Economy Report Nov 2009

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MAIA Financial Services Pvt Ltd

MAIA

FINANCIAL

SERVICES

PVT LTD

ECONOMY360DEGREES

INDIA:NOVEMBER 2009


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Index

1) Market View .2) Economic Indicatorsa. 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 yieldh. 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 . Mostlikely 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 RBIs target of 15%.

The money supply M3 remains at 18.9%. This is higher than the RBIs expectations andestimates 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 actas 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 thecorresponding 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 Banks 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 significantlyaffect industrial and services sector.

Industry :

The Index of Industrial Production (IIP) increased at a higher rate of 5.8 per cent during April-

August 2009 as compared with a growth of 4.8 per cent in the corresponding period of theprevious 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 coreinfrastructure 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 andairports 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 demand-private 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, whichhad 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 thewake 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 netprofits 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 thebusiness 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 productionand 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 topositive 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 deficientmonsoon.

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 yearago. 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 financingwhich had almost dried up during the crisisat 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 showsthat 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 (asmuch as 80.4 per cent of the budget estimate) through dated securities during 2009-10 (up toOctober 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 agood 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 sectordropped 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 productsremained 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 thatthere 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 laterstart raising the rates

10 year government bond

yield

Leading 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 theequity 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] Address: C wing, Bsel Tech Park, Opposite

Vashi Station, Vashi, Navi Mumbai.

Contact No: 022 27810674/75/76

Disclaimer: This report is purely for information purpose only. It contains information from sources which we

believe are reliable but we do not guarantee. It also includes analysis and views expressed by our analysts. This

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information contained in this report and must make investment decisions based on their own independent inquiry,

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Economy Report Nov 2009

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