Oct 31, 2006|
Economy: Ready for Reddy?
As a precursor to the mid-term review of the monetary policy for 2006-07, the Reserve Bank of India (RBI) yesterday released its view on the macroeconomic and monetary developments in the Indian economy in this fiscal so far. Here are some of the key highlights of the report from the central bank, which does give some sort of a hint as to what stance would the Governor, Dr. Y.V. Reddy take with respect to interest rates as he outlines the mid-term review of the annual policy in some hours from now.
On real economic performance
The RBI has indicated sustained buoyancy in the Indian economic performance, citing the Central Statistical Organisation's (CSO) estimates of an 8.9% YoY growth in real GDP during the first quarter of the fiscal (April-June 2006). This performance is 40 basis points (0.4% higher than the GDP growth recorded during the first quarter of FY06, and is indicative of the strong momentum of the Indian growth engine, which is being driven largely by strong performances of the manufacturing and service sectors. The central bank expects the growth momentum to continue in the remainder of FY07.
Index of Industrial Production (IIP), the barometer of industrial growth in the economy, has grown at a strong rate of 10.6% YoY during the April to August 2006 period. Remarkably, this is the highest growth recorded during the April to August period during the past decade. The RBI had noted that the manufacturing sector, which has posted a growth of 11.8% YoY, also the highest in the last decade, has been the main driver of the industrial activity.
The RBI report also talks of continued strong momentum of the services sector, with the same registering a growth of 10.5% during 1QFY07 (10.1% in 1QFY06).
On government finances
The RBI has noted that despite buoyant tax revenues during the first five months of this fiscal, the situation on the fiscal deficit front remain a cause of concern, largely owing to substantially higher expenditure. While tax revenues have been buoyant on the back of higher collections under personal income tax, corporation tax and customs duties, the aggregate government expenditure has risen largely on account of sharp rise in revenue expenditure, while the more critical capital expenditure has declined on a YoY basis.
The RBI has indicated that the Central government's net market borrowings during FY07 (up to October 23, 2006) already amounts to 58% of the budget estimates (against 52% for the same period in FY06).
On liquidity and monetary conditions
The RBI has indicated a comfortable liquidity position in the economy, citing the fact that sustained growth in bank credit (30% YoY growth in non-food credit) has been well supported by strong acceleration in deposits (money supply has increased by 19% YoY compared to 17% YoY during the same period in FY06) during the fiscal so far.
The central bank has indicated that inflation has largely remained contained during FY07 so far, largely helped by its pre-emptive monetary and fiscal measures. It must be remembered that while the RBI had kept rates stable during its April annual monetary policy announcement in April 2006, it raised the benchmark repo and reverse repo rates first in June (following similar rate hikes in several emerging markets like Turkey, Thailand and Korea) and then in July (as part of the first quarter analysis of the annual policy). In raising these rates, the RBI cited global concerns on inflation to be the main driver behind its actions. Even in its latest view on monetary developments in the economy, it has maintained that underlying inflationary pressures remain.
As per the central bank data, the wholesale price inflation was 5.3% on October 14, 2006, compared to 4.1% at the end of March 2006. The consumer price inflation has also remained higher, reflecting the increase in food prices at the consumer level.
So, what to expect?
The RBI's hawkish view on domestic inflation, combined with concerns on the widening current account deficit makes us expect a rate hike today as well. However, considering that the central bank's decisions to raise rates on the past two occasions during this fiscal (June and July) have been more guided by the then prevalent global economic and monetary situation rather than domestic issues, makes us expect that Dr. Reddy will not hurry up on his next move. This is especially considering the fact that the US Federal Reserve, whose steps most of the central banks follow, has stayed put on its rate hiking campaign since June 2005, stating cooling of the world's largest economy.
Hike or no hike, you as an investor need to be cautious with respect to India Inc.'s growth expectations, considering that profitability is likely to come under pressure on the back of higher interest costs on large debts taken for expansion purposes. As for banking companies specifically, a higher dependence on the interest rate cycle (by having a lower fee to fund income ratio) can prove to be a tough strategy to follow going forward. Overall, being cautious on highly levered companies (having high debt to equity ratio) can be a safe ploy. Let us now turn our ears to what Dr. Reddy says!
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
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 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
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 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
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