Market Outlook: “Strathclyde Associates” Taking A Look at India’s Economy

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India’s economy is expected to grow 8.2% this fiscal year, and accelerate to 9% next year, powered by rising local demand, a robust rebound in manufacturing activity and investment in infrastructure.

India’s economy is expected to grow 8.2% this fiscal year, and accelerate to 9% next year, powered by rising local demand, a robust rebound in manufacturing activity and investment in infrastructure. Policy makers are being kept on their toes by inflation: peak food inflation of over 20% recorded in December 2009 has come down to 17.7% in March 2010, but runs the risk of spilling over to other sectors.

“Strathclyde Associates” Taking A Look at India’s Economy : India’s wholesale price index-based inflation accelerated in March at 9.90%, driven mostly by rising food prices which have surged due to supply-side pressures, aggravated by the worst drought in 37 years in 2009. Thanks to the higher base last year and forecasts of a normal monsoon this year, India’s annual inflation is expected to be 5.5% this fiscal year, and 5% next year.

Policy makers are being kept on their toes by inflation: peak food inflation of over 20% recorded in December 2009 has come down to 17.7% in March 2010, but runs the risk of spilling over to other sectors.

“Strathclyde Associates” Taking A Look at India’s Economy: To contain inflation, the Reserve Bank of India raised the repo rate, a key lending rate, 25 basis points to 5.25% and raised the cash reserve ratio, the amount of money banks are required to hold with the central bank, 25 basis points to 6%.

The much-anticipated rate decision followed a 0.75 percentage point hike in the cash reserve ratio in January and a surprise 0.25 percentage point increase in both lending and borrowing rates in March.

“Strathclyde Associates” Taking A Look at India’s Economy: Further increases in interest rate are not ruled out, but any rate hikes will be done gradually, in ‘baby steps’.
Trade between China and India is expected to rise to $60 billion this year. The trade deficit was about $16 billion in Beijing’s favour, and the government has described it as “politically unsustainable”.

The central bank governor has made an appeal to China to let the yuan appreciate. China has offered to accelerate free trade agreement talks with India in a bid to balance the burgeoning trade relationship. India’s benchmark stock index jumped 80%, while the rupee appreciated 13% against the U.S. dollar, in the fiscal year ended March 31.

“Strathclyde Associates” Taking A Look at India’s Economy: India has been attracting foreign direct investment and in corporate debt market. Cumulative investment in debt by foreign institutional investors stands at more than $12 billion, compared with $5.17 billion just a year ago.

The central bank has clarified that it isn’t considering imposing the so-called Tobin tax on capital inflows, but will revisit the roadmap based on the global financial crisis.
The rupee may strengthen only a little more over the year to Rs42 to the dollar, but the central bank is unlikely to spend its reserves in supporting the rupee. An appreciating rupee helps contain inflation.