Economy Report August 2009

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MAIA FINANCIAL SERVICES PVT LTD

ECONOMY 360 DEGREES INDIA: AUGUST 2009 JULY 2009

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Economy Report: Index 1) Market Pulse ……………………………………………….2 a. Market View as per Business Cycle…………………2 2) Economic Indicators a. GDP growth and its projection………………………3 b. Credit growth…………………………………………..3 c. Money supply………………………………………….4 d. Interest rates……………………………………………4 e. Yeild curve……………………………………………..5 f. Corporate Bond spreads……………………………....6 g. 10 year governement bond yeild………………………7 h. Inflation and its projection……………………………..8 i. Core Infrastructure Industry……………………………9 j. IIP………………………………………………………….9 k. Business Confidence…………………………………….10 3) Economy Pulse………………………………………………….10

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Market Pulse: Market View as per Business Cycle In our previous report for the month of July, we had stated that we would be witnessing a 15-20% correction from the levels of June and one should be buying once the correction gets over. We saw the markets fall from the June high of 15600 to 13219 which is equivalent to a 15% correction. Indian equity markets have witnessed a 59% rally YTD, supported by a broad-based domestic recovery, global stabilization and improving risk appetite. The trend has been a little volatile in the last month, with a 15% pullback witnessed from the June peak and a strong rebound thereafter. We expect markets to remain volatile and witness these short pullbacks in line with global market trends. These should provide entry opportunities for long-term investors. We recommend adopting an “add on dips” strategy and increasing core equity exposure.

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Economic Indicators GDP growth and its projection The deterioration in the global outlook that started in September 2008 continued in the second quarter of 2009, although some tentative signs of stabilisation have begun to emerge. Reflecting the continued decline, the IMF in its July Update of the World Economic Outlook (WEO) has projected that the global economy will shrink by 1.4 per cent in 2009. In the US, real GDP declined at an annual rate of 5.5 per cent in Q1 of 2009, driven mainly by a decline in consumption and exports. The IMF’s July WEO Update has projected real GDP of the US to shrink by 2.6 per cent in 2009, a slight improvement from a contraction of 2.8 per cent projected in the April WEO.

Credit growth: Credit growth continued to be subdued at 16.3% y-o-y, lower than 25.5% recorded in the corresponding period in FY09. However, the RBI has maintained its projection for a 20% credit growth in FY 10. As a result of continued deposit growth and subdued private sector credit demand, bank’s investment in government securities increased to 30.5% of their Net Demand and Time Liabilities 4

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(NDTL), well above the 24% required. Due to weak private sector credit demand and liquidity injection by the RBI, there has been ample liquidity in the banking system.

Money Supply M3 growth remained high at 20% y-o-y, driven by a 21% 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. Interest rates Since mid-September 2008, the Reserve Bank has reduced policy rates significantly: the repo rate by 425 basis points and the reverse repo rate by 275 basis points. The CRR was also reduced by 400 basis points. Taking cues from the reduction in the Reserve Bank’s policy rates and the easy liquidity conditions, all public sector banks, most private sector and foreign banks have reduced their deposit and lending rates. The reduction in term deposit rates between October 2008 and July 20,2009 has been in the range of 125-325 basis points by public sector banks, 100-375 basis points by private sector banks and 125-300 basis points by major foreignbanks. 5

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Yeild Curve: The yeild curve is upward sloping and hence at this point of time there is no cause of worry.

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Corporate bond spreads:

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As can be ssen from the above figure that the cost of doing business is going down. The spread between a AAA rated 1 year, 5 year and 10 year corporate bond and that of 1 year, 5 year and 10 year rated government bond is narrowing. This represents improved confidence and will prove very good for corporates going down the line as their cost of borrowing is getting lower. 10 year Government Bond Yeild

Inflation: RBI has upped its March 2010 end inflation target to 5% from 4% earlier, in view of the recent rise in global commodity prices and expected domestic demand-supply conditions. Pressure on food prices are likely to sustain due to poor monsoon this year. However, availability of large buffer stocks of food grains with the government and the likelihood of release of government stocks in the open market will help prevent significant rise in prices. Over the medium term, RBI expects to manage inflation expectation at 4.0%-4.5% and 3% in the long term. Overall due to inflation fears it is very likely for RBI to start raising interst rates by December 2009.

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As can be seen from the above figure WPI is in negative but CPI is still holding firm at 9%. Business Confidence: The Industrial Outlook Survey of the Reserve Bank, conducted during April-May 2009, shows a turnaround in the business sentiment. The assessment for Q1 of 2009-10 suggests that the slide in sentiment in the preceding three quarters has been arrested on key indicators such as production, order book position, capacity utilisation, financial situation and availability of finance. The business expectation index (BEI) for the forward July-September 2009 quarter crossed the neutral 100-mark and moved into the growth terrain on the perception of improvement in demand conditions. The Survey indicates that during Q2 of 2009-10, businesses expect improvement in capacity utilisation as also increase in both input and output prices, returning some pricing power to them. While there is a moderation of investment intentions in 2009-10 vis-à-vis 2008-09, capital investments by big companies are expected in food, rubber, paper and cement groups. Core Infrastructure Industries: The Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) with base 199394 stood at 251.6 (provisional) in June 2009 and registered a growth of 6.5% (provisional) compared to a growth of 5.1% in June 9

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2008. During April-June 2009-10, six core industries registered a growth of 4.8% (provisional) as against 3.5% during the corresponding period of the previous year.This growth was led by growth in electricity, cement and coal. The revival in cement production indicates revival of construction activity, led by government infrastructure spending. IIP:

Industrial Production, which had decelerated significantly to 0.1% in Q4FY09, also bottomed out in Q1FY10. IIP grew at an average rate of 1.9% in April and May 09. 10 out of 17 two digit manufacturing industry groups have registered a positive growth rate. Industrial Production faces problems from weak external demand. The acceleration in intermediate goods and consumer durables production indicates a recovery in industrial production. However, the decline in capital goods and consumer non durables production remains a matter of concern. Improvement in capital goods production remains a key factor to watch out as it would signal a revival of private corporate investment 10

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Economic Pulse Parameter

Indication

GDP growth

Credit growth

Type of Indicator

Good/Bad

(Coincident Indicator)

Relative Improvement in India’s GDP growth could be veryh likely be seen by 2010.

(Leading)

Bad. The credit gowth is well below the RBI’s target.

(Leading Indicator)

Good. The growth in money supply is healthy. However caution has to be adopted since this could lead to inflationary effects

(Lagging Indicator)

Good. RBI has reduced interest rates. By keeping the interest rates unchanged in the recent monetary and credit policy review it has done a good job.

(Coincident Indicator)

Yeild curve is normal which is a good sign of improvement.

Money supply

Interest rates[CRR, Reverse Repo]

Yeild curve

Repo,

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Corporate Bond spreads

(Leading Indicator)

Very Good. Spreads have been decreasing.

10 year governement bond yeild

(Leading Indicator)

Bad. Yeilds for 10 year bond has started rising

Inflation and its projection

(Lagging Indicator)

Good.

Core Infrastructure Industry

(Coincident Indicator)

Good

IIP

(Coincident Indicator)

Good

Business Confidence

(Coincident Indicator)

Good

(Coincident Indicator)

Good

Capital Flows

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For the coming August month we feel that prospects for Indian economic recovery shall improve with coordinated monetary and fiscal stimuli as well as the global economy showing Initial signs of stabilisation, albeit not recovery. We will see a full fledge recovery in Indian economy once the credit offtake takes place. As we saw from our above indicators that the credit growth is still subduded and it remains at only 16% well below RBI’s target of 20%. This indicates that corporates are even now postponing their expansion and capital expenditure plans. However the pace of decline in economic activity in several major advanced economies has slowed, frozen credit markets have come into action and equity markets have begun to recover. Recent months have witnessed industrial activity reviving in a number of emerging market economies (EMEs) such as China, Korea, Brazil and India. The IMF has revised upwards its growth outlook for India. According to the RBI, leading indicators of service sector activity, such as railway freight and new cell phone connections, have shown positive signs. Thus we expect the Indian economy to recover by Second quarter of the year 2009-10 provided global economy shows more signs of revival and recovery. However if there is a delay in recovery of global markets we expect Indian economy to recover only by 4 th quarter of 2009-10. Analyst Name:

Company Name: Maia Financial Services Pvt Ltd

Avani Mehta

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