India Economic Review

Economy: Decisive election mandate: A positive surprise

* Contrary to street expectations, the decisive mandate in favour of the United Progressive Alliance (UPA) has come as a pleasant surprise. This essentially means that the new government would be more confident and stable (without the baggage of the ideology of the Left parties and reduced influence of the regional parties). Given the higher flexibility that the new government will enjoy in policymaking, the markets have started hoping for major reforms that would encourage investment in various sectors and lead to the return of capital inflows into the country.

* On April 21, 2009, the Reserve Bank of India (RBI) announced its annual policy review. The RBI announced a token cut in the repo and reverse repo rates while leaving the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged. The announcement was in line with our expectations and highlighted the central bank’s decision to wait for the realisation of the fuller impact of the past measures while stressing the need to bring down the lending rates. The FY2010 macro aggregate estimates now stand at: Gross domestic product (GDP) growth of 6%; inflation at 4.0% by March 2010; credit growth of 20%; deposit growth of 18%; and money supply (M3) growth of 17%.

* India’s trade deficit declined sequentially to USD4.05 billion in March 2009 from USD4.91 billion in the previous month. The trade deficit for March 2009 declined (for the third consecutive month) by 36.0% year on year (yoy) and by 17.6% on a month-on-month (m-o-m) basis. With this, the trade deficit for FY2009 has widened to USD109.0 billion from USD81.2 billion in FY2008.

* In March 2009, the industrial production growth contracted sharply by 2.3% yoy, the steepest contraction in the past one and half decade. Importantly, the Index for Industrial Production (IIP) figure for February 2009 has been revised upwards to indicate a decline of 0.7% yoy against a drop of 1.2% (provisional) earlier. The fall in the industrial output was led by a strong year-on-year (y-o-y) decline of 3.3% and that of 8.2% in the output of the manufacturing and capital goods segments respectively. For FY2009, the IIP growth stood at 2.4% and was significantly weaker compared with the 8.5% growth achieved in the previous year. Though there has been some pick-up in the overall industrial activity, the high base of the previous year has had its bearing on March 2009 figures. Even though the recent uptick seen in the automobile sales, cement dispatches and steel production sustained in April 2009 as well, we believe there is still some time to conclusively term this uptick as a revival in the overall industrial activity.

* After falling sharply to 0.18% in the previous month, the inflation rate inched up to 0.48% for the week ended May 02, 2009. The gradual decline in the inflation rate follows its rise to a record high of 12.91% in August 2008. However, on a week-on-week (w-o-w) basis, the inflation rate has inched up by 0.4% on the back of higher food prices and higher inflation in primary articles. The inflation rate is near zero levels and we believe it is likely to enter the negative territory in the coming few weeks as the high base effect comes into play.

* Globally, the real economies showed some early signs of revival during the last month. There has been some pick-up lately in some of the indicators, like the housing start-ups, new home sales, the Purchase Managers’ Index (PMI) Manufacturing Index. Though the pace of deterioration has slowed down, the trend has not reversed completely as head winds persist (read more under “Global round-up”).

Banking: Credit growth remains subdued

* The non-food credit growth (as on April 24, 2009) improved to 18.1% yoy from the 17.5% y-o-y growth seen a month ago. The deposit growth improved to 22.5% yoy in April from the 20.0% y-o-y growth registered in the previous month. The central bank targets a 20% credit growth and an 18% deposit growth in the current fiscal.

* The deployment rate (ie the credit-deposit [CD] ratio) dipped to 68.6% in April 2009 vs 71.1% in the previous month. Similarly, the incremental CD ratio too fell to 57.2% from 63.7% in the previous month.

* The M3 growth rate increased to 20.8% as on April 24, 2009 compared with 18.6% on March 27, 2009. For FY2010, the RBI targets a 17% growth in the money supply and the target is largely in line with the growth seen in the previous year.

* Yields on government securities (G-Secs) cooled off a bit in May 2009. After touching a high of 7% in March 2009, the ten-year G-Sec yield stood at 6.41% as on May 15, 2009. We expect the movement in the bond market to remain volatile on the back of the recent government-borrowing plan.

Equity markets: Volumes take a breather

* Since March 2009, the strong rally in the broader markets has boosted the volumes in the equity markets. In April 2009, the average daily volumes in the futures and options (F&O) and the cash segment were higher by 29.5% and 53.5% respectively as compared with the levels seen in the previous month. Meanwhile, during the MTD period in May 2009, the average daily volumes fell by 21.4% in the F&O segment while it remained flat in the cash segment. For May 2009, the MTD fund flows indicate the foreign institutional investors (FIIs) as well as the local mutual funds (MFs) have remained net buyers.

* The total assets under management (AUMs) for the MF industry registered a strong 11.7% sequential increase. However, on a y-o-y basis, the total AUMs for the MF industry fell for the seventh consecutive month (albeit at a slower pace) by recording a 3.3% decline in April 2009 and stood at Rs552,006 crore.

Insurance: Premium contraction slows down

* In March 2009, the annualised premium equivalent (APE) for the life insurance industry declined by 11.0% yoy, slower compared with the 23.7% y-o-y decline in the previous month. The APE for the private players fell by 15.7% yoy, continuing its declining trend for the fifth consecutive month. For Life Insurance Corporation of India (LIC) it fell by 4.6% yoy.

* In the non-life insurance business, the gross premium underwritten for the industry registered a growth of 7.6% yoy in March 2009. The growth in the gross premium underwritten of the public sector players increased to 10.5% yoy, while for the private sector players it increased by 3.0% yoy.