It may have raised interest rates but it still is pretty bullish on the country's growth prospects. We are referring to India's central bank, RBI. Yesterday, it hiked both short term rates as well as cash reserve ratio by 25 bps each. The move was deemed necessary to temper price expectations. But it also maintained a pretty bullish tone on the domestic economy. India's central bank believes that India can grow by 8% in FY11 and that too with an upward bias. This coming from as conservative an institution as India's central bank is indeed heartening. The banks also maintained that India must have grown in the range of 7.2%-7.5% in the recently concluded fiscal.
RBI has based its optimism on the improvement on the exports front and a broad based industrial recovery. Needless to say, the later also hinges a great deal on how the monsoons pan out. Thus, the progress of the monsoons is central to India achieving an 8% growth. Besides, the growth could also be at risk if commodity and crude prices harden too much, too soon. This, in a nutshell is the major problem that we have with respect to the Indian economy. On its own, it can easily grow in the region of 6%-7%. But to grow beyond that, it tends to take support of factors like normal monsoons and benign crude prices. And this is certainly not a good sign. In order to employ its millions, India will have to go quickly on a higher growth. Thus, big bang reforms and not prayers that few factors play out in its favour is the need of the hour. We wait for the day when RBI projects India's growth in the region of 9%-10% and that too, without any caveats.
Are auto's best days behind it?
Hero Honda, India's largest two-wheeler manufacturer kick started the results season for the auto industry when it announced its results two days back. And the industry wouldn't have asked for a better beginning. The company ended up posting record numbers. However, it may not be alone. Almost all the auto companies are likely to post another impressive set of numbers. And why wouldn't they? The year FY10 has given them perhaps not a single reason to complain. Demand remained buoyant, cost pressures were minimal and plants were running at near full capacity. Little wonder, the sector players made merry.
But perhaps not anymore. There are signs that cost pressures are on the rise. Commodities like steel and rubber that are key inputs for the industry have already hardened in the past few days. Infact, there are news that tyre manufacturers are contemplating a price hike so that rubber price inflation can be tackled. Soon, other component suppliers could follow suit. Also, volume growth may not be as buoyant as the recent past as factors like higher interest rates and a high base effect make their presence felt. Furthermore, most of the players may have to go in for capacity expansion, thus putting pressure on cash flows. Last but not the least, current valuations do not seem to be incorporating a fair degree of margin of safety in them. In other words, they do look expensive on a historical basis. This thus begs the question, are auto's best days behind it or the industry could spring some positive surprise in the quarters to come. Well, only time will tell.