Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. The Reserve Bank of India on Thursday lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000. The central bank reduced its cash reserve ratio to 6.5 percent from 7.5 percent, a move which will add 400 billion rupees ($8.2 billion) to the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee from near a record low. Until the reduction in the cash reserve ratio which started just over a week ago now the Reserve Bank had increased its repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006. The central bank's next monetary policy statement is due to be released in Mumbai on Oct. 24.

India thus joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch, this is viewed to be a less riskier route at this point than intrioducing interest rate-cuts, and it is hoped it may also prove to be a more effective way of getting liquidity quickly through to the corporate sector.

India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent hit on Oct. 10.

Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries fell 17 basis points to 6.06 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The yield on bonds rises, as the value of the underlying bond falls.

Oil and Commodities Continue To Fall

Oil prices recovered some ground Friday, rallying above $71 a barrel on speculation that OPEC could slash output in an effort to stop crude's downward spiral. But pump prices kept falling and appeared poised to drop below $3 a gallon nationally — a level not seen in eight months. Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel. Despite Friday's modest rally, oil is still down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.




Commodity prices fell during a volatile week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - engulfed gold , which ended yesterday at a one-month low of $775 a troy ounce,



Steel prices as also falling rapidly, as industrial and construction demand drops sharply. Tata Steel Ltd., India's biggest steelmaker, has announced itwon't raise prices for six months or cut output if the government imposes an import tax and scraps levies on exports of the metal.

Companies are seeking 15 percent import duty and scraping of the export levy as demand weakens, Minister Ram Vilas Paswan told reporters after meeting executives in New Delhi today. They also want excise tax to be lowered to 8 percent from 14.4 percent.

Slowing demand from manufacturers and builders is driving down steel prices and forcing producers including ArcelorMittal, and Corus, the U.K. unit of Tata, to consider output cuts. Global steel production and consumption may slump 5 percent in 2009, Research & Consulting Group AG said Oct 9.

Foreign Exchange Reserves


India's foreign exchange reserves fell $9.94 billion during the week ending October 10, 2008 to $274 billion mainly because the Reserve Bank of India continued to sell dollars to try to contain the steep depreciation of the rupee.Forex reserves fell by another $9.93 billion (to $274 billion) during the tumultous week ended October 10, 2008 following the $7.8 billion fall of the previous week. .

India — the fourth largest holder of foreign exchange reserves in Asia after China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since hitting a peak of $316.17 billion during the week ending May 23 this year, reserves have dropped by $42.17 billion. , forcing policymakers to unveil measures such as higher investment limit for foreign institutional investors (FIIs) in corporate debt and allowing banks to offer higher rates on NRI deposits to boost inflows. The situation now stands in stark contrast to the same period a year ago, when reserves rose by $57 billion.


The revaluation of the foreign currency assets also contributed to the steepest-ever weekly fall. In the previous week foreign exchange reserves had declined by $7.8 billion, which was also a weekly record. Overall, reserves have fallen by nearly $18 billion in a fortnight.


In rupee terms, India's foreign exchange reserves, however, rose by Rs 2,258 crore during the week ending October 10 to Rs 13,33,424 crore. In the financial year, the increase is to the tune of Rs 95,459 crore. India's merchandise exports, which were estimated at $250 billion in 2007-08 are, for the time being, well covered.

In recent months, foreign institutional investors (FIIs), which are facing financial pressures at home , have been selling in the Indian markets and repatriating money. In calendar 2008 so far, FIIs have been net sellers of $10.83 billion in the equity market. FII sales have put pressure on the rupee, which has dropped 22.96 per cent against the dollar since January. This has prompted RBI to intervene heavily in the forex markets.





Stocks Fall

Indian stocks fell, with the benchmark Sensitive Index declining to its lowest in more than two years on speculation that overseas funds faced with redemptions are selling the nation's equities. Reliance Industries Ltd. tumbled 6.2 percent to its lowest since March 16, 2007. Infosys Technologies Ltd., the software developer that gets more than half its revenue from the U.S., fell 4.8 percent to its lowest in three years.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 606.14, or 5.7 percent, to 9,975.35, its lowest since June 20, 2006. The benchmark posted its fourth weekly decline, falling 5.3 percent. All 30 stocks in the index dropped. The S&P CNX Nifty Index on the National Stock Exchange dropped 194.95, or 6 percent, to 3,074.35. The BSE 200 Index lost 5.1 percent to 1,201.95.

India's MCSI Core Stock Index was down 4.45% on the day on Friday, after falling 26.7% so far this month, and 63.44% so far this year. But India is far from alone here, since the MSCI Emerging Markets Index plunged by 28 percent this month, with Russia's Micex Index alone falling 42 percent.





Overseas investors sold a net 8.41 billion rupees ($172 million) of Indian equities on Oct. 15, increasing the outflow this year from stocks to a record $11.1 billion, according to India's stock market regulator.


The Rupee


India's rupee fell to a six-year low as the benchmark equity index slid below 10,000 for the first time since June 2006, stoking concern capital outflows will quicken. The currency completed a 10th weekly loss. The rupee in part dropped on concern measures taken by global central banks and governments won't be enough to stave off the credit crisis.

The currency fell back0.8 percent this week to 48.8825 a dollar at the 5 p.m. close in Mumbai. That is the lowest since June 2002. The currency's 10-week losing streak is the longest since December 2005. The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out almost two-thirds of the record $17.2 billion they invested in Indian equities in 2007.



Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at Global Economy Matters and is a featured analyst at Emerginvest. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.

Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. The Reserve Bank of India on Thursday lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000. The central bank reduced its cash reserve ratio to 6.5 percent from 7.5 percent, a move which will add 400 billion rupees ($8.2 billion) to the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee from near a record low. Until the reduction in the cash reserve ratio which started just over a week ago now the Reserve Bank had increased its repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006. The central bank's next monetary policy statement is due to be released in Mumbai on Oct. 24.

India thus joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch, this is viewed to be a less riskier route at this point than intrioducing interest rate-cuts, and it is hoped it may also prove to be a more effective way of getting liquidity quickly through to the corporate sector.

India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent hit on Oct. 10.

Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries fell 17 basis points to 6.06 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The yield on bonds rises, as the value of the underlying bond falls.

Oil and Commodities Continue To Fall

Oil prices recovered some ground Friday, rallying above $71 a barrel on speculation that OPEC could slash output in an effort to stop crude's downward spiral. But pump prices kept falling and appeared poised to drop below $3 a gallon nationally — a level not seen in eight months. Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel. Despite Friday's modest rally, oil is still down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.




Commodity prices fell during a volatile week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - engulfed gold , which ended yesterday at a one-month low of $775 a troy ounce,



Steel prices as also falling rapidly, as industrial and construction demand drops sharply. Tata Steel Ltd., India's biggest steelmaker, has announced itwon't raise prices for six months or cut output if the government imposes an import tax and scraps levies on exports of the metal.

Companies are seeking 15 percent import duty and scraping of the export levy as demand weakens, Minister Ram Vilas Paswan told reporters after meeting executives in New Delhi today. They also want excise tax to be lowered to 8 percent from 14.4 percent.

Slowing demand from manufacturers and builders is driving down steel prices and forcing producers including ArcelorMittal, and Corus, the U.K. unit of Tata, to consider output cuts. Global steel production and consumption may slump 5 percent in 2009, Research & Consulting Group AG said Oct 9.

Foreign Exchange Reserves


India's foreign exchange reserves fell $9.94 billion during the week ending October 10, 2008 to $274 billion mainly because the Reserve Bank of India continued to sell dollars to try to contain the steep depreciation of the rupee.Forex reserves fell by another $9.93 billion (to $274 billion) during the tumultous week ended October 10, 2008 following the $7.8 billion fall of the previous week. .

India — the fourth largest holder of foreign exchange reserves in Asia after China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since hitting a peak of $316.17 billion during the week ending May 23 this year, reserves have dropped by $42.17 billion. , forcing policymakers to unveil measures such as higher investment limit for foreign institutional investors (FIIs) in corporate debt and allowing banks to offer higher rates on NRI deposits to boost inflows. The situation now stands in stark contrast to the same period a year ago, when reserves rose by $57 billion.


The revaluation of the foreign currency assets also contributed to the steepest-ever weekly fall. In the previous week foreign exchange reserves had declined by $7.8 billion, which was also a weekly record. Overall, reserves have fallen by nearly $18 billion in a fortnight.


In rupee terms, India's foreign exchange reserves, however, rose by Rs 2,258 crore during the week ending October 10 to Rs 13,33,424 crore. In the financial year, the increase is to the tune of Rs 95,459 crore. India's merchandise exports, which were estimated at $250 billion in 2007-08 are, for the time being, well covered.

In recent months, foreign institutional investors (FIIs), which are facing financial pressures at home , have been selling in the Indian markets and repatriating money. In calendar 2008 so far, FIIs have been net sellers of $10.83 billion in the equity market. FII sales have put pressure on the rupee, which has dropped 22.96 per cent against the dollar since January. This has prompted RBI to intervene heavily in the forex markets.





Stocks Fall

Indian stocks fell, with the benchmark Sensitive Index declining to its lowest in more than two years on speculation that overseas funds faced with redemptions are selling the nation's equities. Reliance Industries Ltd. tumbled 6.2 percent to its lowest since March 16, 2007. Infosys Technologies Ltd., the software developer that gets more than half its revenue from the U.S., fell 4.8 percent to its lowest in three years.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 606.14, or 5.7 percent, to 9,975.35, its lowest since June 20, 2006. The benchmark posted its fourth weekly decline, falling 5.3 percent. All 30 stocks in the index dropped. The S&P CNX Nifty Index on the National Stock Exchange dropped 194.95, or 6 percent, to 3,074.35. The BSE 200 Index lost 5.1 percent to 1,201.95.

India's MCSI Core Stock Index was down 4.45% on the day on Friday, after falling 26.7% so far this month, and 63.44% so far this year. But India is far from alone here, since the MSCI Emerging Markets Index plunged by 28 percent this month, with Russia's Micex Index alone falling 42 percent.





Overseas investors sold a net 8.41 billion rupees ($172 million) of Indian equities on Oct. 15, increasing the outflow this year from stocks to a record $11.1 billion, according to India's stock market regulator.


The Rupee


India's rupee fell to a six-year low as the benchmark equity index slid below 10,000 for the first time since June 2006, stoking concern capital outflows will quicken. The currency completed a 10th weekly loss. The rupee in part dropped on concern measures taken by global central banks and governments won't be enough to stave off the credit crisis.

The currency fell back0.8 percent this week to 48.8825 a dollar at the 5 p.m. close in Mumbai. That is the lowest since June 2002. The currency's 10-week losing streak is the longest since December 2005. The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out almost two-thirds of the record $17.2 billion they invested in Indian equities in 2007.



Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at Global Economy Matters and is a featured analyst at Emerginvest. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.

Investors remained wary of emerging-market debt as evidence mounted that most of the major major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession. This realisation has triggered a major exit from commodities, which are a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. But at the same time, we might ask ourselves, at theis moment in time if they don't invest in India and Brazil, then where are they going to invest? The problem is that in the present global environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. Of course, the situation is also confused since people are no longer clear what constitutes "risky" and what doesn't - the German government, for example, yesterday found itself forced to offer a blanket guarantee of all domestic bank deposits to head off any risk of flight from German bank accounts.

One result of all this nervousness is that the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks also fell substantially last week, experiencing their the biggest weekly decline in seven years, led by the banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since, given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the back of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary (rather than inflationary) headwinds as capacity levels exceed demand across the whole global economy and commodity prices tumble, as Claus Vistesen explains in this excellent and timely post.

The Indian central bank had been busy tightening, and had raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent during the period between December 2006 and July 2008 in an ongoing battle to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24, but we can be pretty sure that the "bias" will now have shifted towards loosening liquidity conditions rather than tightening them, as the priorities have changed, and the big priority now is to avoid any systemic bank problems, to keep the cost of borrowing for Indian companies down, and to prevent consumer credit slowing too dramatically.

The Indian banking system has been under increasing strain in recent days, and one symptom of this is that the rate at which Indian banks lend to each other reached an 18-month high of 17.5 percent on Oct. 1. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.


Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices has a double-edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development. Really this is a situation which will sort the "men" from the "boys", since those emerging economies which are really going to emerge will be in a position to switch the driving force of growth from commodity and agricultural dependence to industrialisation and domestic investment and consumer demand. It is my firm belief that India is now decidedly inside the group which is in the process of making this transition.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally - and thus it is only natural to assume that Indian industry was also adversly affected - with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.

And the situation seems to have deteriorated further in August, since the headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) registered a 25-month low of 50.4, down from 51.1 in August.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.

India's Industrial Output Weakens Too

India's industrial output growth bounced back again in July (the last month for which we have official data), reaching a five-month year on year expansion rate high of 7.1%. This follows a noted slowdown where output only rose by 5.4 percent gain in June, and 4.1% in May, according to data from the Central Statistical Organisation.


But if we come to look at the manufacturing PMI we will see that India's manufacturing output has also slowed somewhat, and expanded at its slowest pace in 14 months in September according to the ABN AMRO Bank purchasing managers' index. The PMI reading - which is based on a survey of 500 companies operating in India - fell to a seasonally adjusted 57.3 in September from 57.9 in August. This reading was the lowest since July 2007. Still 57.3 still suggests Indian industry continues to grow quite vigoursly, although the report did highlight the fact that the drop in the index was mainly the result of a decline in growth of new orders, and implied a deterioration in demand conditions, both locally as well as in export markets.


Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit rocketed to $10.7 billion in the three months from April to June, up from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India's case the 35 percent drop in oil prices we have seen since July has been partially offset by the decline in the rupee to a five-year low.

India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier. Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India and Brazil Critical Weathervanes

What I have been arguing in this post is not that everything about India's economy is perfect - far from it, but neither is it the "perfect storm" disaster which current knee jerk reactions among international investors would seem to suggest. The problems which are hitting the Indian economy at the moment, from the rapid rise in inflation to the sudden withdrawal of sentiment have a common origin: the dynamics of the global economy, and it is to these we must now look if we are to be able to sort the wood from the trees about what happens next. Basically, when the dust settles, I think it will be apparent that there are few economies left sufficiently well standing (not Russia certainly, and probably not China, given the export dependence on the developed economies) and with sufficient energy to bounce back. Many may be sceptical that Brazil and India are going to lead the coming charge (this recession cannot, after all, last forever), but I ask you, if it isn't Brazil and India, who is it going to be?

JP Morgan Global Manufacturing PMI Methodology


The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

Investors distanced themselves from emerging-market debt as the evidence mounted that major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession and this triggered a major exit from commodities, which is a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. In the present environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. As a result the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks had the biggest weekly decline in seven years last weeks, led by banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the backs of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary headwinds as capacity levels exceed demand across the whole global economy, as Claus Vistesen explains in this excellent and timely post.

The central bank has raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent since December 2006 to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24.

The rate at which Indian banks lend to each other climbed to an 18-month high of 17.5 percent on Oct. 1 as investors hoarded cash. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.

Essentially the wholesale price index fell because of a decline in the prices of farm products such as cereals, fruits and vegetables. The index of primary articles, that includes food items, dropped 0.2 percent, while the indices of manufactured and fuel were unchanged in the week to Sept. 20, today's report said.

Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices have a double edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally, with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.




So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.




Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit increased to $10.7 billion in the second quarter of 2008 from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India, the 35 percent drop in oil prices since July has been partially offset by the decline in the rupee to a five-year low. India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier.

Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.


Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India's current account deficit widened to a record in the three months to June as a surge in crude oil prices increased the nation's import bill. The shortfall, the amount by which imports exceed exports, remittances and other income from abroad, increased to $10.72 billion from a $1.04 billion gap in the previous quarter, the Reserve Bank of India said in a statement in Mumbai. Analysts expected a deficit of $11.52 billion.

India's financial system is evidently showing signs of strain as the impact of both local policy tightening and the global credit crunch steadily take hold. The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings and the U.S. government takeover of American International Group. As a result the Indian finance ministry responded by allowing companies building roads, ports, utilities and other infrastructure projects to borrow more overseas - thus giving them access to cheaper funds - while the central bank announced measures to boost cash in India's financial system.

Indian banks have borrowed an average 642.8 billion rupees from the central bank in the last two weeks, more than five times the average 113 billion rupees in the previous fortnight, further indicating a shortage of funds in the banking system.

Foreign Exchange Reserves Rise Slightly

India’s foreign-exchange reserves rose by the most in five months in the week ended September 19, according to the latest data from the Reserve Bank of India. The rise has surprised many observers, but it should be borne in mind that it coincided with the rise in the dollar against a number of other currencies (and in particular the euro, which the RBI also holds in reserves) on the back of the euphoria about the possible bailout of the US financial system.

Total foreign-exchange reserves rose by $2.51 billion to $292 billion in the week ended Sept 19, while foreign-currency assets - which form the lions share of the reserves -climbed $2.5 billion to $282.8 billion during the week. As we can see from the chart (below) the value of foreign exchange reserves has stabilised since mid-August, so the rot, it would seem, has definitely stopped. I think it is significant that we saw a positive initial response across the key emerging markets to the proposed US bailout, and while we are now seeing considerable volatility as people become nervous about whether it will, finally, arrive.I think when the package is introduced the key emerging market economies will be the principal beneficiaries, as the so called "risk appetite" will bounce back, especially given that the aftermath of the package will be a lower growth period in the OECD economies as the cost of the bailout has to be assimilated.




Even given the recent decline, it is important to bear in mind that India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $56.1 billion in the past year.

Money Supply Continues To Grow

Meanwhile, money supply in India grew year on year by 21 % in the two weeks ended Sept. 12, same rate as in the previous fortnight, according to data from the RBI. M3 - which largely consists of currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 42,26,143 crore as on September 12.

M3 has been rising at an average rate of 21% since the current fiscal year began on April 1, and has been consistently above the central bank’s target of 16.5% to 17% for the fiscal year ending March. At the same time, total bank loans rose by Rs 32,914 crore in the two weeks ended Sept 12, the biggest fortnightly increase since March. Outstanding bank credit was up by 26.1% year on year and reached Rs 24, 91,248 crore. Food credit was up by Rs 847 crore to Rs 45,190 crore, while non-food credit increased by Rs 32,067 crore to Rs24,46,058 crore. Total bank deposits rose by 22.5%, or Rs 6, 25,282 crore, in the same period to Rs reach 34, 05,377 crore.


The Rupee Weakens Again


The rupee has declined almost 17 percent so far this year and is the second-worst performer among the ten most-active Asian currencies excluding the yen. This week it declined for the seventh consecutive week, the longest run in more than 2 1/2 years. The rupee was down 5.6 percent in September, and is thus headed for its worst month since the Asian financial crisis in 1997.

Foreign investors were net sellers of Indian stocks for a fifth straight month in September, and have offloaded $9 billion so far this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year. Indian stocks fell, with the benchmark posting its biggest weekly drop in six months, after talks on a U.S. credit market rescue plan stalled and Washington Mutual Inc. became the biggest bank failure in American history.



The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 445, or 3.3 percent, to 13,102.18. The index had its biggest weekly drop since the week ended March 7. The S&P CNX Nifty Index on the National Stock Exchange slid 125.30, or 3.1 percent, to 3,985.25. The BSE 200 Index declined 3.2 percent to 1,590.58. Nifty futures for October delivery fell 3.9 percent to 3,995.

Standard & Poor's 500 Index futures slid 1.7 percent when negotiations on a $700 billion bailout plan for U.S. credit markets were thrown into doubt by a group of House Republicans who said the plan drawn up by Treasury Secretary Henry Paulson wouldn't work.

The decline in Indian stocks is more a reflection of global sentiment towards emerging market stocks and bonds than it is an indicator of any specific local issue. The MSCI Emerging Markets Index of stocks has been falling since last May - as can be seen in the chart below - and dropped 1.74% percent on Friday to 823.694, its lowest level since Sept. 15. The index is now down 13.6% so far this month, and 33.87% so far this year. But if you look carefully you can see that it peaked up again after 20th September, as speculation increased that there would be a major bailout of the US banking and insurance sector. This bounce back unwound towards the end of last week, as uncertainty grew about the arrival of the package.


A similar picture can be seen of the JPMorgan EMBI+ emerging bonds index (see below), which has been down significantly since the end of August. Since the US package seems now about to be approved for the US congress, as a result we should see sentiment improve significantly, and India may well be one of the principal beneficiaries of this change in sentiment. The coming weeks should clear all this up quite quickly.