop ex. wheat). Also, the share of ‘Rabi’ crop in the total agri production has been increasing over the years. So if we get a better ‘Rabi’ crop', this will compensate for the loss in the ‘Kharif’ crop. Historically, rainfall has been found to have a strong correlation (0.6%) with agriculture growth.

Overall, India’s growth prospects are quite bright as compared to the developed countries though the poor monsoon has diluted the growth outlook to some extent. What’s your take on it?

PS: In my next post I will try to cover RBI’s take on key interest rate and inflation.

Analysis on the RBI’s monetary policy for 2009-10

The Reserve Bank of India (RBI) left its key policy rates unchanged in its first quarterly review of monetary policy for 2009-10 on July 28th. The repo rate – the rate at which banks borrow money from the RBI – was left unchanged at 4.75%, the reverse repo rate – the rate at which banks lend funds to the RBI – remained at 3.25% and the Cash Reserve Ratio (CRR) - the percentage of deposits that banks keep with the central bank was kept unchanged at 5%. The decision, however, didn’t surprise the market at all for its obviousness. The RBI had reduced the repo rate six times, amounting 425 basis points since Oct’08 in order to ensure enough liquidity in the system. As the liquidity situation has been quite comfortable for last 5-6 months and the inflation seems to be posing a threat in the second half of the current fiscal year, RBI’s decision of maintaining a status quo is completely plausible.

* With upward bias, ** end March

Growth outlook:
The RBI looked more sanguine about the domestic growth outlook yesterday than the last policy review in Apr’09. According the policy document, the business outlook in the country has turned positive signaling a revival of industrial activity. However, the RBI expects the export demand to continue to remain weak in coming months and the services sector may experience the drag of sluggish external demand and the lagged adverse impact of the weak industrial growth. Also, the below normal monsoon this year is likely to pull down the agriculture production for the Kharif season crop. Weighing all these factors, the RBI’s the growth projection for GDP for 2009-10 is placed at ‘6% with an upward bias’. I fee the RBI has been a tad conservative about the GDP forecast. As the recent macro-data points to a better economic environment, the economy is likely to grow at 6.5% in 2009-10.

Inflation outlook:
On inflation front, RBI expects the annual inflation to go up to 5% by the end of March 2010. It says that the WPI-based inflation, which has slipped below zero, has only statistical significance and doesn’t reflect a contraction in demand and may not persist beyond a few more months. However, it expressed concern about the elevated food inflation and an uncertain monsoon outlook could further accentuate the problem.

Regarding the money supply growth, the RBI projects the M3 money supply to grow at 18% during 2009-10. Furthermore, the bank deposit and the bank credit are projected to be growing at 19% and 20% respectively in 2009-10.

But I see the RBI will be having a bigger responsibility this time. As the fiscal deficit has been estimated at 6.8% of the GDP in 2009-10, the government plans to withdraw Rs 4.5 trn from the market in the current financial year. This has hardened the interest rate in the bond market. At the same time the RBI will have to ensure that there is enough liquidity left in the system so that the private sector also has easy access to the funds. But if the government goes little aggressive on the disinvestment plans, the situation could improve significantly with foreign money flowing into the economy.

Outlook for Rupee:
The RBI’s decision of keeping the policy rates unchanged doesn’t seem to have much impact on the rupee. However, a revival in FII inflows and an improved domestic growth outlook are likely to provide a support to the rupee in the coming months. Risk aversion is also expected to subside on possible global economic recovery towards the end of 2009. Therefore, I expect the rupee to inch towards 46.50-47 levels by end of Mar 2010. In the immediate term, however, rupee could continue taking cues from the direction of domestic equity markets and from the dollar’s movement against other major currencies.

To sum up the whole thing, I would like to add that the nine-month long easing cycle of the interest rate seems to have come to an end and the RBI’s next move will be to increase the key rates which might happen as soon as beginning of 2010.

Slowdown in credit off-take in India

Credit off-take has been rapidly slowing down in India since June’08, mainly because of high interest rates (until Oct’08) and banks unwillingness to lend later on. Though the RBI – the central bank of India - has projected 20% growth in the credit off-take for the fiscal year 2009-10, credit growth has slowed down to merely 16.7% in the first quarter of FY10, down from 25% in the same period last year.

But there is some positive news which has come up today regarding the credit off-take in India. The total credit off-take increased 16.3% (y/y) as of 3rd July’09, higher than the 15.1% in the previous fortnight. However, it’s still far below the peak of nearly 30% in Oct’08. But a high base effect is also playing its role in distorting these numbers. Not a problem. Let’s take a look at the monthly growth rates, which could give more insights in the current situation.
Banks' credit growth rate in India

Source: Nomura, CEIC

Well, looking at the monthly growth rates, credit growth seems to be gradually gaining traction; credit growth rose to 1.2% (m/m, s.a.) in June’09, as compared to 0.3% in the beginning of 2009.
Banks have become very reluctant to lend money post Lehman Brothers collapse. They rather prefer putting money with the RBI. There has been excess liquidity in the system for last seven months now, which can be seen by repo liquidity data (see the graph below).

To stop that, the RBI has reduced the reverse repo rate – the interest money banks get for parking their funds with RBI – to 3.25% in April’09, from 6% last year. But the result is yet to be seen. The RBI should take some steps to ensure easy access to funds if it wants to see the country growing at a higher pace. The central bank is going to decide on its interest rate on July 28. Till then, take a chill pill and start snoring.

India Budget 2009-10 spoils the party

I am not enjoying writing this post. Why? Actually, I along with millions of Indian citizens was expecting so much from this budget . Alas ! it fails to deliver completely. That's why I didn't feel like writing about it. But we can't ignore it either. First have a look at the highlights and my comments.

Highlights of the budget

(Fiscal year: April 1 – March 31)

§ Real GDP growth assumed at 6.5% in fiscal year 2009-10 – Quite realistic

§ Fiscal deficit projected at 6.8 % of GDP – No roadmap for fiscal consolidation

§ Total expenditure increased by 36 % to Rs 10,208.38 bn over 2008-09 – Govt will have to borrow from markets, leading to upward pressure on interest rates

§ Allocation for the National Highway Development Programme (NHDP) increased 23% in 2009-10. Also, allocation for Bharat Nirman increased 45% in 2009-10 - Infrastructure gets a focus

§ Allocation under National Rural Employment Guarantee Scheme (NREGS) increased by 144 % to Rs 391 bn in 2009-10 – NREGS has been quite successful in the past and will provide further support to the poor

§ Unique Identification Authority of India (UIDAI) to set up online data base for Indian residents and provision of Rs 1.2 bn made for this in the budget – a welcome step

§ No change in corporate tax rate – No relief to corporate India

§ Fringe benefit tax (FBT) to be abolished – Will provide immense relief to millions of people

§ Commodity transaction tax (CTT) to be removed

§ Minimum alternate tax (MAT) to be increased from 10% to 15% of book profits

§ Raised the exemption limit of personal income tax by Rs 10,000 for all categories of individual taxpayers; by Rs 15,000 for senior citizens. Also, surcharge of 10% eliminated on personal income tax – people will have more money to spend

Finance minister Mr. Pranab Mukherjee disappointed the country by presenting a very ordinary (or call it hopeless) budget on July 6. The whole country was waiting for this event desperately; more so because the Congress had received a renewed mandate following the general election in May09. The newly elected government was expected to bring some revolutionary reforms to set the country on a higher growth trajectory. Nothing of this sort happened. On the contrary, there was no clear road-map on how the government is going to tackle the high fiscal deficit, which has been projected at 6.8% of GDP in FY10. Here are the key numbers from the budget.

But don’t get too disheartened. Budget is not the only platform to declare all the reformatory actions. The government might declare some more actions whenever it gets ready for them. Think positive!!

A silver lining in the cloud!

Indian exports continue to be on a falling spree. Exports declined 29.2% (y/y) in May’09 to $11 bn, after dropping 33.2% in Apr’09 due to weak global demand. This was the eighth straight month when exports have fallen sharply.

The Rupee is likely to appreciate in the coming months (see my previous post on rupee), which in turn will make exports less competitive in the international markets. Therefore, the road from here is not going to be smooth for the exporters. However, the government may unveil relief measures in the coming budget on July 6 to help exporters survive. There are expectations that the government may announce a foreign trade policy in Aug’09 to provide further support to the exporters.

Well, this is not all too bad. There is a silver lining here. Indian imports are also falling continuously for past six months at the same time. Imports fell 39.2% (y/y) in May’09 to $16.2 bn, following 36.6% drop in Apr’09. As a result, India’s trade deficit has halved to $5.2 bn in May’09, as compared to $11.2 bn a year ago. A shrinking trade deficit comes as good news for the economy. Don't you think so?

Outlook for INR/USD

The Indian Rupee (INR) has been extremely volatile in last two years. The currency has touched its peak and trough vis-à-vis the US dollar (USD) in these two years (see the graph below). During the same time, the INR defeated the forecasts made by most of the top notch global & Indian banks. I still remember when rupee was trading around 40 per dollar in Jan’08, few big agencies were betting on the INR going below 30 per dollar by end-2008. This was one extreme though. But most of the agencies were of the view that the INR will keep appreciating though out the year (2008). It didn’t happen. On the contrary, the INR depreciated around 20% to 50 per dollar in the same year. The other extreme was when these agencies were forecasting the INR to touch 57 per dollar merely four months back. So I assume you understood the plight of the forecasters.

What went wrong?

The rupee depends very heavily on Foreign Institutional Investor (FII) flows. If FIIs start sending money to Indian financial markets, the currency appreciates and if FIIs pull out money from India, rupee starts taking a hit.

Rupee dependence on FII flows

Forecasters were very bullish on India’s growth story in the beginning of 2008 and were anticipating heavy FII inflows. But FIIs actually pulled out $9.3 billion from Indian markets in 2008. Due to these heavy capital outflows the INR tumbled to around 50-levels against the USD in Dec' 08.

The way forward

The rupee appreciated very sharply around 47-levels against the dollar following the general election results on May 16. A surge in FII inflows fuelled the INR rally against the greenback. However, the rupee has lost over 2% in last fortnight and is trading at around 48-levels against the dollar.

Economic outlook for India has improved to some extent in last one month. The industrial production data, core sector data, manufacturing PMI, and GDP data are the ones which paint a positive outlook for India. The IIP expanded 1.4% (y/y) in Apr09, after remaining in the negative territory for two months. The core sector posted a growth of 4.3% (y/y) in the same month. Manufacturing PMI expanded for a second straight month in May09 to its highest in last eight months. Moreover, as I have mentioned in my previous post, the World Bank has upwardly revised its India’s GDP forecast for 2009 & 2010 on June 22. The next major event is the fiscal bill, which will be presented on July 6.

A better growth prospect will lead to higher capital inflows in the coming months. This builds up a case for a stronger rupee in the medium-term. Therefore, the rupee is expected to be around 46-levels against the dollar by Mar 2010. However, in the immediate term, the rupee could trade in a volatile range, tracking the developments in the equity markets and also the performance of the dollar vis-à-vis other currencies.

World Bank: India to grow faster than China in 2010

I was glad to see the World Bank’s latest revisions in its global GDP forecasts on June 22, 2009. Now you must be thinking that I have lost it completely because in that update the World Bank actually revised the global GDP forecasts downward for both 2009 & 10. So why would someone be happy about it? Well, I understand your point. But if you have read my older post on ‘Who will be the next global economic growth leader?’ posted on June 17, 2009, I had written that India will leave China behind in terms of economic growth to become the global growth leader.

Five days later the World Bank comes to support my statement by projecting India to grow faster than China in 2010. According to World Bank India would grow at 8% in 2010, making it the fastest-growing economy in the world. China is projected to grow at 7.7% in the same year. Have a look at the following table.

Let’s talk about the world economy now. Despite the recent signs of improvement in some parts of the world, the prospects for the global economy remain quite uncertain. According to the World Bank’s revised forecasts, the world GDP will contract by 2.9% in 2009 as compared to 1.7% it had forecast just two months and a half ago. To my mind, the global economy will take some time - say four more quarters - to come out of the trauma of recession.

The policy makers will have to be extra careful about all macro indicators and will have to respond to them accordingly. Structural imbalances which have been created over the period need to be tackled now. The US consumers need to learn how to save and the Chinese consumers should learn how to spend. Another major problem for many countries is the mounting fiscal deficit, which is going to take the centre stage once the recovery starts. Inflation, unemployment, protectionism… It will be quite a task for policymakers to tackle these-going-to-be-serious issues. Well, I am also bracing myself for bringing all the actions on the economy front to your notice.

Signs of global economic recovery or just a mirage?

At a time when people around the world were riding high on early signs of economic recovery, the World Bank (WB) brings them back to the ground reality. According to the WB, which has revised its forecasts on global economic growth to -2.9% in 2009, down from -1.7% projected in Mar’09, the recovery is expected to be very gradual. Have a look at the WB's revised GDP forecasts for 2009 and 2010.

One interesting thing you must have noticed about Indian and Chinese economies. Growth forecasts for both the nations have been revised upward. Now, does it say that the decoupling hypothesis was not a complete absurd and it’s just a beginning? May be a couple of decades later this blissful thought becomes a reality.

Well, for me it’s too early to comment on that. Personally, I don’t believe in ‘decoupling’. If you have views on that please share.

Deflation in India ...Really?

India's inflation rate slipped into negative terrain for the first time in last 35 years. Annual inflation rate declined to -1.6% for the week ended June 6, 2009 as compared to 11.7% during the corresponding week last year.

Now, what does this mean? Should we call it deflation or disinflation or something else? To my mind these numbers have only statistical significance. I don’t think India is facing deflationary pressure at all. In fact, prices for certain commodities have gone up very sharply off late. Mainly, it’s the high base effect which has forced inflation into the negative zone.

Another important thing to notice is that Inflation in India is based on wholesale price index (WPI) unlike most countries which follow consumer price index based inflation. The wholesale price index (WPI) takes into account the wholesale prices of commodities whereas the consumer price index (CPI) considers prices of goods and services at the retail level.

So if we go by CPI-based inflation rate like most other countries do, inflation in India is still ruling firm at near double-digits in light of high food prices. Annual inflation measured in terms of consumer price index (CPI) stood at 8.7% in April’09.

Secondly, if we calculate WBI-based inflation on a monthly basis, it becomes crystal clear that inflation has been picking up for last three months. Going forward, I expect inflation to pick up sharply around Sep-Oct’09 once the base effect dies its own death.

I don’t think RBI need to cut its key interest rate going forward as it has already brought it down by 425 basis points since October’08. Let me know whether you agree with me or not and if not why so?

Who will be the next global economic growth leader?

“I remember myself being the topper of the class for years in my school days? All thanks to my superb tuition teacher. But one day the teacher got married and left the city. And the guy who used to come number two or three stood first in the class that year. Actually, the guy used to study on his own and was not depending on any tuition unlike me.”

I see the same thing happening to China (me) in coming years. China has enjoyed the status of ‘the fastest growing economy in the world’ for quite some time now. But there is a big question mark on whether it will continue to rule the number one position any longer. Why is that so?

Actually, the global demand has dried up completely on account of global recession. China's exports (tuition teacher) have fallen around 22% in the first five months of 2009, as compared to the same period a year ago. May was the seventh straight month when exports tanked. Given the current economic situation, exports are unlikely to recover any time soon.

But that creates a problem for China. Exports contribute more that 35% to China’s GDP as compared to 14% in case of India. Therefore, this kind of heavy dependence on exports will be the reason for China’s sluggish growth in coming time.

Rest I leave to you to guess who will be the next topper in the world. Yes…You guessed it right.

Green shoots of recovery in Indian economy

Furthering to my previous post on Indian economy, following are the indicators which indicate that the Indian economy has already bottomed out. Let’s have a look.

Manufacturing PMI back in expansionary zone : India’s Purchasing Managers’ Index (PMI) – which indicates the economic health of manufacturing sector - rose for the fifth straight month in May’09 to an eight-month high of 55.7 as compared to 53.3 in Apr’09. A reading above 50 indicates expansion, while a reading below 50 indicates a contraction.

There are two interesting things to be noted here. One, India's PMI came out be actually higher than that of China’s 53.1 in May09. And the second one is that domestic demand has been the key driving factor behind it. Exports have been on the falling spree since last eight months as the global demand has dried up completely. So hats off to India’s domestic demand which has helped Indian economy weather through these trying times.

OECD leading indicators: The OECD Composite Leading Indicators (CLIs) for India increased by 0.4 point to 93.9 in Apr09, against 93.5 in the previous month. Buy the way this was the first time in last two years when the OECD leading indicators posted an increase for India, indicating that Indian economy has hit the bottom of the economic cycle.

Industrial production turns positive: This has been the latest flavour of the month. Beating all market expectation, India’s industrial production slipped into positive territory in Apr’09. India’s IIP grew 1.4% (y/y) in Apr’09. Industrial production growth for Mar09 has also been revised upwardly to - 0.8% from -2.3% estimated earlier. Core sector also grew 4.3% in the same month. The problem regarding the industrial production being red for quite some time now seems to be subsiding.

All these indicators suggest a possible recovery going forward. However, the government still has to do a lot many things to put the Indian economy back on the high growth trajectory. Let’s wait for the budget, which will be presented in the first week of July’09. The government has to address many issues regarding the growth. Infrastructure should get a proper attention too. At the same time the government will have to maintain a fiscal balance as well. Let’s hope the government will be able to manage it well.

Indian Economy: Where does it go from here?

At a time when most countries around the world are witnessing the worst slump in more than six-decades, India is still growing at the fastest pace after China. Though we are not able to continue with the 9% plus growth rate as seen in the last three years, a 6% plus kind of a growth is very impressive considering the difficult times the global economy is going through. Indian economy grew 5.8% annually in the final quarter of fiscal year 2008-09, which is much better than expected. To make it sound better, the third quarter growth has been revised upward to 5.8%, from 5.3% estimated earlier, taking the overall growth rate to a respectable 6.7% for the whole year.

Now, this is not the end of it. This gives birth to a very important question. And that question is weather the worst is over for the Indian economy. Let me park this question for a while and put some facts about the global economy first. Well, I may sound a tad harsh to say that the global economy is poised to see an excruciating year ahead. No matter how much we speak about the signs of economic revival globally, the fact is that the job losses haven’t stopped yet. International trade has seen a nose dive in last 8 months, forcing units to halt production, more job losses, further slump in consumer demand, leading to even lesser trade... more job losses... It’s a vicious circle. The global economy needs to come out of that and it doesn’t happen over night. So the global economy is here to face the worst recession since my grandfather was born.
Hmmm, after all that gloomy tour of the world economy, let’s come back to India. Well, I feel proud to say that it seems that the worst is over for the Indian economy. And there are umpteen reasons why it seems so. The first reason is that India is not an exports driven economy. Exports contribute merely 13.5% to India's overall GDP whereas Chinese exports contribute more than 35% to its GDP.

At the domestic front, consumer demand has improved significantly in the month of Aril and May. At a time when urban demand slowed down in the wake of financial crisis, buoyant demand from rural India provided the necessary fuel to India inc’ to weather economic slump. Be it auto-mobile or cement industry, sales have gone up in last two months. Passenger car sales rose over 4% (y/y) in April, following 1% rise in March. Cement dispatches have also been robust in last two months. Steel and electricity have not been behind either. The telecom sector has been adding 10 million plus mobile subscribers to its kitty and will soon cross the 400 million mark as the total subscriber base. FMCG sector has seen around 15% growth in last quarter. So it’s the rural India which has kept the Indian flag high in the sky.

On top of everything else, the best thing that happened to India is the unexpected outcome of the general election. Beating expectations of a hung parliament, which could have been a bizarre for Indian economy, Indian people have given a decisive mandate to the Congress-led UPA. Our Prime Minister Dr. Manmohan Sing has said that he will fix the economy in 100 days, and I don't doubt his capabilities seeing his proven track record.

All these factors suggest that India has managed to jump out of the lurch. The fiscal bill for the current financial year, which is expected in the first week of July, could also though some positive surprises for the Indian economy. Therefore, I can afford to say that the worst is over for Indian economy and we are heading towards a whopping 10% growth rate somewhere around fiscal year 2012. So what are you waiting for? Cheer up!