Chicago, IL – November 12, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Macy’s Inc. (M), Nissan (NSANY), Priceline.com (PCLN), General Electric Co. (GE) and United Technologies Corp. (UTX).

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Here are highlights from Wednesday’s Analyst Blog:

Macy’s Raises Earnings Guidance

Macy’s Inc. (M) recently reported third-quarter 2009 results. The company posted a loss of 3 cents a share that outshined the Zacks Consensus Estimate loss of 9 cents, and improved substantially from a loss of 8 cents delivered in the prior-year quarter.

Effective inventory management and division consolidation to lower costs helped the company to post a narrower quarterly loss.

The better-than-expected results prompted management to raise its earnings guidance. Macy’s now expects full year 2009 earnings in the range of $1.01 to $1.06 per share, up from the previously anticipated 70 cents to 80 cents a share. For the fourth-quarter 2009, earnings are expected between $1.00 and $1.05 per share.

On a reported basis, including one-time items, Macy’s reported a quarterly loss of 8 cents a share, an improvement over a loss of 10 cents delivered in the year-ago quarter.

Nissan to Build World’s Cheapest Car

Carlos Ghosn, the Chief Executive of the alliance Renault and Nissan (NSANY), has revealed that the company will roll out a small car with its Indian partner, Bajaj Auto, that will be cheaper than any other car in India -- and in the world. The car, which is scheduled for launch in India in 2012, would beat India’s largest automaker Tata Motors’ Nano both in terms of pricing and fuel-efficiency, and become the world's cheapest car.

Presently, Tata Nano is the world's cheapest car. The car has a starting price of about Rs100,000 ($2,150). When Renault and Bajaj started discussing on their "ultra low-cost" car 2 years ago, it has been revealed that the car would have been priced between $2,500 and $3,000. However, at the World Economic Forum meeting in New Delhi, India, Mr.Ghosn announced that the ultra low-cost car would be cheaper than the Nano.

So far, India’s bottom-end motor vehicles market has been well known for motorcycles. After the hearty response to the Tata Nano, automakers around the world realized the huge market potential for small cars in India. Hence the initiative for the world's cheapest car.

Priceline Beats, Guidance Strong

Priceline.com (PCLN) reported very strong third quarter results, with earnings beating the consensus by 57 cents and revenue beating by 5.3%.

Revenue of $730.7 million was up 21.0% sequentially and 30.1% year over year. The significant increase from the year-ago quarter was helped by easier comps as the third quarter of 2008 was impacted by the recession, while the third quarter of 2009 benefited from strengthening demand.

Revenue growth was driven by significantly higher room night volumes, which offset the decline in average daily rates (ADRs). Room nights increased 14.1% sequentially and 56.3% year over year. Both airline ticket units and rental car days declined sequentially, although they were up 30.2% and11.6%, respectively from the year-ago quarter.

GE to Sell Security Systems

General Electric Co. (GE) is in talks to sell its security systems unit, most likely to United Technologies Corp. (UTX), for more than $1.5 billion in an effort to reshuffle its extensive portfolio and raise capital for strategic acquisitions.

United Technologies Corp. is a diversified company whose products include Carrier heating and air conditioning, Hamilton Sundstrand aerospace systems and industrial products, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, UTC Fire & Security systems and UTC Power fuel cells. The company has been lately looking to expand its security business.

GE’s move to sell its fire alarms and security division comes as it is finalizing a bigger deal to hive off its NBC Universal television and movie unit into a joint venture controlled by the cable operator Comcast. Strategically, GE wants to raise funds to expand its core businesses – which include infrastructure, oil and gas equipment, and energy – partly by hiving off peripheral divisions.

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Yesterday, the company announced plans to open a new technology center of Excellence & Innovation in Cambridge, Massachusetts, and make certain organizational changes. Monster plans to add more staff to this center in the foreseeable future. As part of organizational changes, the company will eliminate approximately 160 positions within the product and technology group on a global basis.

Monster is now actively recruiting for approximately 80 new technical positions to be located in the Cambridge center, with potential capacity for adding a total of 170 new positions at this center. The company already has technological centers in Massachusetts, California, Czech Republic, Malaysia and New Delhi. Monster believes that Cambridge is a strategic location for its business.

The company‘s business has been adversely affected by the economic downturn. The weak global economy has significantly impacted hiring demand in the past eighteen months. Companies have reduced headcount, frozen hiring and delayed recruitment-related decisions. Many key industry verticals that Monster serves, such as financial services, retail, manufacturing and construction, have been severely hit and might not be able to renew their contracts with the company.

Moreover, we believe competition has intensified in the industry over the last few years and taken away market share from Monster. While Monster once had a dominant position, there are now several national competitors (i.e., CareerBuilder and HotJobs) as well as niche sites (i.e., Dice, JobsintheMoney, TheLadders, SnagAJob, etc.). A number of premium recruiters have reduced their use of job boards in favor of alternative social media sites such as LinkedIn.

In response to this downtrend, the company has justifiably been repositioning itself and making efforts to improve its technology in order to improve the experience for both job seekers and corporate clients. We maintain our Hold on the stock.

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.

Executive Summary


India’s latest run of strong economic growth and continuing macroeconomic stability is a tribute the important progress made in recent years in macroeconomic management techniques as well as to an earlier generation of structural reforms. India’s economy has now expanded at an average rate of about 8½ percent for four years running, on the back of rising productivity and sustained investment. Inflation after ebbing in the second half of 2007 has now returned in full force and become one of the most pressing macro problems facing the Indian economy. In fact the record capital inflows which have followed the bout of global financial turbulance and a slowing U.S. economy, while in the long run beneficial, have only served to complicate the application of sound monetary policy. The current account deficit, which had remained modest, is now – on the back of high oil prices, heavy external energy dependence and a growing fiscal deficit – in danger of becoming a matter of concern.

India Needs:

- to bring inflation back under control and to within the central bank “comfort zone”.
- to reduce the growing fiscal deficit
- to extend and substantially upgrade infrastructure

India's Strong Points:

- solid and sustained economy growth, no likelihood a a major slowdown
- significant foreign exchange reserves
- proven human capital resources
- demographic tailwinds blowing strongly in her favour, and for several decades to come


Economic Background

India’s recent macroeconomic performance has been truly impressive, the result of sound macroeconomic policies, steady reforms which have been ongoing since the start of the since 1990s, and increasingly favourable demographic tailwinds. Growth averaged about 8½ percent in the four years through 2007/08, and while it is set to drop to the 7- 8 percent range this year, India will remain one of the world’s fastest-growing economies in 2008. The poverty rate fell from 36 percent in 1993/94 to under 28 percent in 2004/05.

India’s productivity growth has also been rapid when compared with that of other countries. The IMFs September 2006 World Economic Outlook found that India’s total factor productivity growth has averaged about 3⅓ percent in recent years, which within Asia is only exceed by China. Other recent growth accounting exercises have found TFP growth for India in the range of 3.2–3.5 percent for the recent period.

It’s the demography

At the present time some some 31 % of India’s populations are under 15 years of age. Between now and 2015 that proportion isn’t expected to change too much, but after 2015, with fertility nationwide now falling rapidly, the proportion is set to decline continually, with India moving steadily nearer the proportion which is to be found in more developed economies – Ireland, for example currently has some 21% of its population under 15, while in the United Kingdom the equivalent figure is 17%.

What this means is that India post 2015 will see a steep and sustained decline in its child dependency ratio and a steady increase in the proportion of its population who are of working age. In those Asian economies (the so called “Tigers”) who have previously passed through this demographic transition such steep declines in dependency ratios have been found to boost GDP growth incrementally, and substantially. This boost is known as the “demographic dividend”. The process is not a mechanical one, of course, and to get the increment, jobs have to be created for the new entrants into the labour force, and in India’s case these jobs will be needed at something like a rate of 15 million a year. What is really different about India is that the demographers are forecasting a continuing decline in the dependency ratio for a period of 30 years or so, as India's fertility rate - that is, the average number of children a woman expects to have in her life time – (which was standing at 3.8 in 1990) falls from the present national average of 2.9 to levels which in all probability will be well below replacement level.

There is another reason why this demographic change is important and that is that we human beings exhibit variable spending and saving activity at different moments in our life cycle. Basically we tend to save most either when we have just started working and are waiting to establish a family home, or during the latter years of our working lives. Whatsmore having children makes it harder to save wherever we are in the life cycle, and thus reducing the proportion of children in a society will tend – other things being equal – to increase the level of saving.

And, not unexpectedly, India's savings rate as a percentage of GDP has been rising steadily since 2003. It now stands in the region of 33% of GDP – a figure which is comparable to the Asian super-performers, all of whom save at above 30%, with China saving at an astonishing rate of nearly 40%.

This recent savings growth has been driven in India by improvements in the government's fiscal health and a sharp rise in corporate savings, but even if these positive factors should gradually disappear, the decline in the dependency ratio should enable India to hold its savings and investment rate above the 30% mark for the next 25 years at least.

Recent Economic Indicators

The Indian economy continued to expand strongly in the first quarter of 2008, even though growth has now dropped back somewhat from the 10.1% peak reached in Q3 2006. GDP, however, still grew at a pretty solid y-o-y rate of 8.8% in Q1, and indeed output growth was unchanged from the last quarter of 2007. So while the Indian economy is slowing, it is doing so very gradually indeed.

Private consumption continued to grow rapidly in Q1 2008 (13.5%) but gross fixed capital formation dropped back (from an average of 20% y-o-y in the previous 3 quarters to 15% in Q1). Since construction activity was still running at a strong pace (12.6%, the fastest rate since Q2 2006) it would not be unrealistic to assume that spending on machinery and equipment slowed somewhat. This would also follow from the fact that manufacturing growth (5.8%) showed the slowest expansion in many quarters (well down from the 10% average over the previous 3 quarters). Infrastructure development also lagged behind in terms of electricity, gas and water supply growth, which was only up by 5.6%. Indeed utilities output has only grown by an average of around 6% over the last 8 quarters. On the other hand government spending shot up, growing at an annual rate of 22.4%. Hence here we have two of the key themes which continue to preoccupy observers of India’s economy: the slow growth of manufacturing and infrastructure, and the rapidly increasing fiscal deficit.


Both India’s exports and imports were up quite strongly in Q1 (12.7%), and this revival in exports offers some evidence that Indian exporters have now started to benefit from the weaker rupee, which has declined by some 7 percent so far this year. India's export growth accelerated again in June and overseas shipments, which account for about 15 percent of the Indian economy, were up 23.5 percent year on year (reaching a total of $14.66 billion), following a 13 percent gain in May. Imports, however, have been increasing even more quickly, and were up 26 percent (to $24.45 billion) in June, thus widening the trade deficit (as compared to June 2007) to $9.78 billion. The deficit was however down on May's whopping $10.77 billion. India's oil imports in June rose 53.4 percent to $9.03 billion as refiners paid more for crude oil purchased overseas. India relies on imports of oil for three-quarters of its energy needs. Non-oil imports gained 14 percent to $15.4 billion.India has paid an average $8 billion a month for oil imports in the year through June, compared with $5.4 billion in 2007.

India's inflation accelerated again in late July, and hit it highest level since 1995, providing additional evidence to support last week's central bank decision to raise borrowing costs for the third time in two months. Wholesale prices were up 12.01 percent in the week to July 26, after rising 11.98 percent in the previous week.



The Reserve Bank of India raised its repurchase rate by a half-percentage point to 9 percent on 29 July, giving priority to the inflation fight over India's short term growth rate. Indeed many economists consider that the bank may well increase the benchmark rate again in the next three months. The cash reserve ratio was also raised 8.75 to 9 percent and in the statement which followed the decision the bank said it still had "headroom'' to further tighten monetary policy. The bank also increased this year's inflation forecast to 7 percent from the previous range of 5 percent to 5.5 percent.



However while the inflation process in India still has some momentum, as the global economy slows – thus reducing pressure on commodity prices - and monetary tightening reins in domestic demand, India’s inflation peak can not now be far away. Despite constant ups and downs oil prices have been generally falling since hitting the record high of US$147.27 a barrel on July 11, and by August 1st they had dropped around 15 per cent in a mere three weeks. If this trend continues then India should eventually obtain some notable relief and this is why it is so important to maintain strict monetary policy and avoid second round inflation effects at this juncture.


India's industrial production provides the most evident sign of the economic slowdown, with output growing at the slowest pace in more than six years in May as continuing price rises and tightening credit lead consumers to cut back on purchases of items like cars, fridges and other manufactured goods. Industrial output was up 3.8 percent from a year earlier after gaining 6.2 percent in April. Manufacturing, which accounts for about 80 percent of India's industrial production, was up 3.9 percent. Electricity rose 2 percent, and mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.




The Ratings Agencies

One notable recent development has been the decision by ratings agency Fitch to lower India's local currency credit rating. The decision by Fitch to revise India's local currency outlook to negative from stable was based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.

James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.

Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.

As regards its external balance India is rather different from many other large emerging economies since while the central bank (which has a high level of independence from government) does intervene in the spot market to try to keep a lid on the rupee’s rise and to built up a “war chest” of international reserves the bank has allowed the currency to rise substantially against the US dollar (while the rupee has fallen in 2008, it appreciated by some 12% against the dollar in 2007).



Foreign Exchange Reserves

India's foreign exchange reserves fell another $504 million - to reach $306.6 billion - in the week ended July 25. Despite the fact that India’s foreign exchange reserves, have increased by $81.3 billion in the last twelve months they have in fact now been falling since May. It could be however that the increase in interest rates and the falling price of oil could now see a reversal in this trend.




The big unknown here is the future movement in the oil price. Despite the recent price easing, India still faces an import bill for crude that may reach $120 billion this fiscal year, compared with $69 billion the year before. This extra burden is about 4% of GDP.

Add the impact of the fiscal deficit to the oil bill, and it is not hard to see that the external deficit could reach 4% of GDP this fiscal year. The IMF In April were forecasting a 3.1% for 2008. Reducing this gap is now becoming a priority, especially given the comparative strictness of the ratings agencies vis-a-vis India. Any future downgrades in credit will only make funding the gap more expensive, and as we have seen attracting the foreign capital necessary to bridge the gap has been becoming harder in recent weeks.




Money Supply and Credit

Short term cash rates have been pushing the 8.5 to 9% range in India of late as liquidity has been tighter due to the significant increase in the cash reserve ratio required by the Reserve Bank of India. Banks credit remains strong and rose by 25.8% in the 12 months through July 18. Total bank deposits rose by 21%, over the same period. At the same time, money supply in India grew 20% in the two weeks ended July 18 from a year earlier, compared with 20.5% in the prior two weeks.

While much of the recent increase in lending is likely to be associated with increased credit needs on the part of the oil companies, it also seems that bank credit to other sectors has been picking up. The Reserve Bank of India is unsurpringly rather concerned about the level of credit growth, especially considering that deposit growth slowed to 21% over the same period.

The Rupee

The rupee appreciated significantly during 2007, raising concerns about the competitiveness of Indian industry. In nominal bilateral terms vis-a-vis the dollar, the appreciation has been particularly notable, reaching successive nine-year highs as it rose about 12 percent over the year. Although the increase has been lower in nominal and real effective terms—only about 7–7½ percent—the appreciation of the effective rupee has taken it out of the historical range in which it fluctuated during most of the last decade




Growth Prospects

On the growth front a large gap has now opened up between the increasingly gloomy views about India’s prospects as seen from abroad, and the relative optimism displayed by a number of internal forecasters. The Centre for Monitoring the Indian Economy (CMIE), in Mumbai, still thinks India will grow by 9.5% this fiscal year, while JPMorgan only anticipates growth somewhere in the region of 7%.



While the CMIE estimate is undoubtedly unduly high for this (calendar) year, with growth more than likely coming in in the 7.5% to 8% range, their optimism is not totally unjustified looking forward to 2009 and 2010. Trend growth in India is surely higher than many conventional analyses tend to hold, and if inflation can be gotten under control India then India may well start to hit double digit growth come 2010, and once it breaks the 10% ceiling, it may well stay above it for some considerable time. This is simply because India has a very large untapped capacity for growth, and it is not unrealistic to anticipate that this capacity can be unleased, especially if institutional reform continues, and the fiscal deficit concerns are addressed.

But things are likely to go down before they bounce back up again, since he tightening in monetary policy will surely achieve the desired effect of slowing aggregate demand and GDP growth further. Also negative global factors are likely to continue to weigh adversely on India’s growth outlook in the short term. Consumption growth has already slowed significantly. Investments growth has also begun to moderate and it is quite probable that the slowdown in the investment cycle will accentuate over the next six months.


Everything really now depends on the outlook for inflation and capital inflows. I believe that Inflation should peak in late summer at levels which are not too far above those we are currently seeing. The rate should then start moderating and we could well be back down at 7% - 8% by the end of the financial year. In part this depends on oil prices, and year on year base effects, and oil and food prices, of course, also partly depend on growth in India and the other key emerging economies. Thus we have a kind of "inbuilt stabiliser", since as the major emerging economies slow, commodity prices ease back, and as this happens the central banks can begin once more to loosen monetary policy, providing a kind of win-win feedback effect, until, of course, commodity prices bounce back again, and they need to start tightening once more.

The key point to grasp in all this is that it is consumers in the heavy energy consumption OECD economies who are going to do the heavy lifting of bearing the pain here, as resources are effectively transferred from their wallets to those of the oil producers, and it is this process, rather than what happens in the emerging economies which is likely to keep a cap on global growth in the coming years.



Outlook on Key indicators

• Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving orce here will, as ever, be inflation running above the central bank's comfort zone. Here at Emerginvest we see the Reserve Bank of India being rather more prudent at coming meetings, and we feel the current rate hike cycle may possibly peak at 9.5%. Key factors here will be the behaviour of oil prices, and wages and fiscal policy in India itself with election year approaching.

• The Rupee is likely to continue to be supported by central bank tightening and declining demand for dollars from oil producers as oil prices ease. Also should the Rupee continue to head upwards and inflation start to fall, a win-win process will again be set in motion as investors see the prospect of currency related increasing returns once more opening up. In the great global search for yield there is no better winning strategy than to back a winner. At some point however macroeconomic fundamentals will undoubtedly take over, and as the economy slows and inflation moves down towards the comfort zone (around 5%) the central bank will also move into easing mode pushing the Rupee down in the process. A violent correction however is not expected.

• Obviously, with the domestic credit induced consumer boom now fading, exports are going to become more important than ever for India's headline GDP growth. India's Trade Minister Kamal Nath recently set the target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. This is a worthy target, and perfectly realiseable, but it will require India to conduct a substantial infrastructural overhaul and to intruce widespread regulatory reform. In the shorter term India is targeting exports of $200 billion in the current fiscal year, up 28 percent from the $155.5 billion achieved in the previous year. This is attainable – exports were up 23.5% y-o-y in June - but with a deteriorating external environment it will be quite hard work.
  
• GDP growth is expected to moderate in 2008 compared to the levels seen in the last three years but at this point growth projections remain solid (probably 7.5 to 8% in calendar 2008). We certainly see India’s mid term sustainable growth rate as being above the consensus 7%-8% rate once inflation is firmly under control, and expect double digit annual growth rates to be hit in either late 2009 or 2010 depending on the extent to which the global slowdown in 2009 negatively affects India’s GDP growth.

• We expect India's credit ratings to remain broadly stable even as the nation weathers higher oil prices and slowing economic growth – a view which was endorsed in a statement at the start of August by Moody's Investors Service. Moody's has a Ba2 rating on India's long-term, local currency debt, leaving it two levels below investment grade, although it rates India's foreign-currency debt Baa3, the lowest investment level. The downside risk here obviously comes from fiscal laxity, but the authorities in New Delhi are undoubtedly very aware of this.
  

The Reserve Bank of India raised its repurchase rate by a half-percentage point to 9 percent on 29 July, giving priority to the inflation fight over India's short term growth rate. Indeed many economists consider that the bank may well increase the benchmark rate again in the next three months. The cash reserve ratio was also raised 8.75 to 9 percent and in the statement which followed the decision the bank said it still had "headroom'' to further tighten monetary policy.



Inflation accelerated during the week largely because of an increase in the price of pulses, fruits, spices and sugar. Manufactured price inflation was up 10.82 percent in the week ended July 19, compared with a 10.72 percent gain in the previous week.

However while the inflation process in India still has some momentum, as the global economy slows - reducing pressure on commodity prices - and monetary tightening reins in domestic demand, the peak can not now be far away. Light, sweet crude for September delivery rose 90 cents, or 0.7 percent, to $124.98 a barrel yesterday (at the 2:30 pm close of floor trading on the New York Mercantile) but prices have been falling generally since hitting the record high of US$147.27 a barrel on July 11. International oil prices have now dropped around 15 per cent over the last three weeks, and if this trend continues then India should obtain some relief.

This is why it is so important to maintain strict monetary policy and avoid second round effects.



Foreign Exchange Reserves


India's foreign exchange reserves fell another $504 million - to reach $306.6 billion - in the week ended July 25 according to data from the Reserve Bank of India weekly statistical supplement.

Gold reserves were unchanged at $9.21 billion while reserves with the International Monetary Fund fell $2 million to $515 million. The nation’s special drawing rights with the International Monetary Fund held at $11 million. Despite the fact that India’s foreign exchange reserves, have increased by $81.3 billion in the last twelve months they have in fact now been falling since May. It could be however that the increase in interest rates and the falling price of oil could now see a reversal in this trend.





Exports Up In June

Indian exporters have started to benefit from the weaker rupee, which has now declined by 7.3 percent so far this year. India's export growth accelerated in June and overseas shipments, which account for about 15 percent of the Indian economy, were up 23.5 percent year on year to reach $14.66 billion, following a 13 percent gain in May. Imports increased 26 percent to $24.45 billion, widening the trade deficit (as compared to June 2007) to $9.78 billion. The deficit was however down on May's whopping $10.77 billion. India's oil imports in June rose 53.4 percent to $9.03 billion as refiners paid more for crude oil purchased overseas. India relies on imports of oil for three-quarters of its energy needs. Non-oil imports gained 14 percent to $15.4 billion.

India has paid an average $8 billion a month for oil imports in the year through June, compared with $5.4 billion in 2007.

Even though oil prices have now moderated from their peak at around US$145, they still remain quite high by historical standards, hence the further widening in the trade deficit. Each US$10 increase in crude oil prices results in an increase of approximately US$7 billion (or 0.6% of GDP) in oil imports and the trade deficit. High non-oil import growth may also cause further widening of the current account deficit at a time when global capital inflows are slowing. Non-oil imports grew at an average of 24.9% during April-May 2008.

The big unknown here is the future movement in the oil price. Despite the recent price easing, India still faces an import bill for crude that may reach $120 billion this fiscal year, compared with $69 billion the year before. This extra burden is about 4% of GDP.

Add the impact of the fiscal deficit to the oil bill, and it is not hard to see that the external deficit could reach 4% of GDP this fiscal year. Reducing this gap is now becoming a priority, especially given the comparative strictness of the ratings agencies vis-a-vis India. Any future downgrades in credit will only make funding the gap more expensive, and as we have seen attracting the foreign capital necessary to bridge the gap has been becoming harder in recent weeks.

Obviously, with the domestic credit induced consumer boom now fading, exports are going to become more important than ever for India's headline GDP growth. India's Trade Minister Kamal Nath recently set the target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. This is a worthy target, and perfectly realiseable, but it will require India to conduct a substantial infrastructural overhaul and to intruce widespread regulatory reform. In the shorter term India is targeting exports of $200 billion in the current fiscal year, up 28 percent from the $155.5 billion achieved in the previous year. This is attainable, but with a deteriorating external environment it will be hard work.


The Rupee


India's rupee was up again this week on speculation the demand for foreign currency from oil refiners would reduce following the decline in crude oil prices. The rupee touched its highest in a week on Friday and advanced 0.5 percent to 42.35 a dollar at the 5 p.m. close in Mumbai.


The rupee also strengthened on speculation gains in the benchmark stock index will encourage overseas funds to stay invested in the country. The Mumbai Stock Exchange Sensitive Index, or Sensex, climbed for a fourth week, and was up by 1.86% on Friday at the 3:00 pm close, capping its best run in three months.

Overseas investors have sold $6.9 billion more Indian equities than they bought this year through July 30, compared with $17.2 billion in net purchases in 2007. Overseas investors bought a net 5.97 billion rupees ($148 million) of Indian equities on July 31, reducing their net outflow this year from stocks to $6.62 billion, according to the India's stock market regulator.



India's stock markets were given a boost when a senior oil ministry official said the ministry had requested the finance ministry to ask the central bank to restart its foreign exchange operations with oil refiners. The central bank had said earlier in the week that it would stop a two-month old scheme which provided foreign exchange directly to oil refiners in exchange for their oil bonds. Refiners are the biggest buyers of dollars in the currency markets.


Money Supply And Liquidity Conditions

Short term cash rates held below 7 per cent in India on Friday due to lower demand for funds on the end of fortnight reporting day, since the banks had already made arrangements to fund their reserve requirements in advance. At 12:30 pm call rates were at 6.50/6.60 per cent, higher than the its previous close of 6.00/6.25 per cent, but much lower than Thursday's weighted average rate of 8.34 per cent.

Banks have to report their cash balances to the Reserve Bank of India every second Friday, this has the consequence that demand for fund tends to be lower in the second week of the fortnight as banks generally try to fund most of their requirement in the first week itself. The general impression is that call rates will now climb back towards 9 per cent at the start of a new fortnight next week.

Banks loans fell by Rs 720 crore in the two weeks ended July 18, taking outstanding advances to Rs 24,07,860 crore. Credit rose by 25.8%, or by Rs 4, 93,805 crore, in the 12 months through July 18. Total bank deposits rose by 21%, or Rs 5, 72,859 crore. At the same time, money supply in India grew 20% in the two weeks ended July 18 from a year earlier, compared with 20.5% in the prior two weeks.

So non-food credit growth stood at 25.8%Y during the fortnight ended July 18, up from the end of 2007 low of 21.9%. While much of the increase is probably due to increased credit needs on the part of the oil companies, it also seems that bank credit to other sectors has been picking up lately. The RBI is particularly concerned about the level of credit growth, considering that deposit growth had already slowed to 21% over the same period.

The RBI recently expressed its concern about this situation and stated that "It is noteworthy that the growth in credit during 2008-09 so far has taken the incremental non-food credit-deposit ratio to 82.4%, which appears high, given the prescribed CRR/SLR and banks’ preference for holding excess reserves on a day-to-day basis…In F2009 so far, however, some banks have expanded credit rapidly in relation to the system level growth, with attendant worsening of their credit-deposit ratios. These developments warrant heightened policy concerns in the interest of overall systemic stability and the quality of financial intermediation”.

And the bank warns: “If necessary, the Reserve Bank would consider undertaking supervisory review of those select banks which are over-extended in terms of their credit portfolios relative to their sources of funds”.

Fiscal Policy

The government has continued its loose fiscal policy in recent months. Apart from a higher oil subsidy, there is the off-budget burden of fertilizer and food subsidies to think about, as well as the farm loan waiver costs. The recent decision to raise wages for government employees will also add to the deficit burden. It is not unrealistic to anticipate the combined central plus state government fiscal deficit (including all off-budget spending) in the region of 7.7% in 2008 rising to 11.5% of GDP in F2009.

On the growth front a large gap has now opened up between the increasingly gloomy views of India’s prospects as seen from abroad, and the relative optimism of internal forecasters. The Centre for Monitoring the Indian Economy (CMIE), in Mumbai, still thinks India will grow by 9.5% this fiscal year, while JPMorgan, a foreign bank, anticipates growth in the region of 7%.

While the estimate is undoubtedly unduly high for this (calendar) year, with growth more than likely coming in in the 7.5% to 8% range, the optimism is not unjustified looking forward to 2009 and 2010. If inflation can be gotten under control India may start to hit double digit growth come 2010, and once it breaks the 10% ceiling, it may well stay above it for some considerable time. This is simply because India has a very large untapped capacity for growth, and it is not unrealistic to anticipate that this capacity can be unleased, especially if institutional reform continues, and the fiscal deficit concerns are addressed.

But things are likely to go down before they bounce back up again, since he tightening in monetary policy will achieve the desired effect of slowing aggregate demand and GDP growth further. Also negative global factors are likely to continue to weigh adversely on India’s growth outlook in the short term. Consumption growth has already slowed significantly. Investments growth has also begun to moderate and it is quite probable that the slowdown in the investment cycle will accentuate over the next six months.


Everything really now depends on the outlook for inflation and capital inflows. I believe that Inflation should peak in late summer at levels which are not too far above those we are currently seeing. They should then start moderating and we could well be back down at 7% - 8% by the end of the financial year. In part this depends on oil prices, and year on year base effects, and oil and food prices, of course, also partly depend on growth in India and the other key emerging economies. Thus we have a kind of "inbuilt stabiliser", since as the major emerging economies slow, commodity prices ease back, and as this happens the central banks can begin once more to loosen monetary policy, providing a kind of win-win feedback effect.

This wioll then operate until commodity prices rebound once more and the emerging central banks tighten again, etc, etc. The key point to grasp here is that it is consumers in the heavy energy consumption OECD economies who are going to do the heavy lifting of bearing the pain here, as resources are effectively transferred from their wallets to those of the oil producers, and it is this process, rather than what happens in the emerging economies which is likely to keep a cap on global growth in the coming years.

Thus the RBI is now unlikely to hike policy rates further unless oil and other commodity prices lift up again from the current levels, and if global growth slows further this is hard to see happening. The second risk to the ‘no further rate hike’ outlook is, of course, any large global financial market shock that triggers major capital outflows from emerging markets generally and from India. In such a case, the RBI would need to hike the policy rate to prevent any major depreciation in the exchange rate and consequent adverse impact on the inflation outlook. I feel however that this scenario is being rather overplayed at the present time. There will almost certainly be some kind of "emerging market correction" (in central and eastern Europe, perhaps, or possibly in China) but if this is the case it is hard to see India being in the direct line of fire, since if the money leaves India, one might well ask where it will be bound? Certainly not to Japan, where yields are still more or less on the floor, and the economy almost certainly in recession. It is also hard to see financial turmoil troubled economies in the US and Europe serving as safe havens this time round, so on balance I would put the risk of major outflows from India at a rather low level, which is not, of course, the same thing as being complacent.


More fickle, however, are the foreigners who bet large sums on Indian shares when the stockmarket was in full bloom. They are deserting the country, withdrawing $6.7 billion so far in 2008. The only consolation is that as share prices fall, so does the amount they can repatriate, relieving some of the pressure on the currency.

And things may not improve quickly since the June-September monsoon, which accounts for four-fifths of the nation's annual rainfall, was 33 percent below average in the week ended July 23, raising concerns that there is no easing of food price inflation in sight. Rains in July account for a third of the monsoon season and are crucial for the sowing of crops, including corn and soybeans.

At the same time the hike in the CRR will also be noticed, since overnight cash rates rose to a fresh six month high in the middle of last week as a result of the tightening of liquidity following the earlier increase in banks' cash reserve ratio. On Wednesday last week call rates hit a high of 9.85 per cent, which is the highest since January 18. They were however back down to the 9.50/9.60 per cent range on Thursday. Obviously the new increase will push these rates up even further.

India's economic growth has already slowed somewhat, and held at its weakest pace since 2005 in Q1 2008 as the highest interest rates in six years discouraged consumer spending and investment, while a more complex global environment reduced the possibilities for expanding India's exports. India's economy expanded at a year on year rate of 8.8 percent in the three months to March 31, matching the revised gain of the previous quarter.

India's stubbornly high inflation may well force the Reserve Bank of India to increase interest rates for the third time in less than two months at its next meeting on July 29. The Reserve Bank raised its benchmark interest rate twice in June, to a six-year high of 8.5 percent. It also increased the cash reserve ratio in stages to 8.75 percent, with the last rise coming into effect July 19. Clearly there are issues here of balancing growth needs and inflation fears, but my impression is that the Reserve Bank of India well understands the threat posed by the danger that inflation expectations become engrained and will continue to act with vigilance. In which case we may well see a continuing slowdown in India - but certainly a very soft, not a hard landing - and an early resumption of growth as inflation fades while energy prices will probably settle at what will undoubtedly be a rather high level in historic terms.

Foreign Exchange Reserves


India's foreign exchange reserves fell to $307.107 billion as on July 18, from $308.520 billion a week earlier, the central bank said in its weekly statistical supplement on Friday.

Reserves rose to a record $316.171 billion in late May and the decline since then is largely due to dollars being given by the central bank to oil refiners in exchange for their oil bonds and intervention in the currency market to support a falling rupee.



India's build up in foreign exchange seems to have peaked for the time being as a result of a variety of factors. Capital inflows have not been matching importers’ demands (and thus covering the trade deficit) with the consequence that the central bank has had to sell dollars. At the same time foreign investors have been pulling out of India's stock markets and inflows from overseas borrowing has also slowed due to the slowing consumer boom.

India's central bank has increased the ratio of its rising foreign exchange reserves invested in foreign bonds but has cut deposits held with foreign banks, it said in its half-yearly report. The Reserve Bank of India (RBI) invested $36 billion in overseas bonds, three-fifths of its $60 billion increase in its reserves for the six months ended March 2008, according to the central bank's report on foreign exchange reserves. The percentage of its currency reserves invested in sovereign bonds rose to 34.4 percent from 27.9 percent six months earlier. But the amount of reserves it held with foreign commercial banks as deposits and with external asset managers shrunk to $6 billion at end-March 2008 from $35.4 billion six months ago. Deposits with other central banks, the Bank for International Settlements and the International Monetary Fund rose by $52 billion.

India's total reserves grew 25 percent in 2007/08, and have remained largely steady since the end of the financial year. India's foreign exchange reserves are the third-largest holdings in Asia behind China and Japan.

Foreign direct investment rose to $15.5 billion in 2007/08 from $8.5 billion a year earlier, the RBI said.



Money Supply and Liquidity


Overnight cash rates rose to a fresh six month high in the middle of last week due to the tightening of liquidity following the increase in banks' cash reserve ratio and as a resukt of treasury bill auctions . On Wednesday call rates hit a high of 9.85 per cent, which is the highest since January 18. They were however back down to the 9.50/9.60 per cent range on Thursday.

The Reserve Bank of India increased the banks' cash reserve ratio, or the amount of deposits bank's have to keep with it, by 50 basis points last month. The two stages taken together are expected to have drained about 180 billion rupees from the banking system. The central bank is selling a total of 45-billion-rupees worth of treasury bills later in the day, the outflows towards which will take place on Friday. The central bank infused 474.80 billion rupees into the banking system through its daily money market operation, indicating the extent of cash crunch in the system.

Meanwhile M3 money supply grew an annual 20.5 per cent in early July, still way above the central bank's aim of 16.5-17.0 per cent for 2008/09.

The Rupee

The rupee had its best week in four months last week as the decline in crude oil prices reduced demand for dollars from refiners. The rupee was up for a third consecutive week on optimism exporters may have converted their overseas earnings into rupees to guard against further gains. The rupee gained 1.2 percent on the week and closed at 42.265 per dollar at 5 p.m. in Mumbai. Crude oil has now dropped 14 percent from a record $147.27 a barrel on July 11, curbing the demand for dollars in India, which imports a very large part of its energy needs.



The rupee also gained on speculation overseas funds will stop selling local shares after Prime Minister Manmohan Singh won a confidence vote in Parliament this week, giving him greater scope to liberalize the economy. Singh, with the help of his newly political ally Amar Singh of the Samajwadi Party won a majority in the lower house at the first confidence vote in a decade on July 22. The Samajwadi Party have indicated they will support legislation to reduce restrictions on foreign companies expanding in the insurance, pension and banking industries.

Overseas funds have sold $6.6 billion more Indian shares than they have bought so far this year.

While Chidambaram is evidently right here in big picture terms, it is important not to underplay the seriousness of the problem which is being posed by inflation at the present time, nor should he try to deny the significance of the deteriorating fiscal outlook in India, since, as he is indicating, India is far from being in recession, or even in danger of a serious slowdown, so it is important that these twin problems of fiscal deficit and spiralling inflation be gotten under control now.

The decision by Fitch to revise India's local currency outlook to negative from stable is based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.

James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.

Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.

India's total central government deficit - including the subsidies to oil companies - may surpass 6.5% of GDP in the current financial. Even the budgeted deficit could rise to 4.5% of GDP from the projected 2.8% of GDP due to higher on-budget subsidies, together with rising interest payments and public sector wages. In addition to this, Fitch argue that bonds issued to oil and fertilizer companies may well reach 2% of GDP in 2008-09.

Higher oil prices have raised India's oil import bill dramatically in last three years, and the goods trade deficit was equivalent to 7.7% of GDP in 2007-08. The current account deficit, however, was much smaller at around 1.5% of GDP, due to high services exports and the strong remittances inflow (estimated by the World Bank at 2.8% of GDP in 2006).




Fitch forecast that the trade deficit will widen further in 2008-09 to 8.2% of GDP, although they suggest the current account deficit may remain broadly unchanged at 1.5%. The IMF do not seem to be so sanguine on this as Fitch, however, (although please note they are using calender and not financial year data) since the April World Economic Outlook forecast was for a CA deficit 2008 of 3% of GDP (they are also forecasting 7.9% GDP growth WY 2008). As can be seen in the chart (below), whichever way you look at it India's external position is certainly deteriorating.




So their is a slight disconnect here, with a deteriorating fiscal side and a comparatively strong external position, which is what is being reflected in the credit rating differential between local and foreign currency.

In the past four years, the three rating agencies have raised India to investment grade on the back of its positive external financial ratios, improving budget deficit and robust GDP growth. The external position remains strong, but analysts are worried that domestic problems and a flight of capital could combine to bring down the country's credit standing.

Earlier this month, Standard and Poor's said the rising cost of subsidies, debt write-offs and public sector wage rises had increased the risk of a downgrade of the BBB-minus domestic debt rating - the lowest investment-grade rating - they assign to India.

While Standard and Poor's, like Fitch, rates both India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating. Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. Any further downgrade will only serve to speed this outflow.

While Chidambaram is evidently right here in big picture terms, it is important not to underplay the seriousness of the problem which is being posed by inflation at the present time, nor should he try to deny the significance of the deteriorating fiscal outlook in India, since, as he is indicating, India is far from being in recession, or even in danger of a serious slowdown, so it is important that these twin problems of fiscal deficit and spiralling inflation be gotten under control now.

The decision by Fitch to revise India's local currency outlook to negative from stable is based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.

James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.

Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.

India's total central government deficit - including the subsidies to oil companies - may surpass 6.5% of GDP in the current financial. Even the budgeted deficit could rise to 4.5% of GDP from the projected 2.8% of GDP due to higher on-budget subsidies, together with rising interest payments and public sector wages. In addition to this, Fitch argue that bonds issued to oil and fertilizer companies may well reach 2% of GDP in 2008-09.

Higher oil prices have raised India's oil import bill dramatically in last three years, and the goods trade deficit was equivalent to 7.7% of GDP in 2007-08. The current account deficit, however, was much smaller at around 1.5% of GDP, due to high services exports and the strong remittances inflow (estimated by the World Bank at 2.8% of GDP in 2006).




Fitch forecast that the trade deficit will widen further in 2008-09 to 8.2% of GDP, although they suggest the current account deficit may remain broadly unchanged at 1.5%. The IMF do not seem to be so sanguine on this as Fitch, however, (although please note they are using calender and not financial year data) since the April World Economic Outlook forecast was for a CA deficit 2008 of 3% of GDP (they are also forecasting 7.9% GDP growth WY 2008). As can be seen in the chart (below), whichever way you look at it India's external position is certainly deteriorating.




So their is a slight disconnect here, with a deteriorating fiscal side and a comparatively strong external position, which is what is being reflected in the credit rating differential between local and foreign currency.

In the past four years, the three rating agencies have raised India to investment grade on the back of its positive external financial ratios, improving budget deficit and robust GDP growth. The external position remains strong, but analysts are worried that domestic problems and a flight of capital could combine to bring down the country's credit standing.

Earlier this month, Standard and Poor's said the rising cost of subsidies, debt write-offs and public sector wage rises had increased the risk of a downgrade of the BBB-minus domestic debt rating - the lowest investment-grade rating - they assign to India.

While Standard and Poor's, like Fitch, rates both India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating. Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. Any further downgrade will only serve to speed this outflow.

India's central bank next meets to review monetary policy on July 29. Last month the bank raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, in an attempt to slow the rate of increase in the money supply.

In a sign that the tightening may in fact be working liquidity seems to have been under pressure all week in the Indian banking system as banks had to make additional deposits with the Reserve Bank of India (RBI) to meet stricter cash reserve requirements from Saturday. Some Indian comentaters were jokingly saying that money seemed to have disappeared down black holes in the inter-bank market. From a position of surplus funds last week, several banks have run out of headroom this weel to borrow from the Reserve Bank of India (RBI) after collectively raising Rs 30,000 crore from the central bank.

As a result, interest rates for overnight money have breached the higher end of borrowing and lending rates targeted by the RBI and are running at over 9 per cent. Bankers attribute the cash shortage to three factors. One, banks have been asked to maintain higher cash balances with RBI. Second, the central bank has been selling dollars which results in a dip in rupee funds. And third, the government is sitting on funds worth over Rs 16,613 crore raised by way of taxes.

Industrial Output

India's industrial production grew at its slowest pace in more than six years in May as spiraling prices and tightening credit prompted consumers to cut back on purchases of cars, fridges and other manufactured goods. Production at factories, utilities and mines was up 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, accodring to the statistics office in New Delhi today. Manufacturing, which accounts for about 80 percent of India's industrial production, was up 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.



Credit Downgrade Looming?

India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election lead to further deterioration in the budget deficit, Standard & Poor's said today.

India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place India on par with Indonesia, El Salvador and Guatemala. According to the S&P statement:

``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages...Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''

The Reserve Bank of India this week increased its key rate to a six-year high of 8.5 percent, joining other central banks across Asia in raising borrowing costs as soaring fuel and commodity prices stoke inflation. Some analysts are speculating that Governor Yaga Venugopal Reddy may lift the Indian benchmark by as much as 100 additional base points before the end of the year.

The RBI raised the repurchase rate by 0.5 percentage point on 24 June and lifted the cash reserve ratio to 8.75 percent from 8.25 percent, to prevent money in the banking system from fanning inflation. The move followed a quarter-point increase in the benchmark interest rate to 8 percent on June 11.



Money supply in India's banking system grew 21.4 percent from a year earlier to 41 trillion rupees ($953.5 billion) in the week ended June 6, more than the Reserve Bank's target of 16.5 to 17 percent for the fiscal year ending March.


Soaring food prices are also stoking inflation in India, where more than half the population of 1.1 billion survive on less than $2 a day. Food product costs, including bread, salt, cooking oil and tea, jumped 14 percent in the week to June 14 from a year earlier, according to today's report. Fuel price inflation rose 16.4 percent in the week ended June 14 from a year earlier. India on June 4 raised retail prices of fuels for the second time this year. Higher fuel prices led to higher transportation costs, making manufactured products and food items more expensive.

The index of manufactured products, which has a 64 percent weight in the inflation basket, rose 9.7 percent.

Foreign Exchange Reserves

India’s foreign exchange reserves rose $1.8 billion during the week ended June 20 despite sustained selling by foreign portfolio investors, indicating that the Reserve Bank of India (RBI) was a net buyer of forex assets in the market. The rise in reserves comes after a sharp decline of nearly $5 billion in the previous week. According to the latest data released by RBI, forex reserves, including gold and SDR (special drawing rights) rose $1,794 million during the week ended June 20 to touch $312.5 billion. While foreign currency assets rose $1,789 million, reserves with IMF rose $5 million. The value of gold and SDR — currency with the IMF — remained unchanged during the week.



Thus $1,794-million forex worth of assets were absorbed by the central bank during the week although these assets, even if expressed in dollar terms, include the impact of movements in the value of non-US currencies (such as euro, sterling, yen) held in the reserves. The central bank obviously intervenes to buy and sell assets denominated in a variety of currencies, and even though the currency break-down of India's reserves is not made public, the central bank does reveal the break-down of the SDR-dollar, sterling, euro yen and non-SDR currencies. This data suggests that, over the years, the share of non-SDR currencies - such as the Canadian dollar, yuan and the Australian dollar - in the reserves has been going up.

The Rupee


India's rupee fell by the most in three weeks last week, after crude oil rose to a record and demand consequently rose from importers.India's oil imports have averaged $7.7 billion a month this year, compared with $5.4 billion in 2007.

The rupee seems to be heading for its worst quarter in a decade as accelerating inflation has prompted global funds to sell more Indian equities than they have bought so far this year. The rupee is in fact now the second-worst performer among the 10 most-traded Asian currencies excluding the yen this quarter, and the rally in oil lead the rupee to retreat from the three-week high it touched on Thursday following the decision by the central bank to raise its benchmark interest rate by the most since 2000.

The rupee was down 0.5 percent to 42.88 against the dollar by the 5 p.m. close in Mumbai. That is the biggest fall since June 9.

Reserve Bank of India governor Yaga Venugopal Reddy said yesterday that prospects of more food output this year and curbs on farm exports will boost supplies and help tame inflation, playing down chances of higher interest rates. Still, India's benchmark 10-year bond yield was unchanged at 8.23 percent, the highest in a year, after the inflation data. Inflation was mainly driven by higher costs of fuel, power and light, basic metals including steel and food grains.


India, which imports 70 percent of its oil, increased prices for gasoline by 11 percent, diesel by 9 percent and cooking gas by 17 percent after oil reached a record $135.09 a barrel in New York on May 22. India previously raised fuel prices in February, the first time since June 2006.

The changes in fuel prices announced on June 4 will be reflected in the inflation data due for release on June 20.

India's food grain production may increase to a record 227.3 million tons in the year ending June, helped by bumper rice, wheat and lentils output, the agriculture ministry said in April. It may receive an additional boost as rainfall in the four-month monsoon season that started last week is forecast to be adequate.


Foreign Exchange Reserves

India’s foreign-exchange reserves fell during the week ended May 30 by $1.6 billion to $314.6 billion, according to the Reserve Bank of India yesterday. This was the fifth week this year that this has happened, which is partly an indication that the pace of capital flows has slowed, and partly a reflection of the falling value of the rupee. Foreign-currency assets fell $1.3 billion to $304.9 billion. Gold reserves fell $225 million to $9.2 billion while its reserves with the International Monetary Fund dropped $4 million to $526 million.