CRISIL EcoView

EXECUTIVE SUMMARY ............................................................ 1 OUTLOOK .................................................................................... 2

INDIAN ECONOMY OUTLOOK 2010-11 ..............................

INDUSTRIAL PRODUCTION .................................................

THE EXTERNAL SECTOR ........................................................ 10

INFLATION .................................................................................. 11

MONEY AND BANKING ......................................................... 13

MARKETS ..................................................................................... 15

GLOBAL ECONOMIC OUTLOOK ......................................... 18

March 2010

E I I

conomic Research

A monthly review and analysis of key macro-economic parameters along with outlooks on drivers of the economy, presented by CRISIL's team of renowned economists. Periodic outlooks and views on key regulatory and policy announcements, besides regular in-depth analysis of key themes also form part of this document, titled 'CRISIL EcoView'.

ndustry Research
An annual service on 47 industries, our Industry Research Service offers a detailed analysis of the market, factors impacting performance, players and outlooks on the performance and profitability of sectors.

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Covering 135 industries, CRISIL Industry Risk Scores capture the influence of industry variables and the extent of their impact on cash flows and debt repayment ability of companies in an industry over a short-to-medium term horizon. These scores are accessed by a large numbers of banks and corporates to assess industry risks while evaluating the performance of companies.

Overview
Cautious optimism as the economy prepares to lift We believe that growth will accelerate to 8.0 per cent in 2010-11 if the monsoons stay normal. The partial withdrawal of fiscal stimulus will not derail the economy. We are surrounded by ample good news as we step into the fiscal year 2010-11. Industry has rebounded sharply and exports have turned positive. Private consumption is picking up and more importantly investment is showing signs of resurgence. The global environment has improved beyond initial expectations with Asia leading the rebound. The optimism is evident in budgetary expectation of 8.5 per cent GDP growth in 2010-11. Is it time to fasten seatbelts? The most worrying aspect of this otherwise fast improving economic outlook is faster than expected pick up in inflation which is now a serious concern. The consumer price inflation has been in double digits since the beginning of 2009 and Wholesale Price Index (WPI) based inflation is fast approaching double digits. Till recently, the pressure on inflation has been largely limited to food items. This was due to a supply shock to agriculture. Not anymore. Recent evidence shows inflationary pressures are spreading beyond food items. The raw material prices/commodity prices have also posted a significant rally recently. This has the potential to further pressurize inflation if demand accelerates and monetary conditions stay easy. This months theme highlights inflation as a potential threat to recovery. So far the exit from accommodative monetary policy has been calibrated to ensure that it does not jeopardize the recovery. Further surprise on inflation can force the RBI to press the interest rate pedal a little harder creating a speed-bump for the economy. In the coming year borrowings requirements of the private sector too are expected to pick up. As RBI will withdraw liquidity and raise interest rates, the high borrowings needs of government will pressurize yields and can also crowd out of private borrowers. By targeting a lower deficit, government has certainly begun the process of fiscal consolidation. Disinvestment and 3G auctions bring in revenue windfall of Rs 75000 crores in 2010-11. And there are savings on bank loan write-off and pay commission arrears expenditures which no longer need to be provisioned in 2010-11. All this has helped the government to bring down the fiscal deficit to 5.5 per cent of GDP without much effort. But going ahead this windfall will be absent. The target reduction of fiscal deficit to 4.1 per cent of

Dharmakirti Joshi Sunil K. Sinha Vidya Mahambare Manoranjan Pattanayak Poonam Munjal Radhika Anand Parul Bhardwaj Hriday Kant

Principal Economist, CRISIL Senior Economist, CRISIL Senior Economist, CRISIL Economist, CRISIL Economist, CRISIL Economist, CRISIL Economist, CRISIL Economist, CRISIL

GDP by 2013 is riding on high growth expectations. In my opinion without successful implementation of GST and expanding the net of taxation and expenditure reforms, meeting the targets will be challenging. Further downside risks on the global front still prevail. Despite loads of good news, economy faces some headwinds which will test the resilience of the economy and skills of policy makers as we enter 2010-11.

Contact Details:
Email: research@crisil.com Mumbai: +91 (22) 3342 8000 Delhi: +91 (11) 4250 5100
Dharmakirti Joshi Principal Economist, CRISIL

March 2010

Executive Summary
Economy Outlook 2010-11
The economic recovery in 2009-10 was supported by the large monetary and fiscal stimulus. The focus now shifts to private consumption and investment demand as major drivers of growth for 2010-11. We expect the economy to grow at 8.0 per cent in the next fiscal, with rising inflation and upward moment in interest rates posing key risks to growth.

Credit off-take continues to improve

Bank credit grew by 15.1 per cent y-o-y as of February 12, 2010, a significant improvement over the lowest of 9.8 per cent in November 2009. Despite the CRR hike, liquidity condition remains comfortable due to completion of the government's market borrowing programmes for 2009-10. The moderation in deposits and pick in credit is leading to an increase in the credit-deposit ratio.

Industrial growth at 15-year high Rupee stabilizes amidst reduced volatility

Industrial growth rose sharply to nearly 17.0 per cent in December 2009, with the manufacturing sector growing at 18.5 per cent. Industrial growth is expected to remain robust in the coming months, given that consumer goods and capital goods industries have been expanding at nearly 46 per cent and 38.0 per cent, respectively. The Indian Rupee was traded in a relatively narrow range in February 2010, with the average Rupee-US$ exchange rate for the month at 46.3. The currency has now appreciated by nearly 9 per cent y-o-y, and is expected to strengthen further, going forward, on the back of higher inflows of foreign investment. The growing current account deficit as well as capital outflows on account of ECB repayments could, however, exert downward pressure beyond next few months.

International trade gains momentum

Merchandise exports and imports grew by 11.5 per cent y-o-y and 35.5 per cent y-o-y, respectively, in January 2010. The turnaround in trade is the result of the low base of last year as well as improved global economic conditions. The rise in commodity prices has led to escalation in the import bill. Going forward, trade growth is expected to remain buoyant as export demand improves and increased domestic activity pushes up import demand.

10-year G-secs yields on rise

The 10- year g-sec yield was on the rise in February and closed the month at 7.86 per cent. Although net government borrowings scheduled for 2010-11 were lower than expected, an increase in inflationary expectations on account of rising food inflation as well as a hike in retail petrol and diesel prices kept the yields on the benchmark paper high. Corporate bond yields also rose following a rise in the risk-free rate.

Inflation continues to soar

The WPI inflation surged to 8.6 per cent in January 2010. Low base and rising food as well as commodity prices would continue to exert upward pressure on inflation in the coming months. Manufacturing inflation has also crossed the 6.5 per cent mark, fuelling expectations of an interest rate hike by the RBI in the next monetary policy announcement. Nonetheless, the average WPI inflation for 2009-10 should remain muted at around 3.5 per cent

March 2010

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CRISIL EcoView

Outlook
2010-11

2010-11 Growth Agriculture Industry Services Total 5.5 8.6 8.4 8.0

Rationale With private demand expected to pick up in FY11, industrial production growth should remain buoyant. Under the assumption of normal monsoon, agriculture would grow at a rate higher than its trend due to the low base of FY10. The service sector would continue to grow robustly, albeit with marginal slowdown due to a significant reduction in government expenditure reflected in a decline in growth rate of personal and community services. Headline inflation is expected to stay elevated at least in the first half of FY11, due to the agricultural price shock, rising commodity prices and recent petrol and diesel price hike. However, in the latter half of the fiscal , the year-on-year inflation is expected to come down due to high base of FY10. As growth gains further traction and inflation remains elevated, the RBI would start raising interest rates in FY11. Moreover, the large government borrowing would exert an upward pressure on yields. Additional risk to government borrowings is likely to arise from the expected revenues from disinvestments and 3-G auctions budgeted for FY11 not materializing. Foreign investments are expected to remain robust in FY11, thereby increasing the supply of US$ relative to the demand. This should enable the currency to continue on its fundamental trend of appreciation. The roll-back in tax concessions, as the government gradually withdraws the fiscal stimulus, and the sustained recovery in industry performance, is expected to result in a significant improvement in tax collections during FY11. In addition, the combined expected revenues from the disinvestment in public sector enterprises, and revenues from the auction of 3-G are expected to further inflate the gross revenues.

Inflation

WPI-Average

6.5-7.0

Interest rate

10-year G-Sec (Year-end)

8.3-8.5

Exchange rate

Re / US $ (Year-end)

43.5-44.0

Fiscal deficit

as a % of GDP

5.6

I. Indian Economy Outlook 2010-11

Introduction
There is a growing consensus amongst policymakers across countries that the world economy is on a rebound after having plummeted into a recession following the financial crisis of 2007-2009. Most economies have started to stabilise and grow after an interruption of nearly 2 years. India has emerged relatively unscathed from the global crisis, growing at 7.2 per cent in 2009-10 (Central Statistical Organisation, advance estimates, February 2010). The recovery was supported by a large fiscal and monetary stimulus. The focus has now shifted to private consumption and investment, which are being viewed as key drivers of growth in 2010-11. Against this background, the theme of this month's Ecoview presents our forecasts for GDP growth and other macroeconomic variables for 2010-11 and also outlines some potential risks to economic recovery. 2009-10 to 8.4 per cent in 2010-11 due to decline in growth of government expenditure relative to the last year. Consequently, growth in community and social services is expected to weaken despite significant additions to several infrastructure and development initiatives. In contrast, hotels, transport and communication as well as finance and real estate would expand at a faster pace as compared to 2009-10 with revival in household demand. Industrial growth is expected to maintain its performance of 2009-10 as demand, both exports and domestic, continues to rise. In the event of a normal monsoon, agriculture is expected to grow at a rate higher than its trend because of the low base of 2009-10, when the sector had contracted due to severe drought. On the demand side, investment activity should pick up with gross fixed capital formation expected to grow at 12.5 per cent in 2010-11 as compared to 5.2 per cent in 2009-10. Both improved domestic and export demand are likely to enhance business prospects, and hence, investments. With corporate profits at relatively healthy levels and improvement in other sources of external finance, the supply of funds is not expected to constrain investment growth, unless government borrowing programme goes beyond the budgeted numbers and crowd out private demand. Private consumption growth should recover to around 6.5 per cent from a mere 4.2 per cent in 2009-10, with personal disposable income
Figure 1.1: Growth in the Index of Industrial Production (y-o-y %) 7.2 -0.2 8.2 8.7 8.3 9.9 8.2 4.1 8.2 5.2 8.0 5.5 8.6 8.4 9.1 10.5 5.0 6.5 5.7 12.5
5.5 9.0 8.7 9.0

GDP growth
We expect the Indian economy to grow at the rate of 8.0 per cent in 2010-11, strengthening the recovery process which is currently underway GDP to grow at 8.0 (Table 1.1). Growth in per cent in 2010-11 the services sector, which accounts for nearly 57 per cent of the GDP, is expected to moderate marginally from 8.7 per cent in

Table 1.1: Annual growth (year-on-year) 2008-09 QE 2009-10 AE 2010-11 F GDP factor cost Supply-side Agriculture Industry Services Hotels, trade, transport and communication Finance Community and social Demand-side Private consumption Government consumption Fixed investment Source: CSO, CRISIL 6.7 1.6 3.9 9.8 7.6 10.1 13.9 6.8 16.7 4.0

2.7 2.0 FY09 FY10 * FY11 F

Note: *Average from Apr-Jan FY10

Note : QE - Quick Estimate, AE - Advance Estimate,F - CRISIL Forecast

Source: CSO and CRISIL

March 2010

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CRISIL EcoView

rising due to the new direct tax slabs announced in the budget. This along with relatively improved conditions for retail credit availability should aid household consumption growth.

Industrial production growth

In 2009-10, industrial production grew at an above average rate of 8.7 per cent despite export slowdown. A combination of excise tax reductions, rise in disposable income due to the implementation of Sixth Pay commission Industry to remain buoyant recommendat as private demand picks up ions, and increased spending on the rural economy via social schemes seems to have benefited the industry. Industrial activity is expected to remain buoyant in the next fiscal year. Capital goods is expected to benefit from an upturn in investment demand, while the consumer goods industry is likely to receive a boost owing to rise in disposable income due to the changes in personal income tax slabs. Overall, we expect IIPgeneral to grow by around 9.0 per cent in 2010-11.

influenced the movement of headline inflation. WPI inflation, which entered negative territory in June 2009, remained there for three consecutive Inflation - A potential months. Thereafter, threat to recovery the steady rise in prices of fuel and food items led to a swift pick up in inflation, which rose from 0.5 per cent in September 2009 to 8.6 per cent in January 2010.

One of the prime threats to growth in 2010-11 arises from rapidly growing inflation, especially in the first half of 2010-11, due to the agricultural price shock as well as rising commodity prices. In the latter half of 2010-11, year-on-year inflation should start to slow down in spite of demand pressures, given the exceptionally high base of this year and the prospect of favourable rabi crop. Overall, WPI inflation is expected to be around 6.5-7.0 per cent for 2010-11. Given the high base, CPI inflation, which was at an unprecedented high of 16.2 per cent in January 2010 as per the latest data, should settle between 6.3-6.8.

Interest Rates
The setting for the interest rate outlook in 2010-11 is very different from the current fiscal, except probably for higher government borrowings, which remains a feature of both. During the first half of the current
Figure 1.3: 10-year G-sec yields, year end (%)
9.0

Inflation
In the first half of 2009-10, the base effect largely
Figure 1.2: WPI Inflation (y-o-y %)
10.0 8.4

8.3-8.5
6.5.-7.0

8.0 7.6 7.4-7.6 7.0

6.0

3.5 2.0 FY09 FY10 F FY11 F

6.0 FY09 FY10F FY11F

Source: Ministry of Industry & CRISIL

Source: RBI and CRISIL

fiscal, subdued inflation and private credit demand enabled the RBI to maintain an accommodative stance to support growth. In the Government borrowings second half, the RBI may push up interest rates signaled its gradual exit from the easy monetary policy stance due to rising inflation pressures and the apparent economic recovery. More monetary tightening measures are expected, going forward, as inflation remains high and growth outlook continues to improve.

foreign direct investment remaining strong throughout the crisis. Rupee on Going forward, the Rupee is expected to strengthen appreciating trend further, supported by factors which have been explained below.

In addition, a large net government markets borrowing programme in 2010-11, albeit lower than the last year, would pressurize the g-sec yield. In case the budgeted revenues from the 3G auctions and disinvestment do not materialise, government market borrowings could increase even further. Overall, we expect the yields on the benchmark 10year G-sec to end 2010-11 at around 8.3-8.5 per cent after peaking beyond this level during the year.

Firstly, the US and other major economies are out of recession and have begun to grow. With declining economic uncertainty, the risk appetite of global investors would rise further. Secondly, given the robust performance of the Indian economy during the crisis, optimism about relatively strong mediumterm economic growth remains high. However, increased demand for dollars from oil importers, rising prices of other imports, and demand from corporates to pay back the previous external commercial borrowings should exert an opposite pressure on the Rupee. On balance, we expect the Rupee to stabilise in the range of Rs 43.5-44.0 per US$ by 2011March-end . The margin of error for the exchange rate forecast remains high in view of the continuing global economic uncertainty

Exchange Rate
Since the beginning of 2009-10, the Indian currency has appreciated from around Rs 50 per dollar to Rs 46.3 a dollar by February-end 2010. The appreciation was anticipated in view of foreign institutional investments flowing back into the country and

Fiscal deficit
On the fiscal front, better-than-expected economic

Figure 1.4: India Rs-US$ exchange rate, year-end

52.0

Figure 1.5: Fiscal Deficit as a percentage of GDP

8.0

51.0
6.7 6.0
47.0 45.5-46.0

5.5 5.6

43.5-44.0

42.0 FY09 FY10F FY11F

3.0 FY09 FY10 FY11 F

Source: RBI and CRISIL

Source: Budget Documents and CRISIL

March 2010

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CRISIL EcoView

performance in 2009-10 as well as the upward revision in the level of GDP due to the change of base year resulted in the revised estimate of fiscal deficit to GDP at 6.7 per cent, High level of fiscal a marginal improvement over deficit continues to pose the budgeted cause for concern estimate of 6.8 per cent. This deceptively reasonable performance of the government budget hides the fact that the absolute level of deficit in 2009-10 was higher by Rs 14,000 crore or 3.3 per cent than the budgeted number due to significant decline in revenue collection. Going forward, the roll-back in tax concessions, as the government gradually withdraws the fiscal stimulus, and the sustained recovery in industry performance, is expected to push up tax collections substantially during 2010-11. In addition, the combined expected revenues from disinvestments in public sector enterprises, and revenues from the auction of 3-G are expected to further inflate gross revenues. Overall, we expect fiscal deficit to GDP ratio to be around 5.6 per cent in 2010-11.

trade. From August 2008 until November 2009, exports as well as imports levels were continuously falling relative to the same period a year earlier. The downtrend only started to reverse International from November 2009 trade set to expand onwards. On the balance of payments at a robust pace basis, in the first half of the year (for which the data has been released), net services declined by 38.8 per cent. Software services, which account for a significant proportion of services, fell by 8.2 per cent to US$ 20.6 billion. The sector is likely to witness an improvement in the second half of 2010. The general improvement in tourist and business traffic and private remittances and the rebound in service sector exports, especially software services are expected to raise the surplus on invisibles account in 2010-2011.

Trade and Current account deficit

In the first 10 months of 2009-10, merchandise exports declined by 17.8 per cent as measured in current US$ due to the sharp contraction in global
Table 1.2: As per cent of GDP FY09 Merchandise Deficit Invisibles Surplus Current Account Deficit -2.4 -2.0 -2.3 7.5 6.6 7.0 FY10F FY11F

Overall, we expect the current account deficit to be around 2.0 per cent and 2.3 per cent of GDP in 2009-10 and 2010-11, respectively, with a substantial increase in invisibles surplus next year, which includes transfer payments, business, financial and software services, compensation and reinvested earnings. On the merchandise trade front, both exports and imports should pick up at a robust pace, with the latter rising comparatively faster due to increased commodity and capital goods prices. As a result,

-9.9

-8.6

-9.4

Source: RBI, CRISIL

trade deficit would worsen as compared to the current fiscal.

Summary
The CRISIL macroeconomic forecasts set out here are based firmly on our view of the fundamentals. However, we recognise that the outlook for India can alter depending on the changes in the outlook for the global economy. On the domestic front, any unanticipated sharp rise in inflation is likely to result in relatively speedy tightening of the monetary policy, which in turn, would raise market interest rates, thereby posing a downside risk to economic growth. The reassessment of the current forecasts would largely be driven by worsening of these macroeconomic risks faced by the Indian economy as compared to their current levels.

March 2010

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CRISIL EcoView

II. Industrial Production

Industrial growth surged further in December 2009 as per the recent release of index of industrial production data. Overall industrial production expanded at an impressive 16.8 per cent during the month - the highest monthly growth rate Industry posts achieved in the last 15 ye a r s . A l t h o u g h t h i s spectacular growth in December 2009 impressive growth could partly be attributed to the low base (industry had contracted by 20 basis points in December 2008), the m-o-m growth in December 2009 has also been quite encouraging. Industry grew at an annualised rate of 27 per cent rate (after deseasonalisation) in December 2009. The manufacturing sector posted impressive growth of 18.5 per cent on y-o-y basis in December 2009. Again, the m-o-m annualised growth in manufacturing after deseasonlisation works out to be 28.7 per cent. During October-December 2009, industry and manufacturing grew by 13 per cent and 14 per cent, respectively. Clearly, industrial recovery appears to be well on track, which augurs well for overall economic growth. The mining and electricity sector grew at 9.5 per cent y-o-y and 5.4 per cent y-o-y, respectively, in December 2009. 2009 as compared to 2.0 per cent in December 2008. The capital goods sector registered phenomenal growth of 38.8 per cent in December 2009. The surge in capital goods production indicates buoyancy in investment activities and the rising Capital and consumer confidence of durable goods drive investors in the e c o n o m y. T h e growth in intermediate goods use-based group sector registered double-digit growth for the fifth consecutive month, clocking 21.7 per cent in December 2009. In the consumer goods sector, the consumer durables industry grew at 46 per cent in December 2009 as compared to the contraction of 4.2 per cent in December 2008. Since the beginning of the current fiscal year, the consumer durable goods sector has been expanding at double-digit levels every month. The consumer non-durables sector, on the other hand, has expanded at a modest rate in 2009-10, growing by 3.7 per cent rate in December 2009 vis-vis 3.2 per cent rate in December 2008. Overall growth in the consumer goods segment was recorded at 12 per cent in December 2009.

In case of use-based industries, basic goods production increased at 7.5 per cent in December

The disaggregated data also appears to be quite encouraging for the month of December 2009. Out of 17 manufacturing industries, 14 registered a positive

Figure 2.1: Manufacturing Sector Growth (%)

20.0

Table 2.1: Sectoral Growth (y-o-y %)

18.5

15.0

10.0

9.0
5.0

General Manufacturing Mining Electricity Basic Capital Intermediates Consumer Goods -Durables -Non durables Source: CSO

2.7
0.0

-0.6
-5.0

FY08 FY09 Dec

June

Dec

FY09

FY10

April-Dec Weight Dec-08 Dec-092008-09 2009-10 8.7 1000.0 -0.2 16.8 3.6 9.0 793.6 -0.6 18.5 3.7 8.5 104.7 2.2 9.5 3.2 5.8 101.7 1.6 5.4 2.7 Use Based Industry 6.0 355.7 2.0 7.5 3.4 11.1 92.6 6.6 38.8 8.2 12.5 265.1 -8.9 21.7 -1.7 7.1 286.6 1.7 12.0 6.1 24.4 53.7 -4.2 46.0 4.1 1.5 233.0 3.2 3.7 6.7

Source: CSO

growth in December 2009. In sharp contrast to this, only seven industries had witnessed positive growth in December 2008. The best performing industries in December 2009 were transport 14 out of 17 industries equipment and post positive growth parts (82.2 per in December 2009 cent), machinery and equipment (44.6 per cent), basic chemicals and chemical products (29 per cent), jute and other vegetable fibre textiles (24.5 per cent) and rubber products (21.5 per cent).

December 2009, as against 10 during the same period last fiscal. All the major forward looking indicators indicate a build-up towards an upswing in the business cycle. Import growth turned positive after a gap of 12 months and clocked 27.2 per cent growth in December Lead indicators 2009. Export growth suggest sustained remained in the positive momentum territory for the second consecutive month after having contracted for 13 consecutive months. Cement production continued to increase and clocked 14.7 per cent growth in January 2010. Commercial motor vehicle sales posted 131 per cent growth in January 2010 after having registered 162 per cent growth in December 2009. Similarly, non-food credit off-take grew at 12.7 per cent in December 2009.

14

Cumulative industrial growth during AprilDecember 2009 was recorded at 8.7 per cent as compared to 3.6 per cent during the same period last fiscal. The manufacturing sector grew at 9 per cent, the mining sector at 8.5 per cent and the electricity sector at 5.8 per cent during April-December 2009. All major categories of IIP index witnessed faster growth rate on a y-o-y basis during April-December in the current fiscal. In case of use-based industries, the consumer durable goods sector clocked the sharpest growth, expanding at 24.4 per cent during AprilDecember of 2009 in comparison to 4.1 per cent during same period last fiscal. Similarly, the intermediate goods sector expanded at 12.5 per cent during April-December 2009, whereas it had witnessed contraction during the same period in 2008-09. In case of NIC-2 digit classification, 14 industries posted positive growth during AprilTable 2.2: Performers in Manufacturing Sector (y-o-y %) April-Dec Weight Dec-08 Dec-09 2008-09 2009-10 Transport Eqp Mach. & Eqp Rubber Wool Chemical Textile products Oth. Manufacturing Wood NMMP Source: CSO 39.8 95.7 57.3 22.6 140.0 25.4 25.6 27.0 44.0 -17.8 2.0 -4.8 7.7 -9.0 -0.9 21.6 -19.1 7.4 82.2 44.6 21.5 3.8 29.0 10.2 -9.4 10.4 8.2 4.0 8.3 -3.0 -0.1 2.6 4.7 1.5 -7.3 1.0 19.8 15.8 14.4 12.2 12.0 9.8 8.7 8.6 6.5

Outlook
The strong performance shown by industrial sector so far is likely to continue for the remaining months of the current fiscal on account of both - current momentum as well as low base. The recently released advance estimate of GDP by the Central Statistical Organisation of India has pegged manufacturing growth rate at 9 per cent in 2009-10.

Table 2.3: Laggards in Manufacturing Sector (y-o-y %) April-Dec Weight Dec-08 Dec-09 2008-09 2009-10 Metal Products Metal and Alloy Cotton textiles Paper Leather Beverages Food products Jute 28.1 74.5 55.2 26.5 11.4 23.8 90.8 5.9 6.4 4.1 -2.9 -1.7 -5.3 15.4 -2.5 -66.4 11.7 5.8 2.6 4.0 -0.1 0.5 -6.9 24.5 1.1 6.1 -1.1 3.4 -4.8 17.4 -0.4 -11.3 5.3 4.5 3.3 2.2 0.7 -1.3 -7.4 -15.3

Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text

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CRISIL EcoView

III. External Sector

External trade gathered further momentum in January 2010 with the improvement in the Exports continue to global demand and gain momentum credit scenario. Thus, both exports and imports posted higher growth in dollar terms as compared with the same month last year. December 2009. As a result of the sharper rise in imports, the trade deficit worsened and reached US$ 10.3 billion in January 2010. While this is similar to the levels witnessed during December 2009, it is nearly double the deficit in January 2009. During the first 10 months of the 2009-10, the trade deficit has reached US$ 86.6 billion. In rupee terms too, exports and imports exhibited similar trends during January 2010. While the export bill value increased by 4.9 per cent, the import bill value jumped by 27.6 per cent on y-o-y basis in January 2010. During April-January 2010, exports declined by 12.1 per cent (to Rs 6.3 trillion) and imports by 14.3 per cent (to Rs. 10.4 trillion) as compared to the same period of 2008-09. As a result, trade deficit contracted by 17.5 per cent and presently stands at Rs. 4.1 trillion.

In January 2010, exports have been valued at US$14.3 billion. Although this translates into 11.5 per cent growth on y-o-y basis, exports level has remained unchanged from the previous month in dollar terms. Year-on-year growth is widely expected to be positive over the remaining months of this fiscal on account of low base effect, as exports had started declining from the third quarter of the last fiscal. Imports growth also jumped to 35.5 per cent in January 2010 due to a rebound in both oil and non-oil imports. From January 2009 till November 2009, monthly imports were much weaker than those in the same period in 2008. Within imports, oil and related products were valued at US$ 7.0 billion in January 2010, which implies a yo-y growth of 56 per cent, the highest level since October 2008. Similarly, while non-oil imports jumped by 28.8 per cent on y-o-y basis in January 2010, it was about 3 per cent lower than the level in
Figure 3.1: Exports Performance (US$ bn)
200.0
162.9 168.7 131.4

Outlook
Improved global and domestic economic environment is leading to significant increase in export and import demand. Moreover, a low-base will also help y-o-y growth in external trade remain in the positive territory during the remaining months of this fiscal and thereafter.

Table 3.1: Trade Performance Jan-09 Exports Imports Oil Imports Non-oil Imports Trade deficit Exports Imports Oil Imports Non-oil Imports Trade deficit Jan-10 April-January 2008-09 2009-10

0.0 FY08 FY09

Apr May Jun Jul Aug Sep Oct Nov Dec Jan

FY10

Merchandise (US$ billion) 131.9 12.9 14.3 160.4 218.5 18.2 24.7 272.0 64.0 4.5 7.1 85.6 154.6 13.7 17.7 186.4 -86.6 -5.4 -10.4 -111.6 y-o-y % -17.8 -12.6 11.5 25.9 -19.7 -19.2 35.5 40.0 -25.3 -46.8 56.0 36.1 -17.1 -2.5 28.8 41.9 -22.4 -31.7 93.4 67.0

Source: Ministry of Commerce

Source: Ministry of Commerce

IV. Inflation
The WPI-based inflation surged to 8.6 per cent in January 2010 from 7.3 per cent a month ago and 5.0 per cent a year ago. Low base continues to be one of the main contributors to the current rise in inflation. The index grew by 0.8 per cent Headline inflation rises b e t w e e n further to 8.6 per cent December and in January 2010 January of 200910, while it had declined by 0.4 per cent during the same period last fiscal. Besides, rising prices of food and commodities exerted significant inflationary pressure. The average inflation works out to be 2.4 per cent during April-January 2009-10 as against 9.7 per cent for the same period last year. reached 14.9 per cent in December 2009. However, it decelerated marginally to 14.5 per cent in January 2010 on account of decline in prices of food articles, particularly fruits and vegetables. Inflation in fruits and vegetables fell to 8.3 per cent in January Inflation in primary 2010 from 22.4 per cent a month ago. Other articles at 14.5 per cent in January 2010 food articles, including tea and coffee, also witnessed some moderation in inflation. However, inflation in rest of the items within food articles continued to rise. Foodgrains, accounting for about one-third of the total weight of food articles, witnessed an inflation of 17.9 per cent in January 2010 as compared to 16.9 per cent a month ago and 11.3 per cent a year ago. Among other subgroups, inflation in non-food articles edged up to 10.6 per cent in January 2010 from 7.7 per cent in the previous month. Inflation in minerals continued to stay in the negative territory but increased from -4.4 per cent in December 2009 to 2.9 per cent in January 2010. The same had been at 29.3 per cent a year ago. Average inflation in primary articles stood at 9.6 per cent during April-January 2009-10 as against 10.9 per cent during the same period last fiscal.

The inflation based on Consumer Price Index for Industrial Workers (CPI-IW) continues to surge as the food prices remain at unprecedented high levels. The CPI-based inflation rose to 16.2 per cent in January 2010 compared to 13.5 per cent a month ago and 9.7 a year ago. This marks the seventh consecutive month of double-digit retail inflation. This surge in retail inflation had primarily been driven by food, which accounts for 46 per cent of the overall weight of the CPI basket of goods. In January 2010, primary articles recorded a slight moderation in inflation for the first time since May 2009. Inflation in this group had stood at 6.3 per cent in May 2009, after which it rose every month and
Figure 4.1: Headline Inflation (%)
WPI y-o-y
18.0 14.0 10.0

Inflation in the fuel group inched up to 6.9 per cent in January 2010 from 4.3 per cent in the previous month, when the group had posted positive inflation after a gap of one year. Both low base and increased prices of certain fuel items were responsible for the surge in
Table 4.1: Inflation in Major Product Groups

CPI y-o-y

Weight Jan-09

April-Jan Jan-10 2008-09 2009-10 y-o-y %

General Primary
8.4 4.7
5.0 8.6

100.0 22.0 14.2 63.8

5.0 10.7 -1.7 5.3

8.6 14.5 6.9 6.6

9.7 10.9 10.0 9.0

2.4 9.6 -5.1 2.3

Fuel Manufacturing

6.0 2.0

Contribution to inflation Primary

FY08 FY09 Jan July Jan FY10

48.9 -7.5 59.0

40.6 16.5 42.6

25.8 22.2 52.0

93.7 -46.7 53.0

Fuel Manufacturing

-2.0

FY09

Source: Ministry of Industry

Source: Ministry of Industry

March 2010

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inflation. After having remained stagnant since January 2008, the price indices of coking coal and non-coking coal rose significantly and clocked a rise of 2.2 per cent and 3.0 per cent, respectively, in January 2010. Mineral oils registered inflation of 10.3 per cent in January 2010 as compared to 6.3 per cent a month ago and -3.5 per cent a year ago. This was driven by increase in the prices of naphtha by 20.8 per cent, furnace oil by 5.6 per cent, bitumen by 3.0 per cent and light speed diesel oil by 2.8 per cent in January 2010 over respective prices in the previous month. During April-January 2010, the fuel group registered inflation of -5.1 per cent as against 10.0 per cent for the same period last year. Within the manufactured group, prices of food products continue to accelerate and push the group inflation up. The inflation for the group rose to 6.6 per cent in January 2010 from 5.2 per cent in the preceding month. Food Inflation in manufactured p r o d u c t s group continues to rise i n f l a t i o n continues to be exceptionally high at 22.6 per cent, but moderated slightly from the previous month's level on account of the high base. In the current fiscal, this is the first time in 5 months that this subgroup has registered moderation in prices as compared to the previous month. In this month last year, the food index had grown abruptly by 4.8 per cent after having dipped in the preceding 3 months. Among other subgroups,

significant contributors to the overall group inflation in January 2010 were textiles (9.0 per cent) and chemical products (8.0 per cent). In addition, prices of rubber and plastic products, basic metal and metal products and machinery and machine tools also picked up. However, non-metallic mineral products and leather and leather products exerted downward pressure. On the whole, inflation in manufactured products stood at 2.3 per cent during April-January in 2009-10 as against 9.0 per cent during the same period last fiscal.

Outlook
The continuing rise in prices of food items coupled with firm commodity prices, inflation is expected to stay at elevated level till the first half of FY11. In the second half of the fiscal year, it is likely to slow down in spite of demand pressures, due to the exceptionally high base of this year. Going forward, we expect the average inflation for FY11 to lie in the range of 6.5 to 7.0 per cent.

Table 4.2: Inflation in Primary Articles (y-o-y %) Weight Jan-09 Cereals Pulses Fruits & Vegetables Eggs,Meat & Fish Fibres Oilseeds Metallic Minerals Other Minerals 4.4 0.6 2.9 2.2 1.5 2.7 0.3 0.2 10.9 13.6 17.3 6.9 15.2 7.2 32.6 -0.3 April-Jan Jan-10 2008-09 2009-10 13.7 45.6 8.3 30.7 9.1 10.0 -4.2 12.8 8.2 5.5 8.5 4.8 24.8 16.0 47.0 16.8 13.5 27.1 12.2 19.1 -2.6 1.9 -4.7 -10.1

Table 4.3: Inflation in Manufactured Products (y-o-y %) Weight Jan-09 Chemicals Food Products Textiles Machine Tools Metal & Alloys Transport Eqp. NMMP Rubber & Plastic 11.9 11.5 9.8 8.4 8.3 4.3 2.5 2.4 2.4 6.9 10.0 2.7 7.4 2.7 1.9 2.3 April-Jan Jan-10 2008-09 2009-10 8.0 22.6 9.0 0.9 -2.6 0.2 -1.7 1.4 8.2 10.2 5.5 5.2 18.4 5.7 4.1 5.1 3.7 16.3 4.8 -1.2 -11.7 0.1 2.8 1.8

Source: Ministry of Industry

Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text

V. Money and Banking

The banking segment witnessed improved activity during January 2010, as economic recovery has begun to translate into higher credit demand. Credit growth has been increasing continuously after having fallen to a new low of 9.8 per cent on November 6, 2009. Despite the recent hike in the cash reserve ratio (CRR), the liquidity condition has remained comfortable in February 2010. For the entire month, the average daily transaction through the reverse repo window of liquidity adjustment facility (LAF) stood at Rs 811 billion. Consequently, the call rate remained closer to the reverse repo rate. As per the latest data of February 12, 2010, the yearon-year credit growth stood at 15.1 per cent. The same stood at 13.9 per cent a month ago. While nonfood credit grew by 15.4 per cent, outstanding food credit contracted by 5.4 per cent due to poor agricultural credit demand. The incremental credit growth (defined as the expansion in credit since the beginning of the financial year) stood at 9.9 per cent as against 12.3 per cent during the same period last year. Given the current momentum in credit growth, the RBI's revised projection of 16 per cent non-food credit growth for 2009-10 looks achievable. The year-on-year growth in aggregate deposits declined marginally in the month of January 2010. As per the data of February 12, 2010, deposit growth declined to 16.6 per cent from its last month's value of 16.8 per cent. The same had registered impressive growth of 21.5 per cent during the corresponding
Figure 5.1: Money Supply Growth (%)
30.0 21.2 20.0 18.4 18.9 17.2 y-o-y SA m-o-m annualised

period last fiscal. Relatively lower interest rates on banks deposits can be attributed to lower growth in aggregate deposits. Due to moderation in aggregate deposits growth and sustained rebound in credit offtake, credit-deposit ratio increased to Credit growth revives, 71.0 per cent by reflecting sustained February 12, 2010. recovery For the same period in the previous fiscal, this ratio had been marginally higher at 71.3 per cent. The incremental credit-deposit ratio (defined as the ratio of new credit disbursement and fresh deposit collected) has also gone up to 59.7 per cent on February 12, 2010, from 57.1 per cent a month ago.

The year-on-year growth in investment in G-secs and other approved securities declined to 19.3 per cent as on February 12, 2010. The same had stood at 19.0 per cent during the same period last year and 21.1 per cent a month ago. This decline can be attributed to lack of fresh supply of G-secs as the entire government borrowing for this fiscal is over. Growth in money supply, which had expanded at an average annual rate of 21 per cent in 2007-08 and 18.2 per cent in 2008-09, has declined steadily since the beginning of this fiscal. After growing at a rate of 20.2 per cent in April 2009, its growth declined to 17.2 per cent as on February 12, 2010. Among the sources of money stock, 'net bank credit to government' grew by 32.1 per cent by February 12, 2010, after having
Table 5.1: Scheduled Commercial Banking Indicators (y-o-y%) As on 13th Feb 2009 2010 Aggregate Deposits Bank Credit Food Credit 21.5 19.8 9.9 20.0 19.0 71.9 16.6 15.1 -5.4 15.4 19.3 71.0 Financial Year so far 2008-09 2009-10 15.4 12.3 6.0 12.4 20.3 59.1 12.1 9.9 -3.6 10.2 19.5 59.7

10.0

Non-Food Credit Investment

0.0 FY08 FY09 Nov FY09 Feb June Oct Jan FY10

Credit-Deposit Ratio Source: RBI

Source: RBI

March 2010

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witnessed strong growth of 40.7 per cent during the corresponding period last fiscal. Among other sources of money supply, 'Net Foreign Exchange Assets' and 'Government's currency liability to the public' grew at a slower rate of 4.9 and 8.2 per cent, respectively, causing deceleration in total money supply growth. Despite hiking the CRR by February 13, 2010, liquidity in the banking system has remained at comfortable levels. The 50 bps CRR hike absorbed approximately Rs 240 billion from the system. Consequently, daily transactions through the reverse repo window of the liquidity adjustment Despite CRR hike, call facility declined in rates remain at lower the second half of February 2010. The bound of LAF corridor average transaction through LAF window stood at Rs 650 billion, whereas the same had been recorded at Rs 975 billion for the first half of February 2010. In spite of this, there were no transactions through the repo window of LAF and call rates have remained closer to the lower bound of LAF corridor.

Outlook
With continued economic recovery, we expect the RBI's revised non-food credit growth projection of 16 per cent for this fiscal year to be achieved. Due to faster-thanexpected revival in industrial growth, we expect non food credit growth to be higher in 2010-11.

Figure 5.2: Liquidity Situation In India

2000.0 1600.0 16.0 1200.0 800.0 400.0 0.0 4.0 -400.0 -800.0 Dec Jan Feb FY09 Mar Apr May Jun Jul Aug FY10 Sep Oct Nov Dec Jan Feb 0.0 12.0
Net LAF transactions Rs bn (LHS) Call rates Repo rate Reverse repo rate

20.0

8.0

Source: CCIL & RBI

VI. Markets
Currency
In February 2010, volatility of the Rupee-US$ exchange rate declined considerably as compared to the previous month. Rupee traded between a narrow range of 46.02-46.81 per US$ during the month. Rupee-US$ rate However, the domestic stabilises in February currency continued to fluctuate significantly against the British pound and Euro. The average monthly exchange rate against the US$ depreciated slightly to 46.3 in February from 46.0 in January. account of ECB repayments and outward FDI is likely to increase demand for the US dollar This would exert depreciating pressure on the currency.
Outlook

Currency gains nearly 9 per cent y-o-y in February

The marginal depreciation in the Rupee-US$ exchange rate was largely the result of reduced foreign inflows in February relative to January. The net foreign institutional investment (FII) inflow (inclusive of debt and equity investments) declined significantly to US$ 0.8 billion in February 2010 from US$ 1.8 billion a month earlier. With the currency stabilising, the forward Rupee-dollar premia for both 6-months and 1-month dropped towards the end of February, suggesting relatively low risk of currency depreciation. The currency has now appreciated by nearly 9 per cent y-o-y. We expect the currency to appreciate further in 2010-11 with continued high foreign inflows as the Indian economy recovers and global risk appetite improves. However, the growing current account deficit as well as capital outflows on
Figure 6.1: Net FII Inflows and Exchange Rate
2.0

The Rupee stabilised, amidst reduced volatility, against the US$ in February 2010, averaging 46.3 per US$ as compared to 46.0 per US$ in January. On balance, we now expect the rupee to settle at 45.5-46.0 per US$ by March-end 2010 and at 43.5-44.0 per US$ by Marchend 2011.

Table 6.1: Currency Movement

55.0

Net FII inflow US$ bn (LHS) Rs per USD

USD

GBP

Euro

Yen

Indian Rupee vis--vis FY 08 FY 09 H1FY 09 H2FY 09 H1FY 10 January-10 February-10 1-month 6-months Source: RBI 40.2 45.9 42.8 49.3 48.5 46.0 46.3 1.9 2.5
Note: * As of 19th February 2010, # Monthly Average

0.0

45.0

80.8 78.5 82.6 74.1 77.7 74.3 72.5

57.0 65.1 65.6 64.7 67.8 65.8 63.4

35.3 46.0 40.3 52.1 50.9 50.3 51.3

Forward premia*
-2.0 04 Apr 11 Jun 15 Oct 16 Jan FY09 24 Apr 32 Jul 06 Nov 35.0 12 Feb FY10

Source: SEBI, RBI

March 2010

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Debt
The debt market outlook in February 2010 was primarily influenced by expectations from the Union Budget 2010-11, which was presented on February 26. The yield on the benchmark 10-year government paper remained at high levels Market borrowings for throughout the 2010-11 on expected lines month owing to concerns pertaining to higher government borrowings in 2010-11. However, though gross government borrowings were marginally higher in the budget, net borrowings were lower by 13.4 per cent y-o-y at Rs 3,450 billion. This was expected to soften the yields, but concerns regarding rise in domestic prices and hike in excise duty fuelled inflationary expectations, thereby maintaining the upward pressure on yields. FIIs were net buyers to the tune of US$0.7 billion in the debt market in February.

touched a 4-month high of 7.89 per cent on February 17, 2010; it closed the month at 7.86 per cent. The yield across the shorter-end of maturity curve remained elevated too mirroring the comfortable liquidity situation in the economy. Consequently, the yield curve (difference between yield on the 10-year paper and 1-year paper) steepened in the month. Corporate bond yields also rose across the yield curve, tracking the sharp rise in gilt yields. The yield on the AAA corporate bond of 10-year maturity rose to a high of 8.92 per cent during February, before closing the month at 8.88 per cent. The spread between the 10-year bond and AAA corporate bond of similar maturity marginally declined to 100 basis points in February 2010 from 110 basis points in January 2010.

Outlook
As growth gains further traction and inflation remains at high levels, the RBI would start raising interest rates in 2010-11. Moreover, the absolute level of government borrowing still remains high for 2010-11 and this compete with private borrowings as recovery takes hold. With some additional risk arising from slippage on revenues from disinvestments and 3-G auctions budgeted for 2010-11, further upward pressure on borrowings cannot be ruled out. All these factors will put upward pressure on yields this fiscal. Hence, we expect the yields on the benchmark 10-year G-sec to end 201011 at around 8.3-8.5 per cent.

With the government completing its borrowing programme for this fiscal on February 5, 2010, the yields remained in the range of 7.60-7.70 per Yields remain high cent in the first week of during February F e b r u a r y. B u t expectations of higher government borrowings in 2010-11 along with increasing inflation hardened the yields. The yield on the benchmark 6.35 per cent paper maturing 2020

Figure 6.2: 10-year G-sec yields, year end & month end (%)
9.0

Figure 6.3: Risk Premia, year end & month end (%)
Spread between AAA corporate & 10-yr G-sec

4.0
7.9

7.9
2.1 2.0 1.5
6.0

3.0

7.0

7.0

1.0

5.0 FY08 FY09 Feb FY09 Aug Feb FY10

0.0
FY08 FY09 Feb FY09

Aug

Feb
FY10

Source: CCIL

Source: FIMMDA

Equity
The domestic equity indices traded lower amidst volatility in February due to intermittent weak overseas cues and worries of monetary tightening by major global economies. As a result, the key benchmark indices the BSE Sensex and Equity market trades NSE Nifty gave lower in February negative monthly returns, while the annual return also moderated. Though the bellwether BSE Sensex, slipped below the psychological 16,000-mark in the first week of February, it was able to breach that mark again later during the month. The slippage in the market in the month was reflected in a lower average price earning multiple of 20.0 per cent as compared to 22.0 per cent in January. Weak global sentiments were mirrored in subdued FII inflows to the tune of US$0.3 billion in the equity market in February. Among other equity market developments, the much publicized followon public offers (FPOs) from state-owned companies such as NTPC and REC got lukewarm response from the retail investors.

positive response from the market, with the Sensex jumping almost 1.1 per cent from the previous day's close. The government's road-map for fiscal consolidation along with the proposed disinvestment plan of PSUs in 2010-11 is expected to act a positive catalyst for the markets, going forward. Amongst other market indices, the S&P CNX Nifty too traded lower in the month, closing the month at 4,922. The major global indices too traded lower on concerns that the recovery process would be derailed due to resumption of monetary tightening by key global economies. Market sentiments were Global equity indices further dampened b y w o r r i e s o f trade lower on worries of defaults by Euro some sovereign defaults economies such as Greece, Spain and Portugal. Japan's NIKKIE was the biggest loser among all the indices analysed, as it posted the sharpest monthly contraction of around 4.6 per cent due to a stronger yen. Going forward, the outlook for the global market will be determined by the pace of exit of the key global economies from their current expansionary monetary and fiscal stimulus.

Most key benchmark indices traded lower in February, thus posting negative monthly returns during the month. The BSE Sensex ended the month at 16,429, posting an average negative return of 6.2 per cent in the month. The Union Budget 2010-11 presented on February 26, 2010, was greeted with
Figure 6.4: Indian Equity Market Performance
Yearly returns -4.6 117.8 Monthly returns CNX Mid Cap -1.8 25.9

Figure 6.5: Global Equity Market Performance

Yearly returns Monthly returns

MSCI WORLD

-5.8 90.0

CNX 500

-3.1 35.3

S&P 500

-6.1 71.7

S&P CNX Nifty

-4.6 32.2

NIKKIE

-6.2 76.1

Sensex

-4.0 51.5

MSCI EME

Source: NSE, BSE

Note : Returns are for avg. index value for February 2010

Source: Yahoo Finances

Note : Returns are for avg. index value for February 2010

March 2010

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VII. Global Economic Outlook

Global recovery, which gathered further momentum post the third quarter of 2009, is showing signs of being a sustained process, with leading economic indicators (LEI) from advanced countries continuing to show an upward Growth prospects trend. The leading economic index of remain bright for 2010 conference board for the US has increased by 0.3 per cent in January 2010 as against 1.2 per cent in December 2009. The LEI for the UK rose by 0.4 per cent in December 2009 after increasing by 0.9 per cent in November 2009. In case of Euro Area, the index has gone up by 0.8 per cent in January 2010 after rising by 0.9 per cent in December 2009. In Asia, Conference Board's LEI for Japan has climbed up significantly since March 2009. The latest release shows that it has increased by 1.3 per cent in December 2009 and 1.7 per cent in November 2009. This clearly indicates considerable improvement in economic sentiments across the globe. fallen persistently in 2008 and up to the first two quarters of 2009. Government spending contracted by 1.2 per cent in the fourth quarter of 2009 after having increased massively till the third quarter. Investment demand has returned to positive territory, with fixed investment demand growing by 6.2 per cent in the fourth quarter of 2009. Both export and import posted positive growth in the final quarter of 2009. This augurs well for global trade. The other positive indication can be seen in the UK, where the National Statistical Office has revised the 2009 fourth quarter GDP to 1.2 per cent from 0.4 per cent in the preliminary estimate. Production industries posted a growth rate of 1.6 per cent as compared to a contraction of 4 per cent in the third quarter. Within the production sector, manufacturing output grew by 3.2 per cent in the fourth quarter of 2009 after declining by 1.2 per cent in the third quarter. However, the construction sector continues to be a laggard and contracted by 4 per cent in the fourth quarter of 2009. Service sector output grew by 2 per cent in the fourth quarter of 2009 as compared to a contraction of 1.2 per cent in the previous quarter. On the demand side, household consumption expenditure increased by 1.6 per cent and government final consumption expenditure rose by 4.8 per cent in the fourth quarter of 2009. However, gross fixed capital formation fell by 12.4 per cent
Table 7.2: Trade Balance (Billion, National Currency) Q3-09 Q4-09 2.2 -0.6 1.6 1.1 8.9 5.9 1.2 0.4 4.6 10.7 United States United Kingdom Euro Area Japan China (US$ billion) Sep-09 Oct-09 Nov-09 Dec-09 -35.7 -3.1 0.9 525.3 12.9 -33.2 -3.1 6.6 805.4 24.0 -36.4 -2.9 4.0 369.3 19.1 -40.2 -3.3 4.4 544.2 18.4 Jan-10 63.0 14.1

The fourth quarter GDP of the US for 2009 has been marginally revised upwards from 5.7 Revised GDP growth per cent to 5.9 per numbers present cent. Domestic demand grew by 5.4 improved scenario per cent, following 3 per cent growth in the previous quarter. Demand had

Table 7.1: GDP Growth (q-o-q, annualised %) 2007 2008 Q1-09 Q2-09 United States United Kingdom Euro Area Japan China* 2.1 3.0 2.9 2.4 13.0 0.4 0.7 0.8 -1.2 9.1 -6.4 -10.1 -10.0 -12.4 6.1 -0.7 -2.7 -0.4 2.7 7.9

Source: Statistical Bureau, Respective Countries

Note: * y-o-y %

Source: Statistical Bureau, Respective Countries

during the same period. In Euro Area, GDP grew by 0.4 per cent in the fourth quarter of 2009 vis--vis 1.6 per cent in the third quarter. Further, private consumption and investment demand in Euro area remained subdued, although exports showed some buoyancy due to global recovery. Among the Euro area countries, only France recorded positive growth. While Germany stagnated, Italy and Spain witnessed contraction in the fourth quarter of 2009. China continues to surpass expectations and managed to grow at 10.7 per cent in the fourth quarter of 2009 after expanding by 8.9 per cent in the third quarter. In 2009, the primary industry grew by 4.2 per cent, secondary industry by 9.5 per cent and tertiary industry by 8.9 per cent. Going ahead, economic activities in China are expected to gather more speed. This is evident from the fact that the business climate index in December 2009 has posted 20 per cent annualised growth. Industrial output and retail sales grew by 18.5 per cent and 17.5 per cent, respectively, in December 2009. The other Asian giant, Japan grew by 4.6 per cent during the fourth quarter of 2009, primarily due to strong growth in exports. Private consumption grew by 2.8 per cent and government consumption by 3.2 per cent in the fourth quarter of 2009. This is a substantial improvement over the previous quarter. Trade deficit has further widened in the US to $ 40.2 billion during December 2009 from $36.2 billion in November 2009, due to the goods deficit increasing to
Table 7.3 Consumer Price Inflation (y-o-y %) Oct-09 Nov-09 United States United Kingdom Euro Area Japan China -0.2 1.5 -0.1 -2.5 -0.5 1.8 1.9 0.5 -1.9 0.6 Dec-09 2.7 2.9 0.9 -1.7 1.9 Jan-10 2.6 3.5 1.0 -1.3 1.5

$51.8 billion and services surplus decreasing to $11.7 billion. The good news, however, is that the y-o-y trade contraction, which had been ongoing for the past 13 months, has finally ended in Japan's trade surplus December 2009. shrinks during Exports were up by 7.4 January 2010 per cent y-o-y and imports were up by 4.6 per cent y-o-y in December 2009. In the UK also, trade deficit has widened, albeit marginally, to 3.3 billion in December 2009 from 2.9 billion in November 2009. The goods deficit was at 7.3 billion in December 2009 as compared to 6.8 billion in November 2009. Trade in services registered a surplus to the tune of 4.0 billion in December 2009 as compared to 3.9 billion in November 2009. Euro Area witnessed positive trade balance and registered a surplus of 4.4 billion during December 2009, up from 4 billion in November 2009. On a y-o-y basis, however, exports contracted by 1 per cent and import by 6 per cent in December 2009. On a cumulative basis (JanuaryDecember), exports and imports show a contraction of 18 per cent and 22 per cent, respectively, in 2009 over 2008. Japanese trade surplus declined to 63 billion in January 2010 from 544 billion in December 2009, primarily because exports contracted by 9.4 per cent in January 2010 from December 2009, while imports contracted by only 0.6 per cent. On a y-o-y basis, however, Japanese exports and imports grew at a robust rate of 40.8 per cent and 9.1 per cent, respectively, in January 2010. China registered a trade

Table 7.4: Policy Interest Rate (End of Month %) Nov-09 United States United Kingdom Euro Area Japan China 0.0-0.25 0.5 1.00 0.1 5.3 Dec-09 Jan-10 Feb-10 0.0-0.25 0.5 1.00 0.1 5.3

0.0-0.25 0.0-0.25 0.5 1.00 0.1 5.3 0.5 1.00 0.1 5.3

Source: Statistical Bureau, Respective Countries

Source: Statistical Bureau, Respective Countries

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surplus of $14.1 billion in January 2010, down $4.3 billion as compared to the previous month. Both exports and imports have contracted in January 2010 as compared to December 2009. However, on y-o-y basis, exports grew by 21 per cent and imports by 85.6 per cent in January 2010. This is the second month in a row when both exports and imports have registered positive growth after having contracted for 13 months in a row. Headline inflation in the US came down marginally to 2.6 per cent in January 2010 from 2.7 in December 2009. However, energy prices shot up by 19.8 per cent January 2010. Japan still under As a consequence, transportation prices deflationary phase rose by 14.8 per cent. In case of food and housing, prices fell by 0.2 per cent and 0.6 per cent, respectively, in January 2010. Core inflation (excluding food and energy) declined marginally (-0.1 per cent m-o-m) for the first time since 1982. Hence, the core inflation dropped to 1.6 per cent in January 2010 from 1.8 per cent in December 2009. In case of the UK, consumer price based inflation rose sharply from 2.9 per cent in December 2009 to 3.5 per cent in January 2010. The price rise was quite high in case of industrial goods (3.5 per cent) and transport services (11 per cent). The core inflation was at 3.2 per cent in January 2010 in comparison to 2.8 per cent in December 2009. Prices did not rise to the same extent in the Euro Area in January 2010, and only went up by 0.1 percentage

points from 0.9 per cent in December 2009. However, energy prices rose at a faster rate of 4 per cent in January 2010. In contrast, core inflation was at only 0.9 per cent in January 2010 vis--vis 1.1 per cent in December 2009. Inflation in Japan continued to stay in the negative territory as prices fell by 1.3 per cent in January 2010. We expect Japan to go through this deflationary phase for some more time before it registers positive price movement. As the economic recovery becomes more entrenched and broad based, central banks across the globe are initiating calibrated steps to unwind the Monetary policy to loose monetary stance shift towards undertaken to fight tighter stance recession. Also, inflationary pressure is gradually building up due to the expected rise in energy prices.

The US has maintained the Fed funds rate at 0-0.25 per cent; however, it has raised the discount rate by a quarter point to 0.75 per cent. While mild recovery in market conditions has enabled the central bank to take this step, the larger goal is to encourage financial institutions to rely on private funding for short-term credit. In the recently held FOMC meeting, the Fed has taken decisions to close Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the
Figure 7.2: Commodity Price Movements
m-o-m y-o-y

Figure 7.1: Europe Brent (US$ per barrel)

80.0 73.35

48.0 -8.6

Aluminium

60.0

35.7 7.5 17.1

43.32

Steel

-1.2 -14.0 -3.6

Soya Oil

35.0

Feb-09

May09

Aug 09

Sep-09

Feb-10

Wheat

Source: Energy Information Administration

Source: Metal Bulletin, FAO

Term Securities Lending Facility. Also, the Fed is going to wind down its Term Auction Facility. On the other hand, the Bank of England has maintained a status quo on both policy rates and quantitative easing programme in the MPC meeting held in February 2010. As in the past meeting, it reviewed the inflationary scenario and negated any overwhelming risk of inflation as it is below the target over the forecast period, and therefore, did not relax the policy stance. Also, the MPC did not favour any further expansion of the asset purchase programme. The European Central Bank (ECB) has also preferred to maintain the benchmark interest rate at 1 per cent in its February 2010 meeting. However, ECB has started to phase out its non-conventional lending measures and it has reduced the frequency and maturity of its open market operations. China's central bank, the People's Bank of China has further raised the bank reserve requirement to 16.5 per cent, effective from February 25, 2010. This is the third move of China's central bank to tighten the monetary policy stance after having eased it post June 2008. The risks emanating from further rise in inflation and asset price bubble in view of GDP growth crossing 10 per cent in the fourth quarter of 2009 prompted the central bank to take such an action. The base lending rate, however, remained unchanged at 5.3 per cent.

Commodity Price Movement

The volatility in oil prices somewhat softened in February 2010 as compared to the previous month. After crossing $80 per barrel during the first week of January 2010, crude prices moderated to $69.5 per barrel on February 8, 2010. Prices have again climbed to $76.6 per barrel as on February 23, 2010. Overall, oil price has fallen by 3.7 per cent m-o-m in February 2010, but has increased by 69.3 per cent y-o-y. Among metals, price of steel has gone up by 7.5 per cent in February 2010 on an m-o-m basis, but increased by 35.7 per cent on a y-o-y basis. In case of aluminum, while prices declined by 8.6 per cent m-o-m in February 2010, they rose by 48 per cent y-o-y. Among food commodities, wheat prices fell by 3.6 per cent mo-m in February 2010 and by 14 per cent y-o-y. On the other hand, soya oil prices grew by 17 per cent in February 2010 on y-o-y basis, but contracted by 1.2 per cent over the previous month.

March 2010

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CRISIL EcoView

VIII. Annexure
Table 8.1: Annual Data Summary - 1 Real GDP growth (y-o-y%)1
Total
9.5 9.7 9.0 6.8 7.2 4.0 1.6 5.8 4.9

Agriculture
10.2 11.0

Industry
10.6 8.1 8.2 11.2

Services
10.9 9.7 8.7

3.9

-0.2 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10

WPI Inflation (y-o-y%)2

Inflation
11.8 9.1 8.4 5.7 5.4 4.4 6.2 4.7

Primary goods
9.5 10.1 7.8 7.7 9.6 5.6

Fuel
7.6

Manufacturing
8.1

1.0 2.9
2.4

4.4 3.1

5.0

2.3 -4.8

FY06 FY07 FY08 FY09 FY10 WPI CPI-IW

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

Index of Industrial Production (y-o-y%)3

General
11.5 8.2 8.6 8.6 5.2 7.3 6.4 6.0 9.1

Electricity

Manufacturing
12.5 9.1 8.9 5.3 2.9 1.0

Mining

8.5 5.2 2.6

2.8

2.7

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

External Variables (US$ bn)2

Exports Imports
287.8 251.7 163.1 168.7 126.4 103.1 131.9 149.2
46.1

Merchandise Trade Deficit

119.1

Current account deficit4

28.7

218.5
59.4

88.5

185.7 15.7 9.9 9.8 5.8

-86.6

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

Figures for FY10 are: 1 Advance Estimate, 2 Apr-Jan, 3 Apr-Dec, 4Apr-Sept Source : RBI, CSO, DGCIS

Table 8.2: Annual Data Summary - 2

Interest Rates, year-end (%)5
1-yr G-sec
7.9 6.6 7.6 6.6 7.5

10-yr G-sec
7.9 7.9 7.6 7.2 4.1 6.50

Repo rate
7.50 7.75 5.50 5.00 4.75

Reverse repo

6.00 6.00

3.50

3.25

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

Markets (year-end)6
INR/USD
51.0 44.6 43.6 40.0 47.6 54.2 58.1 63.1

INR/EURO
67.5 67.6

Forex Reserves (US$ bn)7

309.2 252.3 199.2 151.6 278.7 9.3

Net FII flows (US$ bn)7

23.8 16.0 6.7

-11.4 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10

Equity Market (year-end)6

Sensex
15644 13072 11280 9708 6492 2035 3402 3021 797 13.7 3821

S&P CNX Nifty

4734 1180 1294

S&P 500
1420 1322 15.6

Sensex P/E
20.9 20.3 20.1

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

Government Finances
Centre Fiscal Deficit (as % of GDP)
6.7 6.0 5.5 3.4 3.5 2.7 2.5 1.9 1.5 2.7

Money and Banking8

State Fiscal deficit (as % of GDP) Non-food credit growth (%)
31.8 28.4 23.1 17.5
15.4

M3 growth (%)

17.0

20.7 21.1 18.6 16.4

FY06 FY07 FY08 FY09 FY10 (RE) (BE)

FY06 FY07 FY08 FY09 FY10 (RE) (BE)

FY06 FY07 FY08 FY09 FY10

FY06 FY07 FY08 FY09 FY10

Figures for FY10 are :5

Avg from Apr-Feb, 6 as on Feb 26, 2010, 7 cumulative flow till Feb 19, 2010, 8 as on Feb 12, 2010

Source: CCIL, BSE, RBI and MoF

March 2010

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CRISIL EcoView

Table 8.3: Quarterly Growth rates

Real GDP (y-o-y%)

Manufacturing

Mining & Quarrying

Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 -2.8

-0.8
Agri, forestry& fishing

2.7

3.7 4.9 1.6 7.9 9.5 14.3

5.1 0.9

3.8 3.5 3.6 6.2

9.6

12.1 5.9 6.3 8.1 8.5 10.8

6.4 8.3 9.5 8.1 7.7 7.8

Community, social & prsnl serv

Q1FY09

3.0

4.6

5.5

2.7

8.4

13.0

Financing, Insurance & real estate

Trade hotels, transport and comm

6.9

8.2 9.0 22.5 12.5 6.8 12.7

Electricity, gas & water

Construction

4.2 6.8 7.1 6.5 8.7

2.7 2.4 0.9

-1.4 3.4 9.2 6.3

7.4 4.9

-2.2

Real GDP (y-o-y%)

GDP Deflator (%)

Q1FY09 Q2FY09 Q3FY09

7.8 7.7 5.8

3.0 2.7 -0.8

2.3

6.0 6.1

10.2 9.8

8.1

7.3

8.8

8.1

Services

Industry

Agriculture

Q4FY09 Q1FY10 Q2FY10 Q3FY10

5.8 6.1 7.9 6.0

2.7 2.4 0.9

1.4 5.0 8.3

8.6 7.8 9.3 6.3

2.1 0.9 0.8 5.6

6.8 5.8 9.7 12.3

Industry

10.2

8.0

Agri & allied services

10.0 1.1 0.3

8.6

Services

10.7

9.1

12.0

10.7 7.3 1.6

Overall

Overall

-0.2 -0.2

-.08 3.4

2.8

11.6

4.7

WPI Inflation (y-o-y%)

Q1FY09 Q2FY09 9.6 12.5

CPI Inflation (y-o-y%)

Fuel, power& lubricants
9.6 11.3 10.3 17.0 7.8 8.9

Commodity prices
998

11.2

123.9

Primary

Overall

Mfing

Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10

8.6 3.2 0.6

11.9 7.6 6.5 -8.1

6.7

4.1 1.5 0.2 3.6

Crude-WTI($/barrel)

Agricultural Labours

Industrial workers

7.9

Steel prices ($/tonnes)

9.0 10.2 9.4 8.9 11.8 13.3

10.2 11.1 10.6 10.3 13.0

118.0 58.3 42.9 59.4 68.2 76.1

1109 585 385 390 587 508

-3.7

-0.1 4.5

8.0 -9.3 11.8 -1.1

15.5

Index of Industrial Production (y-o-y%)

Used-based classification of IIP (y-o-y%)

2.6
Intermediate goods

Q2FY09

4.7

4.9

3.8

3.2

4.7

13.2

-1.7 -5.7 -2.8 7.5 11.8

Consumer goods

Q1FY09

5.3

5.8

3.9

2.0

3.1

8.2

8.6 6.6 3.4 1.2

Manufacturing

Q4FY09 Q1FY10 Q2FY10 Q3FY10

0.5 3.8 9.1 12.9

0.3 3.4 9.3

Electricity

General

Q3FY09

Capital goods

Basic goods

0.8

0.5

2.0

2.9 2.9 6.1 7.6 4.5

2.4 0.4 6.3 6.3 6.0

3.8 7.1 1.3 8.1

Mining

0.8 7.0 9.0

-0.4 10.0 11.6

14.1

9.5

20.7

18.7

Source: CSO

Table 8.4: Full description of abbreviations used in the text Sectors Beverages, tobacco and related products Wool, silk and man-made fibre textiles Jute and other vegetable fibre textiles Wood and wood products Paper and paper products Leather and leather & fur products Basic chemicals and chemical products Rubber, plastic, petroleum and coal products Non-metallic mineral products Basic metal and alloy industries Metal products and parts Machinery and equipment Transport equipment and parts Other manufacturing industries Abbreviation Beverages Wool Jute Wood Paper Leather Chemical Rubber NMMP Metal and Alloy Metal Products Mach. & Eqp Transport Eqp Oth. Manufacturing

March 2010

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Note

Note

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