Economy Report Nov 2009

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MAIA FINANCIAL SERVICES PVT LTD

ECONOMY 360 DEGREES INDIA: NOVEMBER 2009 JULY 2009

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Index

1) Market View ………………………………………………. 2) Economic Indicators a. GDP growth and its projection……………………… b. Credit growth…………………………………………. c. Money supply…………………………………………. d. Interest rates………………………………………….. e. Yield curve…………………………………………….. f. Corporate Bond spreads…………………………….... g. 10 year government bond yield……………………… h. Inflation and its projection……………………………. i. Core Infrastructure Industry…………………………. j. IIP……………………………………………………… 3) Economy Pulse Analysis……………………………………….

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Market View: In our previous report for the month of October 09, we had stated that we would be witnessing a 5-10% correction. As we write this report, Sensex is at 16800 which is 5% lower than the earlier levels. We are of the view that most likely we could witness a further correction of 5-10% or so. Most likely it would be a start of intermediate downtrend. However one needs to remember that the primary trend still remains up. So for the long term investor it would time for accumulating stocks after major dips.

Our market view comes from the assessment of various economic indicators showing a negative view. The non food credit remains as low as 11.9%, which is well below RBI’s target of 15%. The money supply M3 remains at 18.9%. This is higher than the RBI’s expectations and estimates of 18%. This higher money supply growth can create inflationary problems going down the line. So we feel that RBI will start looking at lowering the liquidity on gradual basis so as to achieve price stability. This will not be good for equity markets as such and hence can act as trigger event for some intermediate correction.

Economic Indicators:

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GDP

The Indian economy posted a growth of 6.1 per cent for Q1 of 2009-10. This is higher than the expansion of 5.8 per cent in Q4 of 2008-09, but lower than the expansion of 7.8 per cent in the corresponding first quarter of 2008-09. The year-on-year (y-o-y) deceleration in growth was broad-based covering all the three major sectors,- agriculture, industry and services.

Agriculture: The rainfall this year (June - September 30) was 23 per cent lower than the long-period average, the weakest since 1972(According to the data released by RBI). Twenty three of the 36 meteorological sub-divisions recorded deficient rainfall. The entire central and northern India received deficient rainfall. The Reserve Bank’s production-weighted rainfall index for 2009 was 73, significantly lower than the index number 104 for 2008. A deficient rainfall can have a disproportionate impact on overall economic prospects. Poor output will push up prices and depress rural labour incomes. This could in turn significantly affect industrial and services sector. Industry : The Index of Industrial Production (IIP) increased at a higher rate of 5.8 per cent during AprilAugust 2009 as compared with a growth of 4.8 per cent in the corresponding period of the previous year and 0.6 per cent growth in the second half of 2008-09. While the basic, intermediate and consumer durable goods sectors witnessed higher growth, the performance of the capital goods and consumer non-durable sectors was relatively modest. The core infrastructure sector, with a weight of 26.7 per cent in the IIP, posted a growth of 4.8 per cent during April-August 2009, up from 3.3 per cent in the corresponding period of the previous year. Services:

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The performance of the services sector during April-July 2009 continued to follow the pattern witnessed in Q4 of 2008-09. Trade-related services such as cargo handled at major sea and airports continued to show negative growth reflecting contraction of trade. The number of passengers handled at international terminals increased, albeit marginally, while the number of passengers handled at domestic terminals declined. Other domestic activity related services such as communication and construction have begun to show signs of upturn. Demand components of GDP:

Continuing the trend witnessed since Q2 of 2008-09, the two major components of demandprivate final consumption expenditure and gross fixed capital formation (with a combined weight of around 88 per cent) decelerated further in Q1 of 2009-10. Government consumption, which had increased sharply in Q3 and Q4 of 2008-09 due to the fiscal stimulus measures and the Sixth Pay Commission payouts, also decelerated in Q1 of 2009-10. External demand continues to remain weak.

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Corporate performance

Sales of the private non-financial corporate sector declined marginally (0.9 per cent) in Q1 of 2009-10 on a year-on-year basis as also in comparison with Q4 of 2008-09 (1.7 per cent). In the wake of the downturn, firms responded quickly to the changed cyclical conditions by reducing their inventories around Q2 of 2008-09. Now, with the onset of recovery in Q1 of 2009-10, the upturn is characterized by an increase in the stocks to sales ratio. Year-on-year growth in net profits also witnessed a turnaround in Q1 of 2009-10 after registering negative growth in the preceding three quarters.

Business confidence The latest round of the survey conducted during July-August 2009 showed a turnaround in the business sentiment. The assessment for Q2 of 2009-10 showed continuing upturn with a 7.8 per cent increase in the Business Expectations Index (BEI) over the previous quarter. Considerable improvement was noted in key indicators such as production, order books and capacity utilisation. The financing conditions were also reported to be better. The outlook of manufacturing companies for Q3 of 2009-10 maintains its upward trend, with the BEI moving up to 116.4 from 109.9 in the previous quarter. The respondents expect production and capacity utilization to improve further, working capital finance requirement to grow, the cost of raw materials to rise and pricing power to return to them. On the back of improved demand conditions, the manufacturing companies also expect further improvement in their employment situation. Inflation:

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The headline inflation, as measured by year-on-year variations in the wholesale price index (WPI), which remained negative during June-August 2009 due to the base effect, returned to positive territory in September 2009. WPI inflation was 1.21 per cent on October 10, 2009 as compared with 11.30 per cent a year ago, and 0.84 per cent at end-March 2009. During the current financial year (up to October 10, 2009), according to data released by RBI, WPI has increased by 5.95 per cent reflecting higher food price inflation aggravated by deficient monsoon.

Credit growth Non-food credit by scheduled commercial banks (SCBs) declined significantly, with the growth rate (y-o-y) falling to 11.2 per cent this year (as on October 9, 2009) from 29.4 per cent a year ago. On a financial year basis (up to October 9, 2009) too, the growth in scheduled commercial banks’ non-food credit at 4.3 per cent is significantly lower than the growth of 10.5 per cent in the corresponding period of last year. According to data which is released by RBI, several factors have contributed to the slowdown in non-food bank credit. 1] Overall credit demand from the manufacturing sector slowed down reflecting a decline in commodity prices and drawdown of inventories. 2] Corporates were able to access non-bank domestic sources of funds and external financing – which had almost dried up during the crisis – at lower costs. 3] Unlike in the previous year, oil marketing companies reduced their borrowings from the banking sector as oil prices moderated.

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4] A significant amount of bank finance has gone to the corporate sector through banks’ investment in units of mutual funds. 5] Banks have also reined in credit to the retail sector due to the perceived increased risk on account of the general slowdown. This credit retrenchment was more pronounced in the case of foreign banks and private banks. This is evident from bank group-wise analysis, which shows that credit from private banks slowed down sharply, while that from foreign banks actually contracted. Thus, despite ample liquidity in the system, non-food bank credit expansion slowed down. Bank group wise credit and deposit

The above bank group-wise analysis, shows that credit from private banks slowed down sharply, while that from foreign banks actually contracted. Only the public sector banks have shown a credit growth of 15% that too is lower by 50% when compared to the previous year figures. Thus, despite ample liquidity in the system, non-food bank credit expansion slowed down.

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Fiscal deficit position of Central government:

Source: CSO The Central Government has already completed net market borrowing of Rs. 3,19,911 crore (as much as 80.4 per cent of the budget estimate) through dated securities during 2009-10 (up to October 26, 2009)

Yield curve

The yield curve looks to be normal. Money Supply:

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Major sources of money supply M3

The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009 remained above the indicative projection of 18.0 per cent in 2009. The main source of M3 expansion was bank credit to the government reflecting large market borrowings of the Government. 10 year government yield

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The yields are rising partly because of the borrowing programme of the Central government and partly because of the rising inflation numbers. Corporate Bond spreads: As can be seen from the charts, the bond spreads have been narrowing continuously. This is a good sign as it suggests that there is a decrease in the borrowing cost for the corporate.

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Core infrastructure industries After showing a healthy expansion of 7.1% in August, the growth in core infrastructure sector dropped to 4% in September. The coal and cement which had led the chart in August by showing an impressive growth of 12.9% and 17.6% respectively, slipped to 6.5% each in September. On year-on-year basis, the September growth this fiscal of the six sectors - cement, coal, steel, electricity, crude, oil and petroleum refinery products—remained unchanged at 4%. The index of the core industries, which account for a quarter of the industrial production, had helped the factory output reach a robust 10.4% growth in August. These figures do tell us that there is some problem with the investment and the consumption demand. Analysis:

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Economic Indicator

Type

Comment

Yield Curve

Leading

Normal.

Corporate Bond Spreads

Leading

Falling for AAA and AA rated bonds.

Inflation

Coincident

WPI falling, however CPI rising in double digits. Going down the line, would be bad for equity markets

Interest rates

Coincident

Currently stable, however indicators are signaling that RBI would sooner or later start raising the rates

10 year government bond Leading yield

Rising. With the huge government borrowing programme and inflation fears the yields have started rising. This would be bad for equity markets

Non Food credit growth

Leading

Declining. It is bad for the equity markets

CCIL Bond Index

Leading

Falling. As the yields are rising, bond prices are falling. This would be bad for the equity markets going down the line

GDP

Coincident

Growth of 6.1% for the 1st quarter of the FY10. Better than the same quarter of the previous year.

IIP

Lagging

Good. However the data for Sep 2009 which is yet to be released will surely be lower than the previous month. This

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is because the six core infrastructure industries data have been lower compared to the previous month.

Core Infrastructure Industries

Lagging

Bad. Growth lower at 4% compared to that of 7% in the previous month.

Money Supply

Leading

Higher than the target growth rate. This is however due to increased government spending and the borrowing programme.

Business Confidence

Lagging

Good.

Analyst Name: Avani Mehta

Company Name: MAIA Finacial Services Pvt Ltd

Email Id: [email protected]

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