Jul 6, 2007|
Economy: Will it be a smooth landing?
After the blazing FY07, the economic slowdown in FY08 has been a view occasionally echoed by the CMIE, the central bank, corporates, bankers and economists alike. After sustaining strong growth for about nine quarters, there are clear signs that the growth trend is moderating. Higher inflation and interest rates, coupled with the rupee appreciation have only accelerated the meltdown. Infact, the key cyclical growth indicators have started reflecting the slowdown in 1QFY08 itself.
Automobile sales: The earliest indicator to reflect the slowdown has been automobile sales growth. Growth in all three segments - passenger, two-wheeler and commercial vehicles has decelerated significantly in the first quarter of FY08. Infact, the two-wheeler sales growth has been declining on a year-on-year basis for the past two months now, while passenger car and commercial vehicle sales growth have dipped to single-digit levels. This reflects the impact of higher interest rates on automobile loans as well.
Bank credit: Bank credit growth moderated to 25.6% YoY at the end of June 2007, with the deposit growth rates catching up with the same for the first time in the last 3 years. The key drivers of the slowdown have been mortgage and high-risk sensitive loans that attract high provisioning. Banks expect the loan moderation to continue in FY08 even in the absence of further spurt in the interest rates.
Goods exports: The 8.5% appreciation in the rupee against the US dollar since March 2007 (well ahead of other regional currencies) has had a telling impact on the country's exports. Sectors like textile and software, which have a huge exposure to the US currency, have largely borne the brunt of the same. The dip in India's export value, primarily on account of the appreciating rupee, has translated into a 10% to 15% dip in the realisation for most textile exporters. India's exports of textile and apparel products to the US declined 0.4% in value terms even as export volumes surged 7.5% YoY in the first half of 2007. China, on the other hand, has registered increases in both volume and value terms by 25% and 47% respectively. Other key exporting nations such as Pakistan, Sri Lanka and Indonesia, where local currencies have depreciated against the US dollar, have seen higher growth in value terms, even though export volume growth has not been significant. It is also understood that the real impact of the rupee is yet to be reflected in exports growth due to the time lag between the export orders' receipt and execution.
The landing though certain...
In addition to monetary tightening through the repo and CRR hikes, since early March, the RBI has shifted its exchange rate management approach, allowing faster appreciation of the currency. Appreciation in the exchange rate has, to an extent, been helping to reduce the overheating pressures. First, it resulted in a rapid reduction in global commodity-linked product prices (that have a 37% weightage in the WPI) in rupee terms. Second, it reduced pressure on domestic capacity utilisation, as the exports growth decelerated. Although one can argue that controlling overheating through currency appreciation will not be sustainable and the ideal outcome, considering the given mandate of achieving rapid control on inflation, the RBI has fewer options left. Having said that, the RBI policy has ensured that the real GDP growth rate is tempered in this fiscal.
...will be smooth due to the liquidity flush
The accretions to the RBI's forex assets are currently at 125% of the reserve money. With the global capital market environment remaining supportive, there is a possibility that capital inflows increase way above the average amount received over the past 12 months. Indian companies are planning fresh equity issuances worth around US$ 15 bn (excluding the recent DLF and ICICI Bank equity issuances) in the next six months. If all these equity issuances do come through and if the ECB/FCCB issuances spike up further, this would only increase domestic liquidity, challenging the RBI's efforts to slow domestic demand.
While we believe that, under such a scenario, the RBI may demonstrate its commitment to maintaining control over inflation via further tightening, the economic slowdown will not be very sudden and abrasive, due to the availability of sufficient liquidity in the medium term.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407