Yields: The market worry on expected policy tightening by RBI on the back of increasing worry of inflation, is reflected in higher government bond yields. The 10 year benchmark bond yields were at 7.35% as on 31st August 2009 and are likely to cross 7.5% levels if bond auctions continue to see weak response. The rising government bond yields will also ultimately create pressure on corporate bond yields which in turn could increase the cost of borrowing for the corporate.

Credit growth: While the growth in the non-food credit continues to be lower at 14.98%, for the week ended 14th August 2009, the deposits growth remained higher at 21.3%.This implies that the industry still hesitates in taking additional loans for their investment plans. To put the figure in context, last August i.e. in August 2008, this credit grew by 25%. The persisting softness in credit trend implies that the rate of gross fixed capital formation, which slipped to 31.6% in the April-June quarter of FY 10 from 32.4% in the corresponding quarter of last fiscal, will take longer to recover.

Also these poor figures of Credit growth are indicative of the fact that banks are reluctant to extend financial support to industries that have poor credibility due to slowdown.

Money Supply: M3 growth remained high at 20.5% y-o-y, driven by a 21.3% increase in deposits. M3 growth remains well above RBI’s revised projection of 18% y-o-y growth, which does not bode well for future inflation. Also inflationary concerns would further be elevated because the food price inflation has already reached 11% and it would be further a cause of worry because of the low rainfall.

Inflation: The food price inflation is already in double digits and remains at 10.5% currently. With lesser rainfall the threat that the inflation would be would rise further gets elevated. At the moment when economy is on the path of recovery, this kind of inflation would most likely hurt growth. Thus by September end or October when the WPI also starts reflecting the true picture and it becomes loud and clear that inflation is gripping us all, stock markets would definitely react and that reaction would lead to down move in the equity markets.

Interest rates: It is unlikely that RBI would further cut any rates with food inflation reaching double digits. Rather, to control the inflation RBI would take liquidity tightening steps which would prove not very good for the corporate sector as well as for the future growth. With 10 year government bond yield already giving us a signal of rising interest rates, it is only a matter of time when we would see the real interest rates rising.

Exports: India's exports dropped 28.4 per cent in July, the tenth straight month to record a fall. India's imports fell sharply by 37.1 per cent in July to USD 19.62 from USD 31.18 billion a year ago, largely due to a drop in crude oil prices.

Core sector: The six core infrastructure industries grew 6.5% in June on the back of a robust performance by Cement and Steel. A year ago, the Infrastructure sector had grown by 5.1% while the figure for May 2009 stood at 2.8%. Cement topped the chart with a growth of 12.8%, while Steel rose 5.3%, both crucial inputs for construction activity. Sectors like Steel and Cement are very cyclical in nature. The government’s counter-cyclical stimulus measures are showing their result by way of a pickup in construction activities. Accordingly, the industrial output figures has also improved. However this is not very great news as this might have been already factored in when we saw are equity markets rally from 8000 to 16000 levels. This is because the stock markets are leading indicators of the health of the economy.

Industrial Production: India's Index of Industrial Production grew 7.8% for this June on a year-on-year basis. Mining sector reported the highest growth rate of 15.4%, followed by electricity (8%) and manufacturing (7.3%). The cumulative growth during the April-June quarter of fiscal 2009-10 was 3.7% on a year-on-year basis.

Economic Indicators Analysis:

Courtesy: MAIA Financial Services

Indiabiznews, September 17, 2009