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Contributions to GDP Growth – Analyst Blog

Dirk Van Dijk — Thu, 29 Oct 2009 18:02:59 +0000

Not all components of GDP are created equal. Some are very big, and others relatively small. Some tend to be very stable over time, and some tend to swing violently from quarter to quarter. The bigger and more volatile they are, the more they will impact the overall growth rate of GDP.

Thus looking at just the percentage changes in the components does not tell the full story. Of the 3.5% total growth, how many points were added or subtracted by each part of the economy?

The biggest part of the economy is the Consumer, or PCE -- overall it contributed 2.36 of the 3.50 points of total growth. In the second quarter it caused 0.62 of the 0.70 total decline in the 2Q. In the first quarter it actually offset 0.44 points of the 6.40 total decline. In other words, excluding the Consumer the economy would have contracted 6.84% rather than 6.40%.

Within Consumer spending, spending on Goods added 1.79 points after subtracting 0.71 points in the 2Q and adding 0.56 points in the 1Q. Spending on Durables was the main driver, adding 1.47 points after subtracting 0.41 points in the 2Q and adding 0.28 in the 1Q. Non-Durable goods added 0.31 points after subtracting 0.29 in the 2Q and adding 0.29 in the 1Q.

While spending on Services is much more stable than spending on Goods, it is also a much larger portion of the Consumer wallet. Service spending added 0.57 points to the overall GDP growth in the 2Q -- up from adding 0.09 points in the 2Q and subtracting 0.13 in the 1Q.

It is the volatility that gives Durable goods their importance to the economy, not the overall size. In the third quarter, total spending on Durable goods was at a $1.055 Trillion annual rate, just 15.4% of the $6.852 Trillion spent on Services, but Durable goods had an impact on economic growth that was 158% bigger.

Investment spending was a big swing factor in the 3Q. It added 1.22 points to overall growth. That is a HUGE improvement over the 3.10 point subtraction in the 2Q and the 8.98 point implosion in the 1Q. Unfortunately, 0.94 points of that contribution came from Inventories.

Inventory investment is the "worst" type of GDP growth, since large increases in one quarter are usually reversed in the next quarter -- or in this case, large declines being reversed upwards. In the 2Q, Inventory investment subtracted 1.42 points from overall growth and in the 1Q it subtracted 2.36 points. Even in the 4Q, it subtracted 0.64 points from growth. Three straight quarters of sharply lower inventories is highly unusual, and we were due for a bounce. Perhaps we have one more quarter of a solid contribution from Inventory investment, but I would not expect it to last much beyond that.

Overall Fixed investment added just 0.28 points to growth, but that sure was a nice improvement over the 1.68 point subtraction and the 6.62 point disaster that was the 1Q. However, it was not coming from the business side. Business investment subtracted 0.24 growth points in the 3Q, so it is still very soft, but at least it is not imploding like it was earlier in the year. In the 2Q it subtracted 1.01 points and in the 1Q it took away 5.29 growth points.

Within business investment it was spending on structures that caused the problem, with a deduction of 0.32 growth points while spending on E&S offset 0.08 points of that. In the 2Q, both sides of business investment were drags on the economy with investment in Commercial real estate subtracting 0.69 growth points, and spending on equipment deducting 0.32 points. The 2Q was in turn a major improvement over the 1Q disaster, where spending on structures subtracted 2.28 growth points and equipment spending subtracted 3.01 points.

Housing finally helped the economy in the 3Q, adding 0.53 points to growth -- after a string of 15 straight quarters where it was a drag on the economy. In the 2Q it was a 0.67-point drag and in the 1Q it was a 1.33-point drag.

The long decline has, however, made housing a much smaller share of the overall economy. In the 3Q, residential investment totaled only $360.9 billion, or 2.52% of the overall economy. At the peak of the housing bubble, it represented 6.34% of the overall economy. Thus the 23.4% increase in residential investment had far less of an overall impact than it did in the past.

While residential investment is still near a record low share of the overall economy, I have serious questions about the sustainability of the increase. The extension and expansion of the the tax credit by Congress might keep things going for the next few quarters, but after that things are likely to fall apart again. Just like we saw with the "Cash for Clunkers" (C4C) program, it is probably just encouraging those folks who might have bought later to buy now.

It is also tricking people into thinking that a house is more affordable that it really is -- just the way that teaser-rate ARM’s did, and we saw just how well that worked out. The FHA is handing out mortgages with only 3.5% down, and people can use the tax credit for that ridiculously small down payment. This has future disaster of biblical proportions written all over it. The next bailouts will not be of the banks like Bank of America (BAC) and Citigroup (C) but of the FDIC and the FHA.

Direct Government spending had a small but positive impact on overall growth in the 3Q, adding 0.48 points -- a fairly significant slowdown from the 1.33 contribution in the 2Q, but better than the 0.52 point drag in the 1Q. All the help came from Washington, not City Hall or the Statehouse.

The Federal government added 0.62 growth points, down from 0.85 points in the 2Q but up from a 0.33 point drag in the 1Q. The Pentagon was the main factor in all three quarters, with Defense spending adding 0.45 points in the 3Q following a 0.70 addition in the 2Q and a 0.27 point drag in the 1Q. Non-Defense spending was sort of a non-issue, adding just 0.17 points in the 3Q, not much difference from the 0.15-point contribution in the 2Q, and up a little bit from the slight 0.06 point drag in the 1Q.

State and Local governments are not allowed to run operating deficits, and so when faced with declining tax revenues they have to cut back, unless Uncle Sam helps them out. Well, Washington is helping, but it's not enough, and S&L spending was a 0.14 point drag in the 3Q. The Federal help was enough in the 2Q and so the contribution to growth in the 2Q was a positive 0.48 points. In the 1Q, before the stimulus package could get much traction, S&L spending was a 0.19 point drag.

Net exports had been just about the only bright spot in the first half of the year -- even though it came the wrong way, from both imports and exports plunging, only with imports falling more than exports did. That reversed in the 3Q, as both showed a nice expansion, but our appetite for foreign goods is outstripping the desire for U.S. goods and services abroad.

The increase in exports added 1.49 points to growth, but the increase in imports was a 2.01 point drag, for a net negative contribution from net exports of 0.52 points. In the 2Q, falling exports subtracted 0.45 points, but plunging imports added 2.09 points, for a net imports net help to the economy of 1.64 points.

In the first quarter, as world trade came to a near-standstill, net exports were just about the only positive you could find for the economy. Yes, plunging exports subtracted an awful 3.95 points of growth, but the fact that we were buying practically nothing from overseas added 6.58 growth points, for a net aid to the economy of 2.85 points. In other words, if the U.S. were a closed economy in the first quarter, growth would have fallen not at a 6.4% rate, but at a 9.25% rate.

Overall

Overall this is a very welcome report. It confirms that the recession is over and that we are on the right track. However, I am not thrilled about the overall composition of the growth. Over time we need to see the consumer become a much smaller part of the overall economy, and real business investment become a much bigger share.

Unfortunately, we seem to be headed in the wrong direction, with the growth in consumer spending nearly keeping up with the overall growth of the economy. This is especially true if you consider Residential Investment as primarily part of Consumption. We need net exports to play a bigger and more positive role in the economy, and ideally have that happen through exports growing faster than imports, not from a plunge in imports like we saw in the first half of the year.

Seeing net exports turn into a drag again is disappointing. A big part of that, however, is due to oil imports, and the increase in the price of oil. That is a long-term structural problem that needs to be addressed. Fortunately, the opening-up of the shale gas plays gives us a chance to finally do something about it, but I’m not sure how fast that will occur. That, along with more efficiency and alternative energy sources, can make a dent over time, but not overnight.

But it is a fertile place to see an increase in Investment spending, so it could have a double-barreled effect -- on both the investment line and on the net exports line. The contribution from inventories is not sustainable long-term, but given how much they fell prior to this rebound, we might see a bit more of it in the 4Q, though not much beyond that.

The increase in Consumption spending was largely due to the C4C program, which is now over, so don’t look for a big contribution from Durable goods spending in the fourth quarter.

All in all, a better-than-expected report, but don’t be deluded into thinking that we are out of the woods and the coast is clear. We still face major challenges, and getting complacent here would be a big mistake.
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Profit by Considering Sustainable Energy Past the Oil Play

QualityStocks — Fri, 16 Oct 2009 17:29:39 +0000

Over the last several years, politicians have been grappling with the need for sustainable energy. As this discussion has become rather commonplace, investors have become immune to the discussion. Ignoring the possibilities may be an error as there are many ways to profit in the energy sector. As an average investor, oil is often the [...]

Zacks Analyst Blog Highlights: Ford, Honda, Caterpillar, Boeing and Chevron Corp. – Press Releases

Zacks Market Commentaries — Mon, 12 Oct 2009 12:15:00 +0000

For Immediate Release

Chicago, IL – October 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: Ford (F), Honda (HMC), Caterpillar (CAT), Boeing (BA) and Chevron Corp. (CVX).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Friday’s Analyst Blog:

Trade Deficit Improves

While the year-over-year improvement in the trade deficit is very good news, the reason for it is not so good. It was a reflection of the overall collapse in world trade, something that makes everyone poorer. As far as the GDP calculations are concerned, it does not make any difference -- a decline in the trade deficit is a decline in the trade deficit -- and it is something that feeds directly into the calculations.

However, it is not like there has been a big surge in people buying domestically produced Fords (F) rather than foreign produced Hondas (HMC). Rather, the fall in imports has been simply fewer people buying cars, period. Currently, for every dollar of goods and services we export, we import $1.24 -- down from $1.38 a year ago, but still way out of whack.

It was not until the price of oil crashed last fall that we started to see real improvement in the overall deficit. Now that benefit is largely gone. While the price of imported oil has a bit of a lag with the prices in the pits, there is clearly a relationship. The price of imported oil bottomed in February at $39.22 and was $64.75 in August. It will most likely go up again in September.

It is somewhat ironic that the most dramatic part of the improvement in the trade deficit came as the dollar dramatically strengthened a year ago in the flight-to-safety trade. The path of the trade deficit has not yet been greatly affected by the path of the dollar, for two major reasons.

First, a very large part (over half) of our trade deficit is due to oil imports, and when the dollar is weak, the price of oil tends to go up to compensate. Second, our biggest single deficit is with China, which has effectively pegged the Yuan to the dollar. In August, the China deficit fell to $20.2 billion from $20.4 billion, but still represented 65.1% of the total deficit. Put another way: in August, our deficit with China was more than our deficits with OPEC, The European Union, Japan and Mexico...combined!

The flight-to-safety dollar trade is now unwinding, and the greenback is almost back to the levels it was at before the fall of the House of Lehman. Over time, this should lead to further improvements in our non-oil trade deficit -- if not with China, then with the rest of the world. It might even indirectly help with the Chinese deficit even though the value of the Yuan is effectively fixed to the price of the dollar.

This would happen at the expense of the Japanese or the Europeans, as the Chinese decide to buy their heavy earth-moving equipment from Caterpillar (CAT) rather than from Komatsu, or airplanes from Boeing (BA) rather than Airbus.

Chevron’s Positive Upstream Update

Chevron Corp. (CVX) released its third-quarter interim update, covering the first two months of the quarter. On the whole, the update is positive, with earnings expected to be higher than in the previous quarter.

The company expects the upstream segment to benefit from an increase in crude oil prices as well as from gains of about $400 million associated with asset sales and tax items. Downstream results are likely to be relatively flat, as it continues to be hurt by weak refining margins. Chevron further said that unfavorable foreign currency movements will affect the segment profitability.

The best part of the update pertained to upstream volumes, highlighting Chevron’s attractive growth profile among the super-majors. The company reported that oil and natural gas production average 2.687 million oil-equivalent barrels per day – better than estimates and nearly 10% above the third-quarter 2008 level. Compared to the second quarter of 2009, production would be up by about a percentage.

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Prieur’s readings (October 12, 2009)

Prieur du Plessis — Mon, 12 Oct 2009 06:12:31 +0000

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other worthwhile articles you would like to share to the comments section.

Trade Deficit Improves – Analyst Blog

Dirk Van Dijk — Fri, 09 Oct 2009 17:14:12 +0000

In August, the monthly trade deficit fell to $30.7 billion from $31.9 billion in July. We got improvement from both sides as exports rose by $0.2 billion to $128.2 billion and imports fell to $158.9 billion from $159.8 billion in July, a decrease of $0.9 billion. This reverses two months where the trade deficit rose slightly.

On the other hand, over the last year the trade deficit is down dramatically. A year ago our imports were $63.6 billion higher than now, at $222.6 billion, and our exports were $33.4 billion higher at $161.7 billion, resulting in a deficit of $60.9 billion.

While the year-over-year improvement in the trade deficit is very good news, the reason for it is not so good. It was a refection of the overall collapse in world trade, something that makes everyone poorer. As far as the GDP calculations are concerned, it does not make any difference -- a decline in the trade deficit is a decline in the trade deficit -- and it is something that feeds directly into the calculations.

However, it is not like there has been a big surge in people buying domestically produced Fords (F) rather than foreign produced Hondas (HMC). Rather, the fall in imports has been simply fewer people buying cars, period. Currently, for every dollar of goods and services we export, we import $1.24 -- down from $1.38 a year ago, but still way out of whack.

As the chart below shows (from http://www.calculatedriskblog.com/), a big part of our overall trade deficit comes from our addiction to foreign oil. The blue line shows the total trade deficit, while the black line shows the oil portion, and the red line shows everything else. Our overall trade deficit actually peaked (or hit bottom, as shown in the graph) at the end of 2005, and then went into a broad valley that lasted until last summer. That actually masked the underlying dynamics, as the non oil deficit actually started about the time the overall deficit first hit the valley floor, but the oil portion of the deficit soared along with the price of oil.

It was not until the price of oil crashed last fall that we started to see real improvement in the overall deficit. Now that benefit is largely gone. While the price of imported oil has a bit of a lag with the prices in the pits, there is clearly a relationship. The price of imported oil bottomed in February at $39.22 and was $64.75 in August. It will most likely go up again in September.

It is somewhat ironic that the most dramatic part of the improvement in the trade deficit came as the dollar dramatically strengthened a year ago in the flight-to-safety trade. The path of the trade deficit has not yet been greatly affected by the path of the dollar, for two major reasons.

First, a very large part (over half) of our trade deficit is due to oil imports, and when the dollar is weak, the price of oil tends to go up to compensate. Second, our biggest single deficit is with China, which has effectively pegged the Yuan to the dollar. In August, the China deficit fell to $20.2 billion from $20.4 billion, but still represented 65.1% of the total deficit. Put another way: in August, our deficit with China was more than our deficits with OPEC, The European Union, Japan and Mexico...combined!

The flight-to-safety dollar trade is now unwinding, and the greenback is almost back to the levels it was at before the fall of the House of Lehman. Over time, this should lead to further improvements in our non-oil trade deficit -- if not with China, then with the rest of the world. It might even indirectly help with the Chinese deficit even though the value of the Yuan is effectively fixed to the price of the dollar.

This would happen at the expense of the Japanese or the Europeans, as the Chinese decide to buy their heavy earth-moving equipment from Caterpillar (CAT) rather than from Komatsu, or airplanes from Boeing (BA) rather than Airbus.

An expansion of our exports is vital to our long-term economic health. Consumption is a far higher percentage of our economy (71%) than it is for the rest of the G7 (average is about 64%). We have not always been an economy that was so lopsided in favor of consumption -- in fact, on average since the end of WWII we have consumption has averaged 64.5% of GDP, but consumption has been an ever-increasing share since the early 1980’s.

If our consumption share were to trend back down to that historical average, and the level that most comparable countries are at, then something else has to increase. It would be nice if it were offset by an increase in business investment as a share of GDP. But where is the incentive for businesses to invest if consumers are spending less?

Remember that capital is by far the most mobile factor of production, so if you answered "cut capital gains taxes" to provide the incentive, that would not work. For starters, they are already greatly preferentially treated, and secondly, they apply as much to investments abroad as here.

If investment is as likely to fall as rise in response to a decline in the consumer as a share of GDP, that leaves either government spending or net exports to pick up the slack. In case you have not noticed, the government debt is a bit on the high side, and we are running a deficit of about $1.8 Trillion, so there is not a lot of room there. If the import side of net exports is constrained by the price of oil, and a pegged Yuan, the only variable that provides much hope is increased exports.

Efforts to bring down the amount of oil we consume but replacing it with domestic sources of energy would also help a great deal, as they would raise investment (say building windmills, or drilling for Natural Gas in North Dakota) as well as reducing our need to import oil. A falling dollar will help stimulate our exports, and should be seen as a good, or at least necessary, thing.

Read the full analyst report on "F"
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Read the full analyst report on "CAT"
Read the full analyst report on "BA"
Zacks Investment Research

An Unsustainable Stimulus

Bill Bonner — Fri, 14 Aug 2009 19:32:33 +0000

pHow do you like this recovery? Pretty good, huh? Except for the jobs, of course. And except for the retail sales. And except for the foreclosures#8230; and house prices. And incomes. And consumer prices. And business profits. It’s like a female impersonator#8230; just like a real woman in every way, except for the essential ones./p pAt least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it’s already beat the bounce of ’30#8230; it’s in its 6 th month. In terms of stock prices, it’s still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short#8230;/p

Good News and Bad News from the GDP release

Menzie Chinn — Sat, 01 Aug 2009 17:35:32 +0000

Some additional observations (see Jim Hamilton's take, as well as others) on the GDP release: (1) the five year revision indicates that GDP was larger than we thought, but it also declined faster in 2009Q1; (2) GDP growth was lower throughout 2008 than earlier estimated; (3) GDP growth in 2008Q2 at 1.5% SAAR would have likely been at zero or negative in the absence of the January 2008 stimulus package in which case; (4) GDP q/q growth would have been negative from 2008Q1 to 2009Q2; (5) the case that ARRA directly affected 2009Q2 GDP is limited, in a mechanical sense since most of the increase in government spending is accounted for by defense spending; and (6) the US ex-oil ex-agricultural net exports to GDP ratio is back to where it was in 1998Q1.

Just a recap: GDP q/q SAAR came in above the -1.6% growth predicted in the early-July WSJ survey (see here), but below the Bloomberg consensus reported a few days before the release.

The log level of GDP, as reported in the final 2009Q1 and advance 2009Q2 releases, is depicted in Figure 1. According to the revisions, GDP is now 4% lower than a year ago, in log terms. This is the largest recorded year-on-year change in GDP in the post-War period.

Figure 1: GDP in pseudo-Ch.2000$ SAAR from 09Q2 advance (dark blue), GDP in Ch.2000$ from 09Q1 final (red). NBER defined recession dates shaded gray. GDP in Ch.2005$ converted to Ch.2000$ using ratio of GDP deflators in 2005. Source: BEA 2009Q2 advance GDP release and 2009Q1 final release, NBER and author's calculations.

GDP larger pre-recession, but shrinking faster in 09Q1

Note that the BEA changed the units in which it measured real output, from Chained 2000 dollars to Chained 2005 dollars. In order to get them in comparable units, I adjusted the series in Ch.2005$ by the difference in deflators between 2005 and 2000. Hence, this is an ad hoc adjustment, which does not fully account for the many differences (see the GDP release for details, as well as NYT).

The major reason why real GDP is higher than earlier estimated is because nominal GDP is higher.

Notice further that while GDP only declined by 1% SAAR in 2009Q2, 2009Q1 GDP growth was revised downward. These revisions are shown in Figure 2.

Figure 2: Quarter on quarter annualized growth rates of GDP in Ch.2005$ (blue), of GDP in Ch.2000$ (red). Growth rates calculated as log first differences. NBER defined recession dates shaded gray. Source: BEA 2009Q2 advance GDP release and 2009Q1 final release, NBER and author's calculations.

The Bush stimulus

With the exception of 08Q2, q/q growth has been negative since 08Q1. Even 08Q2 q/q SAAR growth was only 1.5 ppts. A CBO analysis of the impact of the January 2008 stimulus package indicated that consumption growth was raised about 2.3 ppts in 08Q2. Since consumption is about 70 percent of GDP, then -- holding all else constant -- then GDP growth was about 1.6 ppts higher (of course, not all else was held constant, but this is good enough for back-of-the envelope).

Beware revisions

Let me observe that GDP is a number subject to numerous revisions, and people who make definitive pronouncements about the state of the economy based on advance releases of GDP around likely turning points (case in point discussed here) are likely to be embarrassed in the future. This applies to both maxima and minima; troughs will likely be re-assessed in the future as well. These comprehensive revisions also highlight why the NBER BCDC focuses on four other variables above and beyond GDP.

The impact of ARRA in 09Q2

In terms of contributions to growth, there's been some discussion of how the stimulus package has, or has not, had an impact on 2009Q2 growth. In mechanical terms, it's hard to see an impact. First, as indicated in this post, the cumulative amount spent through June 2009 was only about $60 billion. Second, according to the NIPA definition of spending on goods and services, very little of the growth can be accounted for by Federal nondefense spending [1].

Figure 3: Growth rate of GDP in Ch.2005$ (dark purple thick bar), contribution from consumption (light blue bar), from Federal nondefense spending (dark orange bar), Defense spending (light green bar) and state and local government spending (light orange bar), all in percentage points. NBER defined recession dates shaded gray. Source: BEA 2009Q2 advance GDP release, and NBER.

Even state and local government spending only contributes slightly to growth. I have two caveats here. First, working in the mechanical sense, while state and local spending only contributed a small positive amount (0.3 ppts) in 2009Q2, this is a reversal from 2009Q1 when state and local spending was deducting 0.2 ppts from growth. In the absence of the stimulus bill, state and local spending might very well have continued to deduct from growth, as states were forced to balance budgets.

Accounting is useful, but it's important to recall Figure 3 presents only an accounting decomposition. Intertemporal considerations come into play, to the extent that households, anticipating higher future income than would otherwise would have occurred. State and local governments probably kept some projects running, rather than shutting them down, with knowledge that funds would be coming in. I don't want to overstress these channels, but the intertemporal perspective is, in any case, the hallmark of the New Classical approach. (In my view, this effect is likely to be large only if one is a believer that the intertemporal rate of substitution is large and liquidity constraints minor, and I'm not quite ready to go so "New Classical"). I expect the biggest impacts to be in the future (and I, like the CBO, expect those effects to be noticeable).

Tracking trade

The trade balance still seems to be improving, either overall, or when excluding agricultural exports and oil imports. In fact, the latter is back to the levels of 1998Q1.

Figure 4: Real value of dollar against a broad basket of currencies (blue, left axis), net exports to GDP (red, right axis) and exports ex.-agric minus imports ex.-oil to GDP (green, right axis). NBER defined recession dates shaded gray. GDP Source: BEA 2009Q2 advance GDP release, NBER and author's calculations.

That being said, real goods imports (ex.-oil) and exports (ex.-agric.) are still decreasing, albeit at slower rates than before [2]. The reported values for 2009Q2 are based upon only two months' worth of data, so we'll have to wait until the preliminary release for a better fix on where trade volumes are going.

Figure 5: Log exports ex.-agricultural goods in Ch.2005$ (blue) and log imports ex.-oil (red). NBER defined recession dates shaded gray. Source: BEA 2009Q2 advance GDP release, NBER and author's calculations.

Since exports are still declining, they are deducting (mechanically) from the components of growth. I've viewed the sharp drop in trade volumes as a function of sharply declining world output combined with high income elasticities (perhaps due to vertical specialization) and a credit crunch [3], [4]; in contrast Freund believes that the dropoff is explicable in terms of elasticities. How fast trade volumes bounce back depends upon the importance of each factor, and the pace of resolution of the credit crunch [5].

Zacks Bull and Bear of the Day Highlights: Heinz, Xtent, Inc., Boeing, Caterpillar and Microsoft – Press Releases

Zacks Market Commentaries — Mon, 13 Jul 2009 14:11:14 +0000

For Immediate Release

Chicago, IL – July 13, 2009 – Zacks Equity Research highlights Heinz (HNZ) as the Bull of the Day and Xtent, Inc. (XTNT) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Boeing (BA), Caterpillar (CAT) and Microsoft (MSFT).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676.

Here is a synopsis of all five stocks:

Bull of the Day:

Growth in Heinz’s (HNZ) domestic businesses, strengthening international operations, and the reallocation of resources in favor of key brands are major positive trends for the company.

Despite cost pressure from higher commodity costs, strong pricing of 3.5% to 4.5% has allowed the company to report positive earnings surprises in the last twelve quarters. Management expects net sales to increase by 4% to 6% in fiscal 2010 driven by new product introductions and positive pricing.

In addition, the stock's valuation is attractive. The Buy rating is maintained.

Bear of the Day:

Xtent, Inc.’s (XTNT) Custom NX drug eluting stent (DES) Systems treats coronary artery disease (CAD), the leading form of cardiovascular disease and major cause of death in the U.S. and Europe. CAD accounts for over 650,000 annual deaths and affects over 13 million people in the U.S.

The company received CE mark approval for the product. However, commercialization of the product in Europe may be delayed due to the company's shortage of funds.

As such, we lowered our near-term revenue estimates and downgraded this stock to a Sell.

Trade Deficit Declines – Analyst Blog

Dirk Van Dijk — Fri, 10 Jul 2009 18:08:28 +0000

In May, the U.S. trade deficit fell to $26.0 billion from 28.8 billion in April, a decline of $2.8 billion. For a change, the principal reason for the decline was both a rise in exports -- which rose by $1.9 billion -- as well as a fall in imports -- which declined by $0.9 billion.

Most of the previous (and remarkable) decline over the past year or so has been do to imports falling much faster than exports. True, as the graph below (from http://www.calculatedriskblog.com/) shows, a big part of the decline in imports has been due to a shrinking oil bill. This is both due to lower prices (oil prices peaked out about $145/barrel a year ago) and due to lower consumption.

The improvement in the non oil part of the trade deficit, shown in red on the graph, started earlier (late 2005) and has been remarkable in its own right. Until a year ago, the progress on that front was obscured by the huge oil portion of the trade deficit (shown in black on the graph). Oil is part of a larger category of industrial supplies and materials, our exports of those were up by $2.1 billion while our imports of them fell by $0.7 billion. In other words, the entire change in the overall trade balance can be accounted for in the change of the trade balance in industrial goods and materials.

However, for the month, the story was not all about oil, since while oil prices were down on a year-over-year basis, they were higher in May than in April, and the increase in our exports of industrial goods and materials was a bigger factor in the decline in our imports. This can be seen in the regional trade deficit numbers.

For the month, our deficit actually expanded with OPEC to $4.1 billion from $3.6 billion. Most of the improvement in the overall trade deficit numbers came from a sharply reduced deficit with the European Union ($2.8 billion vs. $5.3 billion in April) and with Japan ($1.9 billion versus $3.2 billion).

Our trade deficit with China actually widened to $17.5 billion from $16.8 billion. As a percentage of the overall trade deficit, that is a pretty astounding 67.3%, up from 57.3%. A year ago the trade deficit with China was $21.4 billion, so we have brought it down significantly on an absolute basis, mostly because we are buying less stuff from them at Wal-Mart (WMT) and Target (TGT). However, as a percentage of the overall trade deficit, China has soared from "just" 35.3% a year ago.

Relative to a year ago, the overall trade deficit is down by $34.6 billion, or 57.1%. However, this has been achieved through a $67.9 billon, or 31.1% decline in imports and a $33.3 billion decline in exports. While as a matter of National Income Accounting (what goes into GDP) that does not make much of a difference, in the real world of creating jobs and producing profits for investors it makes all the difference in the world.

Yes, it is nice to see imports decline, particularly things like oil imports, but it would be far better if we were reducing the deficit by selling more abroad, rather than buying less here. If there were some evidence that the reason for the reduced imports was that we were making more of what we consume here, say by buying Chevys built in Detroit rather than Hondas built in Tokyo (or Hondas build in Tennessee, for that matter), it might be a different story.

However, it appears that the reduction in imports is just another reflection of weak overall demand. The change in the balance of industrial goods and materials (including oil) was a very significant part of the year over year improvement, with our monthly import bill falling by 34.9 billion while our monthly exports were down by $11.0 billion. In other words, this category was responsible for $23.9 billion -- or 72.6% -- of the total improvement on a year-over-year basis.

Net imports (aka the trade deficit) is a direct input into the GDP numbers. The improvement in the May trade deficit will be an important factor in making the second quarter GDP growth decline much less than the 5.5% decline we saw in the first quarter. Since our exports are by definition the imports of some other country, the fact that demand for them is rising might indicate that the rest of the world is also starting to find its economic footing (although it would show up as a negative in their national income accounts, just as it helps ours).

I find the rise in actual exports to be a very encouraging sign. It might just be signaling some light at the end of the tunnel for major U.S. exporters like Boeing (BA), Caterpillar (CAT) and Microsoft (MSFT).

Read the full analyst report on "WMT"
Read the full analyst report on "TGT"
Read the full analyst report on "BA"
Read the full analyst report on "CAT"
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Plug-In Electric Vehicles: In Search of the Mass-Produced Hybrid

Investment U — Fri, 26 Jun 2009 21:18:21 +0000

Plug-In Electric Vehicles: In Search of the Mass-Produced Hybrid by David Fessler, Advisory Panelist We found out that Tesla Motors joined the growing list of automakers receiving federal funds this week. It locked up $465 million to develop and produce battery-powered vehicles. But as we know too well, large government checks are hardly ever the answer to our [...]

G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

Contrarian Profits — Mon, 15 Jun 2009 14:20:15 +0000

div class="entry" h4Top financial officials from the a href="http://encarta.msn.com/encyclopedia_761589420/Group_of_Eight.html" target="_blank"Group of Eight/a (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.br / /h4 pThe G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create #8220;a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/06/13/AR2009061301479.html?hpid=sec-business" target="_blank"a set of common principles and standards/a governing the conduct of international business and finance,#8221;strongemThe Washington Post/em/strong reported./p pIn a communiqué called #8220;the Lecce Framework#8221; – which described the strategy for obtaining those goals –#8230;/p/div

Is The Indian Economy Heading For Its Finest Hour?

Edward Hugh — Mon, 18 May 2009 16:55:00 +0000

by Edward Hugh: Barcelonabr /br /br /blockquote"For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving,on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to."br /a href="http://krugman.blogs.nytimes.com/2009/04/27/japans-recovery-again/"Paul Krugman /abr /br //blockquoteblockquoteWith results still coming in, projections show the United Progressive Alliance is likely to win about 250 seats, making it a shoo-in to form the next government and provide continuity, a stable administration and progress on key economic and corporate reforms.br /a href="http://online.wsj.com/article/SB124247401653426893.html"Wall Street Journal/a, May 16 2009/blockquotebr /blockquotePrime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty.....Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third largest economy.br /a href="http://www.bloomberg.com/apps/news?pid=20601091amp;sid=akuJ.QBgbLawamp;refer=india"Bloomberg/a, May 18 2009/blockquotepbr /Many are called, but few are chosen, as the saying goes. But could it just be that this time around, and on a one-off, never to be repeated basis, India might find itself right there in the midst of things, with a 50-50 opportunity to add its name to that select and noble band, the chosen few. After all, someone has to lead the next global charge. The majority of the developed economies are either weighted down with substantial quantities of debt that they desperately need to pay off, or weighted down with elderly populations which are weakening consumption growth and leading to export dependence (Germany, Japan...). And as Krugman humorously points out, someone will have to add the extra demand which will allow global trade to start to grow again, so why should India not supply a significant part of this new demand, after all we are more likely to find consumers in India than we are on Mars. /ppIndia's Sensitive index, or Sensex, surged 2,099.21 points to 14,272.63 on Monday morning, posting a record 17 percent gain, and prompting exchanges to halt trading at 9:55 am, initially for 2 hours and then for the rest of the day, the first time ever that this has happened.The rupee also jumped the most in two decades while bonds rose. The reason for the surge is not due to any deap seated admiration for the Singh government itself, but rather a sense of optimisim that it will give India the continuity and stability it needs to grasp the challenge before it with both hands.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/ShBgX6_fAII/AAAAAAAAN9k/LlhEmBTFveM/s1600-h/india+two.png"img id="BLOGGER_PHOTO_ID_5336871522522824834" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 220px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/ShBgX6_fAII/AAAAAAAAN9k/LlhEmBTFveM/s400/india+two.png" border="0" //abr /br //pp/ppstrongFrom "Hindu Growth" To A Global Powerhouse/strongbr /br /But why the enthusiasm now? Certainly India's post independence growth record has been notoriously uneven, with growth rates up to the 1980s low and extremely volatile. But then, in the 1980s and 1990s things started to change, economic reform started, tentatively at first, and more substantially later, while Inda's demographic profile started to improve, as the country faced the prospect of a steadily growing, healthier and better educated workforce. Post 2000 growth really started to take off - and has averaged around 7 percent since then. In 2007 the Indian economy maintained an impressive 9 per cent growth rate, despite the arrival of the sub-prime crisis (although not a few were talking of overheating, and "bubbles"), only then to drop back to a 7.3 percent rate in 2008, with the IMF are currently forecasting growth of 4.5 percent in 2009.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/ShAO8r_zXjI/AAAAAAAAN9U/MisOvFchyeo/s1600-h/INDIA+long+term+GDP.png"img id="BLOGGER_PHOTO_ID_5336781994199309874" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 220px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAO8r_zXjI/AAAAAAAAN9U/MisOvFchyeo/s400/INDIA+long+term+GDP.png" border="0" //abr /br /Evidence of the recent slowdown in the Indian economy is everywhere, but this, it should be stressed, is a "slowdown" and not an outright crisis of the kind we are seeing in many other countries. GDP growth slowed in Q4 2008 to 5.3 percent (from 7.6 percent in Q3), a serious development, but not an outright disaster.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sg_Xin_WTaI/AAAAAAAAN8s/LPglwvy_DSQ/s1600-h/india+GDP.png"/ppimg id="BLOGGER_PHOTO_ID_5336721073307536802" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 264px; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sg_Xin_WTaI/AAAAAAAAN8s/LPglwvy_DSQ/s400/india+GDP.png" border="0" //abr /Industrial output also fell year on year by about 1 percent during the first three months of 2009, which compared to the 8.7 percent rise in the first quarter of 2008 was disturbing, eespecially since this is the first time we have seen a quarterly contraction in many years. Money supply has remained rather more constant, and M3 growth to mid February 2009 was an annual 19.9 percent as compared to 21.6 percent growth last year, so the rate of increase has only eased marginally. And in the meantime the annual rate of wholesale price inflation has fallen back strongly, hitting an estimated 0.48 percent at the start of May. But then, since money supply growth hasn't slackened that much, there has evidently been a significant weakening in internal demand (alongside the obvious fall in commodity prices). /ppA number of fiscal stimulus packages have been put in place, and as a result the fiscal deficit from April 2008 to January 2009 was 174.3 per cent above that for the corresponding period a year earlier. The revenue deficit was up by 278 percent higher, indicating very strong pressures on the fiscal deficit and a significant departure from the The Fiscal Responsibility and Budget Management Act (FRBM). This surge in the fiscal deficit has been widely criticised, and Standard and Poor's reduced India’s rating outlook to negative from stable in February, citing the danger that “continued loose fiscal policy would result in a downgrade” in the country’s credit rating. In the meantime it affirmed India’s BBB- long-term credit rating, the lowest investment grade level. /ppBut there are reasons for optimism. As Duvvuri Subbarao (Governor of the Reserve Bank of India) argued in a speech - ‘India, Managing the Impact of the Global Financial Crisis’ - delivered to the Conference of Indian Industries on 26 March this year, the Indian economy has been spared the worst of the blast from the present crisis for two reasons. The Indian economy is still not sufficiently "open" to take a direct hit - only 15 percent of the Indian economy is export oriented - and Indian banks and financial corporations were relatively free of contamination from "toxic" instruments. /ppstrongWhy Should We Expect A Ressurgence In Indian Growth?/strong/ppIn order to understand what may happen next, perhaps the most import thing to grasp is what it was that just happened. In some ways a quick look at look at the Reuters/Jeffries CRB commodities index (see chart below) says it all. The chart - which shows the evolution of this index from the mid 1990s to date - immediately makes a number of important details about what has been going on incredibly clear. In the first place we can see how, after long languising idly around some sort of mean, a secular rise in commodity prices starts up around 2002 and last for around four years, eventually flattening out from between 2006 to mid 2007. After this there was a further strong surge forward in the autumn of 2007 which lead to a sharp spike upwards. Basically, you could say (with the benefit of hindsight) that this period from August 2007 to July 2008 was the "overheating" period, as the growth crisis in the developed economies which followed the initial wave of "financial turbulence" in the US lead to massive inflows of funds into the BRIC and other emerging economies. This produced a sharp spike in commodity price inflation, and monetary tightening in one emerging economy after another. A desperate attempt to avoid the inevitable correction in the global economy which would follow the sub-prime "blow out" was "forcing" growth in the emerging economies at a rate they could not withstand (given global resource constraints), and the thing inevitably had to burst. Commodities peaked in July 2008, but the correction in the real economy only set in following the aftermath of the collapse of Lehman Brothers in October. /ppThe Reuters Jeffries index hit an all-time series high of 473.518 on 2 July 2008, but was still stuck in the low 200s as we entered May 2009.br //ppa href="http://4.bp.blogspot.com/_ngczZkrw340/ShBgnp7roVI/AAAAAAAAN98/1TOl0TpTYQI/s1600-h/india+five.png"img id="BLOGGER_PHOTO_ID_5336871792821379410" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 213px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShBgnp7roVI/AAAAAAAAN98/1TOl0TpTYQI/s400/india+five.png" border="0" //a /ppSo the real point I would make a about the current slowdown is not the result of a problem inherent to the Indian economy as much as a reflection of more general problems at the global level, whereby the Indian economy was first accelerated and then half crashed. Which is why I personally think the recent (and highly controversial) US bank stress tests were so important, not because of their significance from a US banking point ofview (which is what all the fuss was about), but because of the reassurance they can give market participants that we are not going to see another financial explosion in the United States (as opposed to a protracted recession, and slow recovery). Uncle Ben is thus underwriting the recovery in emergent economies like India and Brazil by offering the reassurance that investors need that there will not be another violent bout of instability. What India and Brazil now most need is for Ben Benanke to commit to mainaining US interest rates near zero for a sustained period of time, so that people can practice "carry" with a certain degree of confidence that things won't unwind, then, I think, we are up, up and away. So, on behalf of everyone concerned, thank you Ben./ppbr /strongHere Come The Opportunitiesbr //strongbr /India’s inflation rate stayed under one percent for a ninth consecutive week at the start of May, giving the central bank a much needed margin to keep the current record-low interest rates in place and offering the outlook of inflation free economic growth for some time to come. With so much slack in the global economy, a sudden surge in commodity prices like the one we saw in the autumn of 2008 is most unlikely, and so, as they say, while the cat is away the mice can well and truly play./ppWholesale prices rose a mere 0.48 percent year on year in the week to May 2 following a 0.70 percent increase in the previous week. /pa href="http://3.bp.blogspot.com/_ngczZkrw340/Sg8l1DOdUpI/AAAAAAAAN8c/FcnO-F4LbzM/s1600-h/india+CPI.png"img id="BLOGGER_PHOTO_ID_5336525676786569874" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sg8l1DOdUpI/AAAAAAAAN8c/FcnO-F4LbzM/s400/india+CPI.png" border="0" //a Not everyone is convinced the outlook is so benign, and Reserve Bank of India Governor Duvvuri Subbarao said only last week policy makers need to begin to think about when they will begin reversing their expansionary steps. The current RBI forecast is for inflation to climb back towards 4 percent by March 31 as the economy gradually revives. Some evidence to support Subbarao's fears can be garnered from the evolution of consumer prices paid by industrial workers, which rose 9.63 percent in February from a year earlier, after gaining 10.45 percent the previous month, according to government data. Consumer-price inflation for farm workers was 10.79 percent. India, in fact, has four consumer-price indices and as a result tends to rely on the wholesale price index as benchmark because since it is felt the consumer price indices don’t adequately capture the aggregate price. However, the disconnect between wholesale and consumer prices that we can see at this point can be more a reflection of the fall in commodity prices and the presence of excess capacity on the supply side, so the evolution of these indices needs to be carefully monitored.br /br /The RBI has now slashed borrowing costs six times in the past seven months, with the reverse repurchase rate being cut by a quarter-point to 3.25 percent as recently as April 21.br /This means the bank has now lowered the benchmark by 275 basis points since last October, while the repurchase rate has been reduced by 425 basis points over the same period to its current 4.75 percent level.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/ShAGUFnxgcI/AAAAAAAAN88/C5BPSNG6qqE/s1600-h/bank+of+india+rates.png"img id="BLOGGER_PHOTO_ID_5336772500610187714" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 224px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAGUFnxgcI/AAAAAAAAN88/C5BPSNG6qqE/s400/bank+of+india+rates.png" border="0" //abr /As I say governor Subbarao is rightly cautious about reducing interest rates further as Indian consumer price gains remain high, suggesting that local demand hasn’t been completely dented even as the rest of the world remains mired in a recession. Cheaper loans are helping stoke consumer spending. “The fiscal and monetary stimulus measures initiated coupled with lower commodity prices could cushion the downturn in the growth momentum” over 2009 to 2010, the central bank said recently. “Notwithstanding the contraction of global demand, growth prospects in India continue to remain favorable compared to most countries.” pAnd between now and September, the central bank is set to inject another 1.2 trillion rupees ($23.8 billion) into the banking system by purchasing government bonds via auctions and buying back market stabilization bonds, which were sold in the past four years to drain money from the economy. The injection is estimated to be the equivalent of a 3 percentage point reduction in the cash reserve ratio, according to the Reserve Bank. /ppSubbarao’s optimism is also based on forecasts for this year’s monsoon rains - which look set to be normal. If this expectation is confirmed it will help sustain the unprecedented 4.3 percent average annual farm production growth recorded since 2005, boosting incomes for the three-fifths of India’s 1.2 billion people who depend on agriculture for their livelihood while keeping price inflation modest to feed to consumption of India's urban workforce./ppSibbarao is also aware that India is much less vulnerable to the global economic slump than most of its neighbors since exports only constitute about a quarter of the economy, as compared with around a half for developing Asia as a whole. So India is less open, and while in general terms this would not be an advantage, during the current slump in world trade it is an evident plus./ppstrongIndustrial Output Falls Sharply In Q1 2009br //strongbr /India’s industrial production fell the most in 16 years in March as the worst global recession since World War II hit demand for the country’s exports. Output at factories, utilities and mines declined 2.3 percent from a year earlier after a revised 0.7 percent drop in February. Production was dragged down in March by an 8.2 percent drop in capital-goods output (which does not bode well for short term investment), with all other categories showing improvement from February. Consumer durables production jumped 8.3 percent from a year earlier, the biggest increase in six months. /ppa href="http://1.bp.blogspot.com/_ngczZkrw340/Sg8lC6Fs7AI/AAAAAAAAN8U/adP7984loMQ/s1600-h/india+IP.png"img id="BLOGGER_PHOTO_ID_5336524815340465154" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 236px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sg8lC6Fs7AI/AAAAAAAAN8U/adP7984loMQ/s400/india+IP.png" border="0" //abr /br /In fact the (non seasonally corrected) output index was up in March over February, and substantially up from the lows registered in the last quarter of 2008. This impression is confirmed by the purchasing managers index, which in April gave the highest reading for the Indian headline manufacturing PMI in seven months. In fact the output index registered 53.3, a level above the 50 critical one separating growth from contraction. In fact the index has now steadily risen after hitting a trough of 44.4 in December. /ppbr /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sf7O4-gHKTI/AAAAAAAANp8/Py4mXlvfHlc/s1600-h/india+pmi.png"img id="BLOGGER_PHOTO_ID_5331926487098927410" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 224px; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sf7O4-gHKTI/AAAAAAAANp8/Py4mXlvfHlc/s400/india+pmi.png" border="0" //abr /br /Just as encouraging, the new orders index rose to 54.9 from 49.5 in March. The return to growth was primarily driven by an improvement in domestic demand, according to the accompanying report. "Although the rise in new business came principally from the home market, there was also some, albeit slight, improvement in foreign demand for Indian manufactures," ABN Amro Bank said in the official release.br /br /Interestingly, along with the expansion Indian manufacturers noted renewed input price inflationary pressures. A combination of increased prices for some commodities and unfavourable exchange rates led to a moderate rise in input costs during April. This is the first time that input price inflation has been recorded in India's manufacturing sector since October last year. However continuing competitive pressures meant that manufacturers did not pass on their cost pressures on to customers, and factory gate prices were cut for the sixth straight month. However, the latest drop in average prices was the weakest in the current period of falling output prices.br /br /Employment levels across India’s manufacturing economy were little-changed during April with increased production requirements leading to recruitment on the one hand, while cost-cutting pressures produced job losses on the other. /pblockquote"The April PMI gives a very clear indication that business conditions in the manufacturing sector have improved significantly after a period of sharp contraction and gradual stabilisation. The headline PMI at 53.3 has signaled expansion in activity for the first time since October 2008. Moreover, the April reading is the strongest since October 2008," according to Gaurav Kapur, Senior Economist, India, with ABN Amro. "Survey data suggests that production was ramped up during April in order to cater to a pick-up demand and to build inventories. The output index printed at 55.7 for April compared to 49.3 in March, as new incoming business expanded during the month. The domestic orientation of the improvement in demand is clearly visible from the new orders index rising well above 50, even though external demand also improved modestly. New orders index printed at 54.9 as against 49.5 in March. This is critical as it suggests that domestic demand conditions are now strong and supportive for growth in the sector,"br //blockquotepCar sales and the production of cement, electricity and refined petroleum are also showing signs of recovery. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data. But exports still remain weak, with shipments declining 33 percent in March from a year earlier, the biggest fall since at least April 1995.Goods exports dropped 33 percent from a year earlier to $11.5 billion last month, the government said in New Delhi today. That was the biggest fall since at least April 1995. Exports slid 21.7 percent in February.br /br //ppa href="http://4.bp.blogspot.com/_ngczZkrw340/ShAL6cssZyI/AAAAAAAAN9E/AwpEci3xQ1w/s1600-h/india+exports.png"img id="BLOGGER_PHOTO_ID_5336778657198008098" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 233px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShAL6cssZyI/AAAAAAAAN9E/AwpEci3xQ1w/s400/india+exports.png" border="0" //abr /India’s exports, which account for about 15 percent of the economy, were up 3.4 percent (to $168.7 billion) in the fiscal year ended March 31, missing a $200 billion target set by the government before the September collapse of Lehman Brothers accelerated the world financial and economic slump. The government now expect exports to total $170 billion in the year that started April 1. The decline in exports is likely to continue until at least September, according to India’s Trade Secretary Gopal K. Pillai, while falling overseas sales may cost India about 10 million jobs, according to estimates from the Federation of Indian Export Organisations.br /br /Imports were also down in March - by an annual 34 percent - and as a result the trade deficit narrowed to $4.04 billion from $6.3 billion in March 2008. Oil imports plunged 58 percent to $3.8 billion, while non-oil imports dropped 19 percent to $11.75 billion. /ppHowever, Subbarao argues, the Indian economy has globalized rapidly during the past few years. In terms of openness to international trade the ratio of exports plus imports to GDP increased from by more than 50 per cent in the 10 years from 1997–98 to 2007–08 (from 21.2 per cent of GDP to 34.7 per cent of GDP). Furthermore, the growth of financial integration has been even more rapid. During the same 10 year period (1997–98 to 2007–08) the ratio of total external transactions (gross current account flows plus gross capital account flows to GDP) increased by more than 100 per cent from 46.8 per cent in 1997–98 to 117.4 per cent in 2007–08. Furthermore, corporate borrowing from external sources has also increased significantly. In 2007–08, for example, India received capital inflows to the extent of 9 per cent of GDP as against a current account deficit of 1.5 per cent of GDP. /ppstrongTwin Deficits?br //strongbr /India has been facing the so-called twin deficit problem for some time now, and the poor fiscal record, together with the continuing high deficit is the main reason why international credit rating agencies have brought the country’s debt close to junk status. The fiscal problem is not an easy one - apart from running a general government fiscal deficit of a estimated 9.9 percent of GDP, the debt to GDP ratio is stubbornly stuck round the 80% level - far, far too high.br //ppbr /On the other hand th current account deficit seems set to shrink despite the huge tumble in export earnings. Part of this steep fall is because of the recent drop in global oil prices. Meanwhile, capital flows continue to be vibrant despite the huge withdrawal of money from the domestic stock market by foreign financial institutions, or FIIs. But equally interesting is the change in the composition of these capital flows. FIIs pulled out an estimated $15.02 billion in 2008-09, according to data released this week by the Reserve Bank of India, or RBI. The scale and rapidity of this withdrawal after September did unsettle the money and foreign exchange markets—short-term interest rates crossed 20% and the rupee tumbled to an all-time low of 52 against the dollar. But other types of capital inflows have been strong, especially foreign direct investment, or FDI. RBI provisionally estimates that India got a net inflow of $33.61 billion through FDI. Overseas Indians, too, sent a lot more money back home, thanks to the financial near-collapse in the West and higher interest rates in India. Money from overseas Indians is volatile and can flow out very easily, as it did in 1990 and 1991 when India came close to defaulting on its global debts. But a greater dependence on FDI rather than FII money will make the financing of the current account deficit more stable.br /br //ppa href="http://3.bp.blogspot.com/_ngczZkrw340/Sg8sUtP_moI/AAAAAAAAN8k/B4kfjHIP4_M/s1600-h/india+FX.png"img id="BLOGGER_PHOTO_ID_5336532817713011330" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 187px; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sg8sUtP_moI/AAAAAAAAN8k/B4kfjHIP4_M/s400/india+FX.png" border="0" //abr /br /br /Taken together, the measures put in place since mid-September 2008 have ensured that the Indian financial markets continue to function in an orderly manner. The cumulative amount of primary liquidity potentially available to the financial system through these measures is about Rs.390,000 crore (78 billion dollars) or 7 per cent of GDP. This sizeable easing has ensured a comfortable liquidity position starting mid-November 2008 as evidenced by a number of indicators such as the weighted average call money rate, the overnight money market rate and the yield on the 10-year benchmark government security. Commercial banks have responded to policy rate cuts by the Reserve Bank of India by reducing their benchmark prime lending rates. Bank credit has expanded too, but slower than last year. The RBI’s rough calculations show that, on balance, the overall flow of resources to the commercial sector is less than what it was last year indicating that even though bank credit has expanded, it has not fully offset the decline in non-bank flow of resources to the commercial sector.br /br /Of course, the present level of fiscal deficit is easy enough to justify, given the need to put a platform under the economy, and a number of stimulus packages have been announced by the Indian Government in response to the global financial crisis. /ppJust one such measure - the decision of India's Sixth Pay Commission (which was not a stimulus measure as such, but rather the outcome of the routine policy process, and possibly highly political in view of the impending elections) was widely criticised, although the implementation in the short term may in fact have been timely. /ppThe Commission recommended across the board increases in salary for central government employees, to be followed in due course by comparable salary increases for state government employees. The payment was to be made in two installments, 40 percent (an estimated Rs. 1.57 trillion or roughly $31.4 billion) during 2008–09, with the remaining 60 percent coming due in 2009–10. The decision is, I say, deeply controversial, given the size of the deficit and accumulated government debt, but under the circumstances may well have served to place some sort of platform under domestic demand during times of global financial crisis./ppbr /The first stimulus packages per se have also come in two installments, a first, announced in December 2008, was largely fiscal in its intent, and included additional expenditure of Rs.3 trillion ($60 billion) over four months, a cut of 4 percent in value-added tax, as well as a 2 percent export credit for labour intensive sectors and other export incentive schemes.br /br /The second stimulus package - announced in January 2009 - was mainly montary and directed towards credit easing. Among the more important measures an SPV was to be created to provide liquidity support for investment grade paper to specific Non Banking Finance Companies (NBFCs). The scale of liquidity potentially available was Rs.25,000 crores/$50 billion. Public Sector Banks were to provide a line of credit to NBFCs specifically for purchase of commercial vehicles. Credit targets of Public Sector Banks were revised upward to reflect the needs of the economy. Government would monitor, on a fortnightly basis, the provision of sectoral credit by public sector banks. The guarantee cover under Credit Guarantee Scheme for micro and small enterprises on loans was increased from Rs 5 million to Rs 10 million with a guarantee cover of 50 per cent. In order to enhance flow of credit to micro enterprises, it was decided to increase the guarantee cover extended by Credit Guarantee Fund Trust to 85 per cent for credit facility upto Rs 0.5 million. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover. /ppIndia Infrastructure Finance Company (IIFCL) was authorized to raise Rs 10,000 crores/$20 billion through tax free bonds by 31 March 2009 for refinancing bank lending of longer maturity to eligible infrastructure bid based PPP projects. This would enable the funding of mainly highways and port projects on hand of about Rs 25,000crore/$50 billion. To fund additional projects of about Rs 75,000 crore/$150 billion at competitive rates over the next 18 months, IIFCL would be allowed to access in tranches an additional Rs 30,000crores/$60 billion by way of tax free bonds once funds raised in the current year are effectively utilized. /ppThis surge in the fiscal deficit has been widely criticised, and Standard and Poor's reduced India’s rating outlook to negative from stable in February, citing the danger that “continued loose fiscal policy would result in a downgrade” in the country’s credit rating. In the meantime it affirmed India’s BBB- long-term credit rating, the lowest investment grade level. Samp;P estimated that India’s national budget deficit, including off-budget items such as oil and fertilizer bonds and state government deficits, may increase to 11.4 percent in the year ending March 31 from 5.7 percent in the previous year. India regards bonds sold to subsidize fuel and fertilizer as “off-budget” items and doesn’t show them in state accounts./ppstrongCurrent Account Blues?br //strongbr /As suggested throughout this post, the tailwinds behind the Indian economy are now incredibly favourable. A new government has just been elected which should provide stability to the country, and continuity in the realm of economic policy. The changing age structure of India’s population means that the proportion of the Indian population in the working age group (15–64 age bracket) is set to rise from 60.9 per cent in 2000 , to one which will surpass that if a developed economy like Japan by 2012, and continue to climb steadily to 66 per cent by 2030. But it isn't only quantity which is important here. Quality also matters. The nutritional status of India's population is improving rapidly, with calorie and other macro and micro nutrient deficiency on the decline. According to the 2001 Census, the literacy rate of India's population climbed from 51.54 percent in 1991 to 65.38 per cent in 2001. India will thus, in the years to come, find itself with a younger, healthier, better educated and thus more productive workforce than ever before./ppAt the same time, the massive slack which exists in the global economy means that Indian now has a more-or-less unique opportunity to accelerate the development process at non-inflationary growth rates well above those which would have been envisaged only two or three years ago. At the same time, as the age structure has shifted, and the weight of child dependence has reduced, India's savings rate has risen steadily from 23.4 per cent of GDP in 2000–01 to 35.4 per cent in 2007–08. During the same period investment rose from 24 per cent of GDP to 36.3 per cent of GDP, suggesting the need for a slight current account deficit to cover the gap between savings and investment.br /br /br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/ShAO3yYwSKI/AAAAAAAAN9M/87bbre0v-dU/s1600-h/india+CA+deficit.png"img id="BLOGGER_PHOTO_ID_5336781910015232162" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 206px; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/ShAO3yYwSKI/AAAAAAAAN9M/87bbre0v-dU/s400/india+CA+deficit.png" border="0" //abr /br /And to return to where we started, on where the demand is going to come from to support the current global recovery. The IMF currently forecast a 2.5% of GDP current account deficit for Indian. Given the extent of investment that is needed in capital goods, technology and infrastructure this is a small, even benign, number, and at the end of the day will mean that Indian is once more playing its part in the community of nations, by adding a little extra net demand to the global pot.div class="blogger-post-footer"img width='1' height='1' src='http://res1.blogblog.com/tracker/8991369883287712098-6308602441082109289?l=globaleconomydoesmatter.blogspot.com'//div

T.Boone Pickens: Widened Trade Gap Due to Rise in Oil Imports Strong Reminder of Urgent Need for Energy Reform

Dawn Van Zant — Tue, 12 May 2009 13:00:00 +0000

Dallas - May 12, 2009 - Energy expert T. Boone Pickens today released the following statement in reaction to news that the U.S. trade deficit on oil imports widened for the first time in eight months during March, as the price of imported oil continued to climb:

Oil Inventory Overhang Easing? – Analyst Blog

Zacks Market Commentaries — Thu, 26 Feb 2009 14:29:39 +0000

Highlighted stocks include Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Transocean Ltd. (RIG) and Schlumberger Limited (SLB).

Oil's Inventory Overhang May Be Easing

Latest data suggests that the persistent inventory overhang weighing on crude oil prices may be easing. With gasoline demand surprisingly strong in the face of continued economic gloom and oil imports beginning to come down, today's report by the Energy Information Administration (EIA) has helped improve sentiment.

It remains to be seen, however, if the favorable developments over the last two weeks on the inventory front can be sustained going forward. If this trend continues, oil prices will most likely start consolidating in the mid to high $40's range over the coming days. This should benefit names like Exxon (XOM), Chevron (CVX), Transocean (RIG) and Schlumberger (SLB).

The agency reported a lower-than-expected build in total commercial crude oil stocks of 0.7 million barrels from the preceding week. Current stocks are 13.8% above the comparable period last year. The supply cover continues inching up, with current stock levels sufficient for 24.9 days of supply, significantly above the year-earlier level of 21.2 days.

The 4-week average of total refined products supplied, a proxy for petroleum demand, was down 0.8% from the year-earlier level. While distillate and jet fuel demand remains below year-earlier levels, gasoline demand remains surprisingly resilient, up 1.7% year over year. Total motor gasoline inventories dropped by a greater-than-expected 3.4 million barrels from the previous week, with current stocks now in the lower half of the 5-year range.

The latest data points on the above chart from the EIA shows that the growth in inventory build is leveling off. Despite these positive recent developments, currently inventory levels remain significantly above the 5-year range (the shaded portion).

At Cushing , Oklahoma -- the official delivery point for the NYMEX futures contract -- crude oil stocks are coming down. For the week ended February 20, total stocks at Cushing dropped 0.4 million barrels from the previous week to 34.5 million barrels. At current levels, stocks at this critical junction remain 104% above the year-earlier level.

The heavy supply overhang at Cushing has been a major contributing factor to the current discount at which the benchmark U.S crude, West Texas Intermediate (WTI), is trading relative to Brent, the European benchmark crude. Typically, WTI trades at a premium to Brent.

Read the full analyst report on "XOM"
Read the full analyst report on "RIG"
Read the full analyst report on "CVX"
Read the full analyst report on "SLB"
Zacks Investment Research

China’s industrial output slumps

Tony Sagami — Mon, 15 Dec 2008 14:49:01 +0000

China's National Bureau of Statistics disclosed that industrial output rose 5.4% in November compared to the same period last year. brbrIt is, however, the a title=output target=_blank href=http://news.xinhuanet.com/english/2008-12/15/content_10508111.htmsmallest increase since January 2001. /abrbrSort of ties into the falling electricity production and oil imports, doesn't it? br

Oil imports to China plunges

Tony Sagami — Mon, 15 Dec 2008 14:36:08 +0000

China's General Administration of Customs reported that a title=oil target=_blank href=http://news.alibaba.com/article/detail/china/100029493-1-update%253A-oil-data%253A-china-crude.htmloil imports dropped/a to an average of 3.26 million barrels a day, a 17.3% decline from October. brbrThat type of drop in demand with drastically cheaper gas prices indicates that things are really slowing down in China.

Machinery/Industrials – Zacks Analyst Interviews

Zacks Market Commentaries — Thu, 20 Nov 2008 00:00:00 +0000

Our outlook for the machinery sector is increasingly one of caution. We are beginning to see U.S economic weakness and the credit crunch negatively impact international markets.

Japan's machine orders have fallen for two consecutive months, with a huge 14.5% decline in August. China Petroleum & Chemical Corp., or Sinopec (SNP) plans to cut its oil imports for the fourth quarter of 2008, which portends of slower manufacturing activity ahead.

As foreign economies deal with weaker exports to the U.S and Europe, industrial customers are cutting back on capital spending. Equipment orders are decelerating in almost every end market -- from machines used in construction, infrastructure, agriculture and base metal projects.

Over the next 6-12 months, we believe the biggest potential problem area is global construction spending. Investors should realize the conditions that created the U.S. housing crisis existed in various markets outside the U.S. Excess liquidity and easy money played a pivotal role in driving housing bubbles in the U.K, Spain, France, Ireland and Australia, as well as a commercial boom in China and in certain Middle East economies. The piper must be paid. Home prices are now falling in several cities within the U.K., China and Spain.

Residential inventory is rising. Mortgage credit is scarce. Given this negative feedback loop, a global construction slowdown appears to be with us for the foreseeable future. This means fewer orders of mini-excavators, cranes, drilling machines, forklifts and front loaders, which has negative implications for construction-machinery suppliers, such as Caterpillar Inc. (CAT).

Amid a negative global backdrop, there is a silver lining. Central bankers have gone from raising interest rates and fighting inflation to slashing rates and flooding the system with liquidity. We believe reflation measures could lead to an appreciably higher gold price. In addition, China has a large reserve of U.S. dollars, which can be tapped to stimulate domestic growth.

Over the next few years, the Chinese government may end up allocating $200 billion (or more) on infrastructure spending. Copper will be a key input in the buildout. Freeport McMoRan Copper & Gold Inc. (FCX) is a stock that could benefit from these positive market themes, and we look to become more constructive on the stock in the future.

Key points on FCX:

* The second largest copper producer in the world * A major gold producer with annual output at 1.4 million ounces * Huge reserve base with which to expand future production. FCX holds 41 million ounces of gold and 93.2 billion pounds of copper * The recent decline in energy prices should reduce operating expenses. Freeport said over 30% of their total costs is energy-related * The market appears to be pricing in a worst-case scenario of $1.50-1.75/lb copper * Attractive dividend yield of 8.2%

Mario Ricchio is a senior analyst covering the machinery & industrials space for Zacks Equity Research.
"SNP" Free Stock Analysis: Buy? Sell? Hold?
"FCX&" Free Stock Analysis: Buy? Sell? Hold?
"CTR" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Machinery/Industrials

Zacks Market Commentaries — Wed, 19 Nov 2008 16:16:43 +0000

Our outlook for the machinery sector is increasingly one of caution. We are beginning to see U.S economic weakness and the credit crunch negatively impact international markets.

Japan's machine orders have fallen for two consecutive months, with a huge 14.5% decline in August. China's Sinopec (SNP) plans to cut its oil imports for the fourth quarter of 2008, which portends of slower manufacturing activity ahead.

As foreign economies deal with weaker exports to the U.S and Europe, industrial customers are cutting back on capital spending. Equipment orders are decelerating in almost every end market -- from machines used in construction, infrastructure, agriculture and base metal projects.

Over the next 6-12 months, we believe the biggest potential problem area is global construction spending. Investors should realize the conditions that created the U.S housing crisis existed in various markets outside the U.S. Excess liquidity and easy money played a pivotal role in driving housing bubbles in the U.K, Spain, France, Ireland and Australia, as well as a commercial boom in China and in certain Middle East economies.

The piper must be paid. Home prices are now falling in several cities within the U.K., China and Spain.

Residential inventory is rising. Mortgage credit is scarce. Given this negative feedback loop, a global construction slowdown appears to be with us for the foreseeable future. This means fewer orders of mini-excavators, cranes, drilling machines, forklifts and front loaders, which has negative implications for construction-machinery suppliers, such as Caterpillar Inc. (CAT).

Amid a negative global backdrop, there is a silver lining. Central bankers have gone from raising interest rates and fighting inflation to slashing rates and flooding the system with liquidity. We believe reflation measures could lead to an appreciably higher gold price. In addition, China has a large reserve of U.S dollars, which can be tapped to stimulate domestic growth.

Over the next few years, the Chinese government may end up allocating $200 billion (or more) on infrastructure spending.Â Copper will be a key input in the buildout. Freeport McMoRanÂ (FCX) is a stock that could benefit from these positive market themes, and we look to become more constructive on the stock in the future.

Key points on FCX:

The second largest copper producer in the world
A major gold producer with annual output at 1.4 million ounces
Huge reserve base with which to expand future production. FCX holds 41 million ounces of gold and 93.2 billion pounds of copper
The recent decline in energy prices should reduce operating expenses. Freeport said over 30% of their total costs is energy-related
The market appears to be pricing in a worst-case scenario of $1.50-1.75/lb copper
Attractive dividend yield of 8.2%

"FCX" Free Stock Analysis: Buy? Sell? Hold?
"CAT" Free Stock Analysis: Buy? Sell? Hold?
"SNP" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Increasingly Cautious on Machinery – Zacks Analyst Interviews

Zacks Market Commentaries — Mon, 20 Oct 2008 00:00:00 +0000

In the following interview, we discuss these stocks: Sinopec (SNP), Caterpillar (CAT), Terex (TEX) and Freeport McMoRan (FCX).
In uncertain economic times such as these, we think back to what we learned in school about companies that produce goods and services as opposed to those that do not. We sat down recently with Zacks senior analyst Mario Ricchio about what he expects from one such goods-producing industry, Machinery.
What is your current outlook for machinery stocks?
Our outlook for the machinery sector is increasingly one of caution. We are beginning to see U.S. economic weakness and the credit crunch negatively impact international markets. Japan's machine orders have fallen for two consecutive months, with a huge 14.5% decline in August. China's Sinopec (SNP) plans to cut its oil imports for the fourth quarter of 2008, which portends of slower manufacturing activity ahead.
As foreign economies deal with weaker exports to the U.S. and Europe, industrial customers are cutting back on capital spending. Equipment orders are decelerating in almost every end market -- from machines used in construction, infrastructure, agriculture to base metal projects.
What aspects concern you the most in this sector?
Over the next 6-12 months, we believe the biggest potential problem area is global construction spending. Investors should realize the conditions that created the U.S. housing crisis existed in various markets outside the U.S. Excess liquidity and easy money played a pivotal role in driving housing bubbles in the U.K, Spain, France, Ireland and Australia, as well as a commercial boom in China and in certain Middle East economies. The piper must be paid.
Home prices are now falling in several cities within the U.K., China and Spain. Residential inventory is rising. Mortgage credit is scarce. Given this negative feedback loop, a global construction slowdown appears to be with us for the foreseeable future. This means fewer orders of mini-excavators, cranes, drilling machines, forklifts and front loaders, which has negative implications for construction-machinery suppliers, such as Caterpillar (CAT) and Terex (TEX).
Anything positive developing, that you can see?
Amid a negative global backdrop, there is a silver lining. Central bankers have gone from raising interest rates and fighting inflation to slashing rates and flooding the system with liquidity. We believe reflation measures will lead to an appreciably higher gold price. In addition, China has a large reserve of U.S dollars, which can be tapped to stimulate domestic growth. Over the next few years, the Chinese government may end up allocating $200 billion (or more) on infrastructure spending. Copper will be a key input in the buildout.
What is your top Buy recommendation in this space presently?
Freeport McMoRan (FCX)
is a cheap way to play these positive market themes. The company is the second-largest copper producer in the world, a major gold producer with annual output at 1.4 million ounces. It also has a huge reserve base with which to expand future production. FCX holds 41 million ounces of gold and 93.2 billion pounds of copper.
The recent decline in energy prices should reduce operating expenses. Freeport said over 30% of their total costs is energy-related. The stock looks cheap; it trades at a P/E multiple of 4.2x the street consensus estimate. And the market appears to be pricing in a worst-case scenario of $1.50-1.75/lb copper. Finally, Freeport McMoRan has an attractive dividend yield of 5.5%.
Mario Ricchio is a senior analyst covering the machinery sector for Zacks Equity Research.
"CTR" Free Stock Analysis: Buy? Sell? Hold?
"TERX" Free Stock Analysis: Buy? Sell? Hold?
"FCX&" Free Stock Analysis: Buy? Sell? Hold?
"SNP" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

India’s Ship IS Battered By The Global Storm, But She Will Survive!

Edward Hugh — Tue, 07 Oct 2008 12:36:00 +0000

by Edward Hugh: Barcelona

India is in the middle of a storm at the moment, there can be no doubt about that. But the important point to note is that this storm is not of India's making. The financial turmoil in a number of key developed economies, and above all the United States, is sending shock waves across the global economy, and as is normal, when the earth trembles, it is the most fragile who notice it most. India's economy may be fragile in the sense that it is very vulnerable to what is colloqially known as global risk sentiment, but it is not fragile in terms of being susceptible to having its growth trajectory knocked completely off course. India may be shaken, but her economy will not be broken.

Emerging Market Bonds

Emerging-market bonds had their worst week in four years this week as the deepening credit crisis raised global recession concerns and slammed the brakes on demand for higher-yielding securities. The extra yield investors demand to own developing-nation bonds rather than U.S. Treasuries surged 62 basis points, or 0.62 of a percentage point, this week to 4.41 percentage points, according to data derived from the JPMorgan Chase EMBI+ index. The increase is the biggest since May 2004 and leaves the so-called spread at its widest since June of that year. The spread has now swelled 1.42 percentage points since the end of August.

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.

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.

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.

The helicopters are coming

Prieur du Plessis — Tue, 07 Oct 2008 06:26:35 +0000

"For all the fireworks that the financial sector provides at the moment, at the end of the day, it is the damage done to the real economy that matters," said quest contributor Niels Jensen in an interesting article on how he sees the economic picture d...

India’s Ship IS Battered By The Global Storm, But She Will Survive!

Edward Hugh — Sun, 05 Oct 2008 14:11:00 +0000

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.

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.

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.

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.

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.

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.

Too Big to Suffer a Loss – Doug Noland

John Lee — Mon, 15 Sep 2008 21:28:18 +0000

For the week, the Dow gained 1.8% (down 13.9% y-t-d) and the S&P500 increased 0.8% (down 14.8%). The Utilities rose 2.6% (down 14.8%), and the Morgan Stanley Consumer index gained 2.2% (down 5.1%).

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Is India Riding Out The Storm?

Edward Hugh — Tue, 09 Sep 2008 15:23:00 +0000

by Edward Hugh: Barcelona

India's growth rate fell back in the second calendar quarter of 2008 (and the first quarter of the 2008/09 financial year), expanding at the slowest rate recorded in three years, as the Reserve Bank of India struggles to control record high inflation by applying tight credit conditions. Annual growth slowed to 7.9 per cent in the quarter of 2008 which ended on June 30, significantly lower than the 8.8 per cent rate reported for the January to March quarter.

Growth momentum has obviously been slowing on tighter monetary policy and the adverse global environment. Higher interest rates, slower bank credit growth and higher oil and commodity prices are evidently now having a marked effect on activity levels in the Indian economy. However, in spite of the slowdown, the growth rate of Asia’s third largest economy remains strong, and there are very positive signs of resilience in the face of what is now a global economic slowdown. China’s economic growth also slowed in the second quarter dropping to a 10.1 per cent year on year rate, from 10.6 per cent in the first quarter.

Despite this slowing growth the Reserve Bank of India is very likely to maintain its tight policy stance until it succeeds in bringing inflation down significantly from the current double digits level. Inflation fell back slightly in mid-August but it may well tick up again before the year is out.

Growth in the services sector, which includes banking, transport and leisure, came in at a healthy 10%, while the construction sector remained strong, clocking up an annual 11.4 per cent expansion. It was the manufacturing sector which suffered the sharpest fall as it grew only 5.8 per cent compared to 10.9 per cent in the same period in 2007. Obviously the impact of a higher rupee and rising internal prices have been having a significant effect of export competitiveness.

Inflation Still A Big Problem

India's inflation remained well above the central bank's comfort level for the sixth straight month in the second half of August, increasing the likelihood that incoming Governor Duvvuri Subbarao will continue to raise interest rates. Wholesale prices were up by an annual 12.34 percent in the week ended August 23, according to the latest data from the Indian commerce ministry in New Delhi. That compared with a 12.4 percent gain in the previous week.

Subbarao, whose three-year term at the Reserve Bank of India starts this weekend is under some pressure to show that he is independent and no less concerned about inflation than his predecessor, and is quoted as saying that the "obvious" answer to surging prices is tighter monetary policy. Outgoing Governor Yaga Venugopal Reddy increased the central bank's benchmark rate three times between June and the end of August, giving a higher priority in the short term to the battle against inflation rather than to economic growth. In the mid-term these both amount to the same thing, since unless India gets inflation under control a whole battery of other macro economic indicators will become misaligned, and then it will be near impossible for India to realise its full growth potential, which I personally consider to be a couple of percentage points higher than consensus opinion would have it.

The Reserve Bank last raised its benchmark interest rate on July 29 - on that occassion by a half point to take the rate to a seven-year high of 9 percent. The central bank's next policy announcement is due Oct. 24.

High energy, commodity and food prices remain the main concern, and these have forced the central bank in July to raise its inflation forecast for the year to March 31 2009 to 7 percent from its earlier target of between 5 percent and 5.5 percent.

Consumer-price inflation for agricultural and rural workers accelerated to 9.41 percent in July, compared with 8.77 percent for farm workers and 8.75 percent for rural workers in June, according to government data. India releases separate indexes for consumer prices paid by industrial, agricultural and rural workers, and as we can see, these come out with a significant time lag, hence the most widely tracked measure of inflation in the Indian context is the wholesale-price index.

But The Tide Could Turn Sooner Than Many Think

There are, however, indications that the tide may already be turning. Prices of fruits, spices, sugar, tea and eggs all continued to rise in the week to August 23, but prices for vegetables, pulses, edible oil and cereals fell. Manufactured price inflation on the other hand continued to move up, rising 11.28 percent, compared with 11.02 percent in the previous week.

One big part of the issue about when inflation drops back revolves around what happens to agricultural output this year. The June-September monsoon season, which accounts for four-fifths of India's annual rainfall, has been more or less "normal" this year, according to data up to the 3 September supplied by the India Meteorological Department (the chart really is worth a look if you are at all interested in seeing where food prices may move).

Most sources seem mildly optimistic on the agriculture front. India, which is the world's biggest producer of rice after China, partly lifted a six-month old ban on the export of some premium quality rice grain last week as we seem set to see a bumper crop for a second year running. Overseas sales of Pusa-1121, a strain of rice grown in north Indian states, will now be permitted as of October 15. Global rice prices have fallen 25 percent from their April high as Thailand and Vietnam, the leading global suppliers, lifted export forecasts following increased plantings. Vijay Setia, president of the New Delhi-based All India Rice Exporters Association estimates that India may export most of the 1.4 million ton output of Pusa-1121 variety forecast for this year. Sowing of paddy in India is up by 5 percent on the year to August 28, and reached to 34.5 million hectares, according to data from the Indian ministry of agriculture. Setia estimates that output may be some 10% above last year's record of 96.43 million tons, and Mangala Rai, director general of the Indian Council of Agricultural Research, holds a similar view.

Farmers in India, which is the world's second-biggest wheat producer, may also increase planting from October because of favourable rainfall, possibly helping India garner a record harvest of this crop for a second year. Wheat, which is the country's biggest winter food grain, is planted from October through December. Harvesting starts in March and continues through April. Again the agriculture ministry estimates that India harvested a record 78.4 million metric tons of wheat in the year ended June 30, up 3.4 percent from the year to June 2007.

A bigger harvest will obviously help reduce the problems of food shortages that have stoked inflation and lead India to import 1.79 million tons of wheat since July 2007 to build up stockpiles. These imports from India are among the factors which helped fuel last year's 77 percent gain in wheat prices on the Chicago Board of Trade index.

Energy prices also seem to be easing, and rapidly.

Oil prices fell to their lowest level in five months last Friday as investors worried that an economic slowdown could chip away at the demand for energy. Light, sweet crude for October delivery closed down $1.66 to $106.23, capping off a week of declines that totaled $9.23. It was the lowest settlement price since April 3, when crude settled at $103.83 a barrel.Oil prices have fallen more than $40 from the record high of $147.27 a barrel on July 11, two months ago, as a struggling global economy has cut into demand for energy. The US is leading the way in the decline in demand for oil, and the US Energy Information Administration reported Thursday that imports of crude in August were 200,000 barrels a day below the same four-week period last year. This pattern is repeated to some degree or another in economy after economy across the globe.

Now this downward movement in oil prices will eventually find a floor, but where exactly will that floor lie? My own view is that the decline will continue for some time yet, but that we may hit bottom around $80, since at some point the inflation situation will ease back, and growth will rebound, and then of course the price will head up again.

My feeling is also that we could then see quite a quick turnaround in inflation in emerging economies like India (from 13% to say 7%) and this will then mean the negative "lose-lose" dynamic of rising inflation, rising trade deficits, rising interest rates, falling currencies and falling growth can transform itself into the "win-win" dynamic of falling inflation, falling trade deficits, slightly lower (but still very yield differential attractive) interest rates, rising currencies and rising growth.

The interesting question is when will we hit the inflection point? Well, if we look at the NYMEX chart below, we will see that oil prices really started to take off in October 2007, and that at current rates of decline in oil prices the two curves should cross (ie 2008 prices should be below 2007 ones) sometime between October and November. Now this will be quite an important event in the emerging market economies, since given the weight which has been attached to energy and food rises in the total inflation picture, once these (for so called base effect reasons) start to clock negative readings, headline inflation should start to sink back.

Within six months of this cross-over we should see the Indian economy really start to pick up speed again, and in particular we should see a strong rebound in industrial output. India, remember, is still growing at a 7.5% annual rate, but this could easily change as the Indian economy starts to "break sweat" and heads upwards again towards 10% (and even beyond). Depending on the future evolution in energy prices I see trend growth in India in the 2010 - 2015 window of between 10% and 12%.

Foreign Exchange Reserves Fall Again

India's foreign exchange reserves dropped back again in the week to 29 August, falling by $1.98 billion (Rs8,791 crore) to $295.3 billion, according to Reserve Bank of India data. Foreign currency assets declined $932 million to $286.11 billion during the week, while gold reserves dropped by $1.04 billion to $8.7 billion,and reserves with the International Monetary Fund (IMF) decreased $2 million to $496 million. India’s special drawing rights with IMF were unchanged at $4 million.

There are various explanations for this continuing fall. One of them is the purchase of dollars by India's oil importers, another is intervention by the Reserve Bank of India (to stop the weakening in the rupee, which to some extent is welcome as it helps exporters, but beyond a certain point becomes most damaging as it only adds more wood to the domestic inflation bonfire) and a third is the selling of Indian equities by overseas investment funds.

All three of these could reverse as oil prices drop and inflation comes under control, since importers will need less dollars, the RBI will not need to intervene since the rupee will be rising, and both of these factors will make India's stock markets once more an attractive proposition for the overseas funds. This is what I mean by "win-win".

Rupee

In the meantime, the rupee slumped back for a fourth successive week on speculation economic slowdown in the U.S. and Europe will prompt global funds to shun emerging-market assets. The rupee dropped to a 21-month low versus the dollar, sliding in tandem with currencies across Asia, as regional stocks tumbled. In this context I very much agree with the view expressed in a recent research note by Kotak Institutional Equities:

"The current USD rally was prompted by technical factors and fears that the US slowdown would lower growth globally sparking flight to dollar as a perceived safe heaven. We feel this argument is overstretched. 1QCY08 COEFER data reveals continued slow movement away from USD and into Euro in reserves. Share of EUR in reserves has increased to 27% in 2008 from 18% in 2000, while that of the USD has dropped to 63% from 71%. We consider it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.......... In real terms, returns on USD assets continue to be negative, making the current USD rally unsustainable"

Basically, the move into the US and Japan as safe havens, seems to be more of a "herd like" knee-jerk response, especially when looked at over a weekend where the US government may well move in and temporarily take over FannyMae and FreddyMac, and as Japan seems to be sliding steadily downwards into its next recession. I also agree with Kotak that the weakening in the rupee is now starting to look decidedly overdone and may well move into reverse gear in the not too distant future.

But this possibility, for now, lies out in the future, and in the present the rupee fell a further 1.7 percent against the dollar this week reaching 44.66 per dollar as of the 5 p.m. close in Mumbai: This was the lowest level since Dec. 20, 2006, and the rupee is now down 11.8 percent against the dollar so far this year as equity sales by global investors exceeded their purchases by $7.1 billion.

Heavy demand for dollars from corporates, and especially oil companies, coupled with anticipated losses in the local equity market had a significant effect on market sentiment. The currency fell to a low of 44.75 at one point — its lowest in over 20 months, before the central bank intervened to halt the fall.

If the central bank had not stepped in, then the rupee could even have breached the psychologically important 45 threshold already on Friday. In the view of some market participants, sentiment for the rupee is extremely bearish at the moment, over concerns over capital outflows, the falling stock market and a rising fiscal deficit. The latter of these is important, but I do think the first two are being overdone, and reflect a rather old fashioned mindset, since as Kotak point out, it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.

External Borrowing

India’s external debt went up sharply - by over $50 billion, according to Finance Ministry data - during the financial year ended March 2008, the highest year-on-year increase ever. A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies seem to be the main reasons for the increase. External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year.

External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, were up more than 40 per cent, and reached $70.6 billion in 2007-08, as compared to $48.52 billion a year earlier. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.

Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation. The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”. As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt as measured in rupees increases. In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.

Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting the higher share of private borrowings. Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08. For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.

Because of larger borrowing by corporates, government’s debt as a proportion of total external debt declined from 28.4% to 25.6%. As a percentage of gross domestic product (GDP), sovereign debt dropped from 5.3% to 4.8%.

The ratio of short-term debt to foreign exchange reserves stood at 14.3% at the end of the year against 13.2% at the end of March 2007. The ratio of short-term debt to total external debt was 20% at the end of March this year against 15.5% in the year before.

Trade Deficit Rises In July

India’s trade deficit widened to $10.79 billion in July, up 83 per cent from $5.87 billion in the year-ago month, as the growth in imports far outstripped exports. But perhaps the big news here is the growth in exports, which in July were up a very healthy 31.2 per cent year on year to reach $16.34 billion. Imports registered an even sharper annual rise of 48 per cent to $27.14 billion, mainly due, of course, to the increase in the value of crude oil imports, the price of which touched an all-time high in July. Oil imports expanded 70 per cent and stood at $9.5 billion as against $5.6 billion in July 2007. Non-oil imports in July stood at $17.66 billion, which is still an increase of 38.7 per cent over the $12.73 billion registered the year before.

Of course the oil factor isn't entirely a one way street, and high crude oil prices also mean that domestic refiners like Reliance Industries sell their products at a higher rate in overseas markets, adding to the export increase, and, with a 40 per cent increase in steel prices, the value of engineering goods’ exports also increased accordingly.

Bottom Line

Basically the Indian economy looks set to slow, possibly hitting its bottom level of around 7.5% year on year during the winter, but after next spring we could well see a rebound, and in all probability a quite healthy one. It would not surprise me at all to see the double digit growth barrier broken in 2010, at least in one or two quarters.

India’s Inflation Holds Steady, Exports and the Trade Deficit Rise, While The Rupee and FX Reserves Fall

Edward Hugh — Sat, 06 Sep 2008 19:02:00 +0000

India's inflation remained well above the central bank's comfort level for the sixth straight month towards the end of August, increasing the likelihood that incoming Governor Duvvuri Subbarao will continue to raise interest rates. Wholesale prices were up by an annual 12.34 percent in the week ended August 23, according to the latest data from the Indian commerce ministry said in New Delhi. That compared with a 12.4 percent gain in the previous week.

Subbarao, whose three-year term at the Reserve Bank of India starts this weekend is under some pressure to show that he is independent and no less concerned about inflation than his predecessor, and is quoted as saying that the "obvious" answer to surging prices is tighter monetary policy. Outgoing Governor Yaga Venugopal Reddy increased the central bank's benchmark rate three times between June and the end of August, giving a higher priority in the short term to the battle against inflation rather than to economic growth. In the mid-term these both amount to the same thing, since unless India gets inflation under control a whole battery of other macro economic indicators will become misaligned, and then it will be near impossible for India to realise its full growth potential, which I personally consider to be a couple of percentage points higher then consensus opinion would have it.

The Reserve Bank on July 29 raised its benchmark interest rate by a half point to a seven-year high of 9 percent. The central bank's next policy announcement is due Oct. 24.

Elevated energy, commodity and food prices remain the main concern, and these forced the central bank in July to raise its inflation forecast for the year to March 31 2009 to 7 percent from a previous target of between 5 percent and 5.5 percent. At the same time India's economy grew at "only" 7.9 percent in the three months to June 30, the weakest since the last quarter of 2004, according to data from the government statistics office last week.

Consumer-price inflation for agricultural and rural workers accelerated to 9.41 percent in July, compared with 8.77 percent for farm workers and 8.75 percent for rural workers in June, according to government data. India releases separate indexes for consumer prices paid by industrial, agricultural and rural workers, and as we can see, these come out with a significant time lag, hence the most widely tracked measure of inflation in the Indian context is the wholesale-price index.

But there are indications already that the tide may be turning. Prices of fruits, spices, sugar, tea and eggs continued to rise in the week to August 23, but prices of vegetables, pulses, edible oil and cereals fell. Manufactured price inflation on the other hand continued to move up, rising 11.28 percent, compared with 11.02 percent in the previous week.

A big part of the issue is what happens to agricultural output this year. The June-September monsoon season, which accounts for four-fifths of India's annual rainfall, has been more or less "normal" this year, according to data up to the 3 September supplied by the India Meteorological Department (the chart really is worth a look).

Most sources seem mildly optimistic on the agriculture front. India, which is the world's biggest producer of rice after China, partly lifted a six-month old ban on the export of some premium quality grain as the country looks set to harvest a bumper crop for a second year running. Overseas sales of Pusa-1121, a strain of rice grown in north Indian states, will be permitted as of October 15, the trade ministry said during the week. Global rice prices now have fallen 25 percent from their April high as Thailand and Vietnam, the leading global suppliers, lifted export forecasts after farmers increased plantings. Vijay Setia, president of the New Delhi-based All India Rice Exporters Association estimates that India may export most of the 1.4 million ton output of Pusa-1121 variety forecast for this year. Sowing of paddy in India is up by 5 percent to 34.5 million hectares as of August 28, according to the Indian ministry of agriculture. Setia estimates that output may be some 10% above last year's record of 96.43 million tons, and Mangala Rai, director general of the Indian Council of Agricultural Research, holds a similar view.

Farmers in India, which is the world's second-biggest wheat producer, may also increase planting starting October because of favourable rainfall, possibly helping India garner a record harvest for a second year. Wheat, which is the country's biggest winter food grain, is planted from October through December. Harvesting starts in March and continues through April. Again the agriculture ministry estimates that India harvested a record 78.4 million metric tons of wheat in the year ended June 30, up 3.4 percent from the year to June 2007.

A bigger harvest will obviously help reduce the problems of food shortages that have stoked inflation and lead India to import 1.79 million tons of wheat since July 2007 to build up stockpiles. These imports from India are among the factors which helped fuel last year's 77 percent gain in wheat prices on the Chicago Board of Trade index.

Energy prices also seem to be easing, and rapidly.

Oil prices fell to their lowest level in five months last Friday as investors worried that an economic slowdown could chip away at the demand for energy. Light, sweet crude for October delivery closed down $1.66 to $106.23, capping off a week of declines that totaled $9.23. It was the lowest settlement price since April 3, when crude settled at $103.83 a barrel.Oil prices have fallen more than $40 from the record high of $147.27 a barrel on July 11, two months ago, as a struggling global economy has cut into demand for energy. The US is leading the way in the decline in demand for oil, and the US Energy Information Administration reported Thursday that imports of crude in August were 200,000 barrels a day below the same four-week period last year. This pattern is repeated to some degree or another in economy after economy across the globe.

Now all this will evidently have a floor, but where exactly does that lie? My own view is that the decline will continue, but that we may see a floor around $80, since at some point the inflation situation will ease back, and growth will rebound, and then of course the price will head up again.

My feeling is also that we could then see quite a quick turnaround in inflation in emerging economies like India (from 13% to say 7%) and this will then mean the negative lose lose dynamic of rising inflation, rising trade deficits, rising interest rates, falling currencies and falling growth can transform itself into the win-win dynamic of falling inflation, falling trade deficits, slightly lower (but still very yield differential attractive, interest rates, rising currencies and rising growth.

The interesting question is when will we hit the inflection point? Well, if we look at the NYMEX chart below, we will see that oil prices really started to take off in October 2007, and that at current rates of decline in oil prices the two curves should cross (ie 2008 prices should be below 2007 ones) sometime between October and November. Now this will be quite an important event in the emerging market economies, since given the weight which has been attached to energy and food rises in the total inflation picture, once these (for so called base effect reasons) start to clock negative readings, headline inflation should start to sink back.

Within six months of this cross-over we should see the Indian economy really start to pick up speed again, and in particular we should see a strong rebound in industrial output. India, remember, is still growing at a 7.5% annual rate, but this could easily change as the Indian economy starts to "break sweat" and heads upwards again towards 10% (and even beyond). Depending on the future evolution in energy prices I see trend growth in India in the 2010 - 2015 window of between 10% and 12%.

Foreign Exchange Reserves Fall Again

India's foreign exchange reserves dropped back again in the week to 29 August, falling by $1.98 billion (Rs8,791 crore) to $295.3 billion, according to Reserve Bank of India data. Foreign currency assets declined $932 million to $286.11 billion during the week, while gold reserves dropped by $1.04 billion to $8.7 billion,and reserves with the International Monetary Fund (IMF) decreased $2 million to $496 million. India’s special drawing rights with IMF were unchanged at $4 million.

There are various explanations for this continuing fall. One of them is the purchase of dollars by India's oil importers, another is intervention by the Reserve Bank of India (to stop the weakening in the rupee, which to some extent is welcome as it helps exporters, but beyond a certain point becomes most damaging as it only adds more wood to the domestic inflation bonfire) and a third is the selling of Indian equities by overseas investment funds.

All three of these could reverse as oil prices drop and inflation comes under control, since importers will need less dollars, the RBI will not need to intervene since the rupee will be rising, and both of these factors will make India's stock markets once more an attractive proposition for the overseas funds. This is what I mean by "win-win".

Rupee

In the meantime, the rupee slumped back for a fourth successive week on speculation economic slowdown in the U.S. and Europe will prompt global funds to shun emerging-market assets. The rupee dropped to a 21-month low versus the dollar, sliding in tandem with currencies across Asia, as regional stocks tumbled. In this context I very much agree with the view expressed in a recent research note by Kotak Institutional Equities:

"The current USD rally was prompted by technical factors and fears that the US slowdown would lower growth globally sparking flight to dollar as a perceived safe heaven. We feel this argument is overstretched. 1QCY08 COEFER data reveals continued slow movement away from USD and into Euro in reserves. Share of EUR in reserves has increased to 27% in 2008 from 18% in 2000, while that of the USD has dropped to 63% from 71%. We consider it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.......... In real terms, returns on USD assets continue to be negative, making the current USD rally unsustainable"

Basically, the move into the US and Japan as safe havens, seems to be more of a "herd like" knee-jerk response, especially when looked at over a weekend where the US government may well move in and temporarily take over FannyMae and FreddyMac, and as Japan seems to be sliding steadily downwards into its next recession. I also agree with Kotak that the weakening in the rupee is now starting to look decidedly overdone and may well move into reverse gear in the not too distant future.

But this possibility, for now, lies out in the future, and in the present the rupee fell a further 1.7 percent against the dollar this week reaching 44.66 per dollar as of the 5 p.m. close in Mumbai: This was the lowest level since Dec. 20, 2006, and the rupee is now down 11.8 percent against the dollar so far this year as equity sales by global investors exceeded their purchases by $7.1 billion.

Heavy demand for dollars from corporates, and especially oil companies, coupled with anticipated losses in the local equity market had a significant effect on market sentiment. The currency fell to a low of 44.75 at one point — its lowest in over 20 months, before the central bank intervened to halt the fall.

If the central bank had not stepped in, then the rupee could even have breached the psychologically important 45 threshold already on Friday. In the view of some market participants, sentiment for the rupee is extremely bearish at the moment, over concerns over capital outflows, the falling stock market and a rising fiscal deficit. The latter of these is important, but I do think the first two are being overdone, and reflect a rather old fashioned mindset, since as Kotak point out, it a paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil.

External Borrowing

India’s external debt went up sharply - by over $50 billion, according to Finance Ministry data - during the financial year ended March 2008, the highest year-on-year increase ever. A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies seem to be the main reasons for the increase. External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year.

External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, were up more than 40 per cent, and reached $70.6 billion in 2007-08, as compared to $48.52 billion a year earlier. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.

Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation. The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”. As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt as measured in rupees increases. In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.

Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting the higher share of private borrowings. Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08. For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.

Because of larger borrowing by corporates, government’s debt as a proportion of total external debt declined from 28.4% to 25.6%. As a percentage of gross domestic product (GDP), sovereign debt dropped from 5.3% to 4.8%.

The ratio of short-term debt to foreign exchange reserves stood at 14.3% at the end of the year against 13.2% at the end of March 2007. The ratio of short-term debt to total external debt was 20% at the end of March this year against 15.5% in the year before.

Trade Deficit Rises In July

India’s trade deficit widened to $10.79 billion in July, up 83 per cent from $5.87 billion in the year-ago month, as the growth in imports far outstripped exports. But perhaps the big news here is the growth in exports, which in July were up a very healthy 31.2 per cent year on year to reach $16.34 billion. Imports registered an even sharper annual rise of 48 per cent to $27.14 billion, mainly due, of course, to the increase in the value of crude oil imports, the price of which touched an all-time high in July. Oil imports expanded 70 per cent and stood at $9.5 billion as against $5.6 billion in July 2007. Non-oil imports in July stood at $17.66 billion, which is still an increase of 38.7 per cent over the $12.73 billion registered the year before.

Of course the oil factor isn't entirely a one way street, and high crude oil prices also mean that domestic refiners like Reliance Industries sell their products at a higher rate in overseas markets, adding to the export increase, and, with a 40 per cent increase in steel prices, the value of engineering goods’ exports also increased accordingly.

Wednesday News Roundup

Sean Brodrick — Wed, 03 Sep 2008 09:46:11 +0000

A growing global power crisis looks to be greater economic and political danger than oil

Lost in all the attention oil is receiving, reports from around the world indicate that 100 or more countries may be suffering, many acutely, from shortages of electricity. Given who is in trouble, both the economic and the political danger of this growing global power crisis are starting to look greater than oil’s. China and India, two of the biggest engines of economic growth, look to be in serious trouble. Pakistan and Afghanistan, hotbeds of terrorism, are routinely plunged into darkness. South Africa’s mining industry is vexed. Even some countries that can afford high oil prices don’t have sufficient electricity to run refineries.

While not facing shortages, many developed countries on whose consumers the world economy depends are increasingly facing what is called “fuel poverty,” a combination of rising electricity and home heating oil costs. The problem is already acute in Great Britain and is starting to take hold in the United States.

Crude oil plunge good for China economy

The "price fall of crude oil will help China to tame inflation, which is one of the country's biggest pressures currently," said Tang Min, the China Development Research Foundation deputy secretary general.

Because of booming economic development and severe natural disasters this year, the country's consumer price index (CPI), a main gauge of inflation, rose 7.9 percent in the first half over the same period last year.

China's oil imports increased sharply amid a booming economy and surging demand. Last year, the nation imported 163 million tonnes of crude, up 12.4 percent over the previous year. This accounted for nearly 50 percent of the oil consumed nationwide, according to China Customs figures.

Chinese Banks Cut Fannie, Freddie Debt

Amid jitters about the future of Fannie Mae and Freddie Mac, China's four biggest listed banks have pared back their holdings in debt related to the two U.S. mortgage giants. At the end of June, the four banks held a combined $23.28 billion of debt issued or guaranteed by Fannie and Freddie. That's a small fraction of the trillions of dollars outstanding, but the reductions attracted interest as a possible gauge of broader sentiment toward such securities.

European Investment, Consumer Spending Drop as Economy Shrinks
European consumer spending, company investment and exports declined in the second quarter, dragging the economy into a 0.2 percent contraction and pushing it to the brink of a recession.

Commodity hedge fund collapses

The hedge fund manager Ospraie Management has said that it will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund.

Australian gold production's slump

Preliminary figures show that Australian gold production fell 7% to a 19 year low in the year to June.

India's August Gold Imports Rise 56% as Price Drop Lures Buyers

India, the world's biggest buyer of bullion, increased gold imports in August for the first time in 11 months as a decline in prices boosted jewelry demand.

Purchases were about 98-100 metric tons, compared with 64 tons in the year-ago month, according to provisional data from the Bombay Bullion Association Ltd., a grouping of 230 traders.

Four Ways to Fight the “Oil-Flation Epidemic”

Money Morning — Wed, 03 Sep 2008 00:47:08 +0000

By Don Miller Contributing Editor Want to know what the price of a barrel of oil will be in eight years? Exactly $119.50 a barrel. There’s no shortage of pundits predicting where oil... Money Morning is here to help investors profit handso...

Beijing swells dollar reserves through stealth

Alex Stanczyk — Wed, 27 Aug 2008 23:23:40 +0000

Beijing swells dollar reserves through stealth Last Updated: 3:24pm BST 26/08/2008 The Telegraph.co.UK Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters [...]

Beijing swells dollar reserves through stealth

Alex Stanczyk — Wed, 27 Aug 2008 23:23:40 +0000

Although Oil Prices Have Declined, the Energy Sector Remains a Global Investing Wild Card

William Patalon lll — Sun, 17 Aug 2008 22:02:48 +0000

By William Patalon III Executive Editor Money Morning/The Money Map Report Although consumers and businesses have gotten a bit of a reprieve at the gas pump as of late, the escalation in oil... Money Morning is here to help investors profit hands...

India Outlook August 2008

Edward Hugh — Thu, 07 Aug 2008 19:11:00 +0000

by Edward Hugh: Barcelona

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.

Indian Inflation Hits Its Highest Level Since 1995 In Mid June

Edward Hugh — Sat, 02 Aug 2008 09:21:00 +0000

India's inflation accelerated again in mid 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 11.98 percent in the week to July 19, after rising 11.89 percent in the previous week, according to data from the commerce ministry released in New Delhi on Friday.

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.

India Battles Between Rising Inflation And Lower Growth While The Rating Agencies Steadily Turn The Screw

Claus Vistesen — Mon, 21 Jul 2008 12:45:00 +0000

by Edward Hugh: Barcelona

India's inflation accelerated to the fastest pace in more than 13 years at the start of July, putting pressure on the central bank to continue raising interest rates following the two increases made last month. Wholesale prices rose 11.91 percent in the week to July 5, after gaining 11.89 percent in the previous week, according to the commerce ministry in New Delhi on Friday.

It now seems very likely indeed that the Reserve Bank of India (RBI) will continue to tighten policy, since one of the major risks facing India now is that inflation becomes entrenched, and to avoid that eventuality the RBI may well need to implement a further significant policy tightening, and this of course will have implications for an Indian economy where growth is already slowing. However, with inflation at nearly 12% and the repurchase rate at 8.5% we shouldn't lose sight of the fact that India still has negative interest rates (minus 2.5% approx) thus monetary policy could be said to be still pretty accommodative, the problem is that with growth at such a fast pace, and inflation expectations rising, and thus the possibility existing of passing on increased prices to consumers, the situation could simply be self-perpetuating with interest rates at the current level. That is high but negative interest rates can, in the right circumstances (and particularly with high liquidity, and M3 money supply growth of 20.5% per annum) simply perpetuate strong price increases, and fuel compensatory wage demands which only serve at the end of the day to send things spinning round and round in an ever more vicious circle

The RBI currently expects the Indian economy to grow by 8.5 percent in the current fiscal year, slower than the 9 percent pace of the previous 12 months, but this forecast is now looking to be significantly under threat from the downside.

India's economic growth has slowed being slowing and clocked up the 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 opportunities 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 rate of the previous quarter.

Foreign Exchange Reserves

India's foreign exchange reserves were up again in the week ended July 11 - by $123 million - according to the latest Reserve Bank of India data. The rise comes following a series of declines induced by changes in relative currency values and the drying up of earlier substantial net inflows. Forex reserves, including gold and SDR (special drawing rights), rose to $308.52 billion. The $123 million rise in the dollar value of the reserves was mirrored by a Rs 14,133 crore dip in the rupee value of funds, which strongly suggests that the increase has more to do with the value of the rupee vis a vis other currencies than any real increase in the inward flow of funds. Looking at the chart (above) it is clear real heavy net inflows came to a halt around the end of March.

M3 money supply growth slowed to 20.5 per cent during the two weeks ended 4 July - down rom 20.7 per cent two weeks earlier. The loan book at Indian scheduled banks was up by 25.7 per cent y-o-y at the close on July 4, compared with a 24.4 per cent rise a year earlier, ie loan growth is still not slowing significantly, although once you take inflation into account it is, of course, slowing. Deposit growth declined to a 21.7 per cent rate compared with a 24.6 per cent at the same point in 2007.

Money supply has now been rising at an average rate of 21.5% since the current fiscal year began on April 1. This is well above the central bank's target of 16.5% to 17% for the fiscal year ending March 2009.

Cash in the Indian money market, however, is likely to get scarcer in the near future since banks will have to place an additional part of deposits with the RBI as of July 19, when the revised norms on cash reserve requirements come into force. This tightening comes at a time when Indian banks are already been borrowing close to a daily Rs 30,000 crore from the RBI.

The raising of the cash reserve ratio to 8.75% coupled with the rise in the cost of borrowing via the the repo rate rise to 8.5% is thus now producing significant effects on day to day liquidity, and most Indian analysts are talking about a withdrawal of some Rs 16,000 crore of funds from the banking system during the coming week. While the cash reserves hike alone is expected to take Rs 8,000 crore out of the system, the RBI is also planning to issue bonds worth Rs 10,000 crore, which will simply bring cash conditions under further pressure. This move by the RBI would seem to be evidence of a certain conflict of interests between the RBI and the Gingh administration, since it was anticipated that funds from an April bond issue which is due to mature in July would be released into the banking system to ease the current cash crunch. However, since the RBI is expressly trying to create the cash crunch, it immediately announced it was itself going to issue a series of bonds as a market stabilisation measure - and effectively suck these funds straight back out again.

Analysts expect banks to be borrowing up to Rs 45,000 crore from the central bank at the daily repo window next week while borrowing rates in the inter-bank call money market are expected to rise to 9.5%. Thus the Indian banking system has been experiencing tight cash conditions for over a month now, and these conditions are likely to continue.

The Rupee

India's rupee gained for a second week last week as the largest weekly drop in crude oil prices ever spurred speculation import costs will decline. The rupee climbed to its highest level in more than three weeks on Friday as light, sweet crude for August delivery fell 41 cents to settle at $128.88 on the New York Mercantile Exchange — well below its trading record of more than $147 a week earlier. India depends on imports to meet three-quarters of its annual energy needs. The rupee also advanced on speculation gains in local equities will attract global funds.

The rupee gained 0.2 percent on the week to 42.785 per dollar at the 5 p.m. close of trading in Mumbai, the highest since June 26. It had risen as high as 42.66 earlier the day. The currency has now rebounded 1.6 percent from a 15-month low of 43.475 on July 1.

The 37 percent rise in crude oil prices so far this year has boosted the average cost of India's monthly oil imports by 43 percent, and oil imports have averaged $7.8 billion a month so far this year, compared with $5.45 billion in 2007.

An additional factor in the upward pressure on the rupee - apart, of course, from the yield advantage which would derive from the anticipated hike in rates following this weeks inflation data - is the fact that the benchmark Sensex share index climbed for a second week, raising optimism overseas investors will scale back sales of local assets. Funds based outside India have sold $7.13 billion more Indian equities than they have bought so far this year, compared with a net purchase of $17.2 billion in 2007, according to the Securities and Exchange Board of India.

Fitch Downgrade

India's Finance Minister Palaniappan Chidambaram has been busy in recent days, trying to downplay the decision by global rating agency Fitch to lower India's local currency credit rating. Chidambaram said the decision was not a cause for concern since the country's economic fundamentals were strong, and stressed that India would grow by around 8 per cent this year. "We must look at fundamentals, which I believe are still strong, but facing difficulties. I do not think we should worry about the outlook,".

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.

Indian Inflation Accelerates Again At The Start Of June

Edward Hugh — Fri, 18 Jul 2008 14:51:00 +0000

India's inflation accelerated to the fastest pace in more than 13 years at the start of July, putting pressure on the central bank to continue raising interest rates following the two increases made last month. Wholesale prices rose 11.91 percent in the week to July 5, after gaining 11.89 percent in the previous week, according to the commerce ministry in New Delhi on Friday.

It now seems very likely indeed that the Reserve Bank of India (RBI) will continue to tighten policy, since one of the major risks facing India now is that inflation becomes entrenched, and to avoid that eventuality the RBI may well need to implement a further significant policy tightening, and this of course will have implications for an Indian economy where growth is already slowing. However, with inflation at nearly 12% and the repurchase rate at 8.5% we shouldn't lose sight of the fact that India still has negative interest rates (minus 2.5% approx) thus monetary policy could be said to be still pretty accommodative, the problem is that with growth at such a fast pace, and inflation expectations rising, and thus the possibility existing of passing on increased prices to consumers, the situation could simply be self-perpetuating with interest rates at the current level. That is high but negative interest rates can, in the right circumstances (and particularly with high liquidity, and M3 money supply growth of 20.5% per annum) simply perpetuate strong price increases, and fuel compensatory wage demands which only serve at the end of the day to send things spinning round and round in an ever more vicious circle

The RBI currently expects the Indian economy to grow by 8.5 percent in the current fiscal year, slower than the 9 percent pace of the previous 12 months, but this forecast is now looking to be significantly under threat from the downside.

India's economic growth has slowed being slowing and clocked up the 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 opportunities 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 rate of the previous quarter.

Foreign Exchange Reserves

India's foreign exchange reserves were up again in the week ended July 11 - by $123 million - according to the latest Reserve Bank of India data. The rise comes following a series of declines induced by changes in relative currency values and the drying up of earlier substantial net inflows. Forex reserves, including gold and SDR (special drawing rights), rose to $308.52 billion. The $123 million rise in the dollar value of the reserves was mirrored by a Rs 14,133 crore dip in the rupee value of funds, which strongly suggests that the increase has more to do with the value of the rupee vis a vis other currencies than any real increase in the inward flow of funds. Looking at the chart (above) it is clear real heavy net inflows came to a halt around the end of March.

M3 money supply growth slowed to 20.5 per cent during the two weeks ended 4 July - down rom 20.7 per cent two weeks earlier. The loan book at Indian scheduled banks was up by 25.7 per cent y-o-y at the close on July 4, compared with a 24.4 per cent rise a year earlier, ie loan growth is still not slowing significantly, although once you take inflation into account it is, of course, slowing. Deposit growth declined to a 21.7 per cent rate compared with a 24.6 per cent at the same point in 2007.

Money supply has now been rising at an average rate of 21.5% since the current fiscal year began on April 1. This is well above the central bank's target of 16.5% to 17% for the fiscal year ending March 2009.

Cash in the Indian money market, however, is likely to get scarcer in the near future since banks will have to place an additional part of deposits with the RBI as of July 19, when the revised norms on cash reserve requirements come into force. This tightening comes at a time when Indian banks are already been borrowing close to a daily Rs 30,000 crore from the RBI.

The raising of the cash reserve ratio to 8.75% coupled with the rise in the cost of borrowing via the the repo rate rise to 8.5% is thus now producing significant effects on day to day liquidity, and most Indian analysts are talking about a withdrawal of some Rs 16,000 crore of funds from the banking system during the coming week. While the cash reserves hike alone is expected to take Rs 8,000 crore out of the system, the RBI is also planning to issue bonds worth Rs 10,000 crore, which will simply bring cash conditions under further pressure. This move by the RBI would seem to be evidence of a certain conflict of interests between the RBI and the Gingh administration, since it was anticipated that funds from an April bond issue which is due to mature in July would be released into the banking system to ease the current cash crunch. However, since the RBI is expressly trying to create the cash crunch, it immediately announced it was itself going to issue a series of bonds as a market stabilisation measure - and effectively suck these funds straight back out again.

Analysts expect banks to be borrowing up to Rs 45,000 crore from the central bank at the daily repo window next week while borrowing rates in the inter-bank call money market are expected to rise to 9.5%. Thus the Indian banking system has been experiencing tight cash conditions for over a month now, and these conditions are likely to continue.

The Rupee

India's rupee gained for a second week last week as the largest weekly drop in crude oil prices ever spurred speculation import costs will decline. The rupee climbed to its highest level in more than three weeks on Friday as light, sweet crude for August delivery fell 41 cents to settle at $128.88 on the New York Mercantile Exchange — well below its trading record of more than $147 a week earlier. India depends on imports to meet three-quarters of its annual energy needs. The rupee also advanced on speculation gains in local equities will attract global funds.

The rupee gained 0.2 percent on the week to 42.785 per dollar at the 5 p.m. close of trading in Mumbai, the highest since June 26. It had risen as high as 42.66 earlier the day. The currency has now rebounded 1.6 percent from a 15-month low of 43.475 on July 1.

The 37 percent rise in crude oil prices so far this year has boosted the average cost of India's monthly oil imports by 43 percent, and oil imports have averaged $7.8 billion a month so far this year, compared with $5.45 billion in 2007.

An additional factor in the upward pressure on the rupee - apart, of course, from the yield advantage which would derive from the anticipated hike in rates following this weeks inflation data - is the fact that the benchmark Sensex share index climbed for a second week, raising optimism overseas investors will scale back sales of local assets. Funds based outside India have sold $7.13 billion more Indian equities than they have bought so far this year, compared with a net purchase of $17.2 billion in 2007, according to the Securities and Exchange Board of India.

Fitch Downgrade

India's Finance Minister Palaniappan Chidambaram has been busy in recent days, trying to downplay the decision by global rating agency Fitch to lower India's local currency credit rating. Chidambaram said the decision was not a cause for concern since the country's economic fundamentals were strong, and stressed that India would grow by around 8 per cent this year. "We must look at fundamentals, which I believe are still strong, but facing difficulties. I do not think we should worry about the outlook,".

Accelerating Indian Inflation Continues to Pressure The Central Bank

Edward Hugh — Fri, 04 Jul 2008 12:10:00 +0000

Inflation accelerated again in India in the week ending June21, reaching its fastest pace in more than 13 years, and strengthening the case for the central bank to increase borrowing costs again this month. Wholesale prices rose 11.63 percent in the week to June 21, after gaining 11.42 percent in the previous week, according to the latest government report issued in Delhi last Friday.

The Reserve Bank of India, which next meets to review rates on July 29, last month 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 ongoing battle to contain growth in the money supply and rein-in inflation. According to the latest RBI data the money supply rose 20.7 per cent year-on-year basis as of June 20, as against the 21.4 per cent increase recorded for the fortnight ended June 6. The pace of money supply growth is thus still well above the RBI's indicative projection of 16.5-17 per cent set for 2008-09.

As a further inflation control measure the Indian government last week also banned exports of corn. This follows earlier restrictions placed on the overseas sales of other food items including wheat, rice, cooking oils and pulses. India has also banned cement exports and imposed a tax on outgoing shipments of steel products.

Evidently this whole situation presents policy with great difficulties since the driving force behind the lions share of the inflation is now not domestic demand as such but global commodity prices (although of course it is the case that rapid economic growth in the BRICs and other emerging economies lies behind the rapid rise in these prices). Crude oil prices touched an all-time high of $145.85 a barrel on July 3, raising concern India's import costs will once more surge as the country relies on overseas crude to meet three-quarters of its needs.

Rising energy costs have fanned inflation in India by making transport, manufactured products and food more expensive. Fuel, power and electricity prices rose 16.2 percent in the week ended June 21 from a year earlier, while food costs, including bread, salt, cooking oil and tea were up 14.6 percent.

Foreign Exchange Reserves

India's foreign exchange reserves fell to $311.790 billion as on June 27, down from $312.481 billion a week earlier, according to the RBI weekly statistical supplement released on Friday. Reserves rose to a record $316.171 billion in late May and have since declined, mainly due to dollar sales by the Reserve Bank of India (RBI), which has been intervening in the currency market to prop up the rupee and provide foreign exchange to the oil companies who need to use them for their import payments. Foreign currency assets, expressed in dollar terms, include the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen.

Foreign institutional investors (FIIs) have also been pulling out a part of their investment from the now volatile Indian stock markets, adding to the downward pressure on foreign exchange reserves. FIIs have sold $6.7 billion more Indian shares than they have bought so far in 2008, following a record $17.2 billion in net purchases last year, according to data from the Securities and Exchange Board of India.

The Rupee

The Rupee fell to a 15-month low this week as data showed the India's trade and current-account deficits are widening after oil prices in New York more than doubled in the past 12 months. The rupee also dropped as losses in local equities spurred speculation overseas funds will pull their money out of the country. The currency declined 0.6 percent to 43.15 a dollar this week as of the 5 p.m. close of trading in Mumbai.

Current Account

India has paid an average $7.7 billion a month for oil imports so far this year, compared with $5.4 billion in 2007, government data show. That widened the trade deficit to a record $10.8 billion in May.

India's current-account deficit narrowed in the last quarter as exports and remittances increased faster than oil imports, the central bank said. The deficit was $1.04 billion in the three months ended March 31 from $5.1 billion in the previous quarter, the Reserve Bank of India said during the week. India last had a current account surplus of $4.3 billion in the quarter ended March 2007.

The rising trend in crude oil costs suggest India's current account deficit may widen this quarter, extending the rupee's losses. The average cost of India's crude oil import basket, a mix of Dubai and Brent, almost doubled to $93.9 a barrel in the quarter ended March 31. The international price of oil has surged 41 percent since then.

India's merchandise exports rose 20 percent to $42.8 billion in the quarter ended March 31 from a year earlier, while imports gained 37 percent to $66.6 billion. Invisibles, an item which includes both software exports and remittances from Indians working abroad, increased 26 percent to $22.8 billion.

India wholsale Inflation 14 June, Foreign Exchange Reserves, Rupee

Edward Hugh — Sat, 28 Jun 2008 11:17:00 +0000

India's inflation accelerated again in the week ended 14 June, hitting the fastest pace in 13 years, and suggesting there may well be more interest rate increases to come from the central bank. Wholesale prices rose 11.42 percent in the week to June 14, following an 11.05 percent rate in the previous week, according to a government statement in New Delhi yesterday.

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.

$250 Per Barrel Oil and Other Scary News

Sean Brodrick — Tue, 10 Jun 2008 18:15:16 +0000

Chart of the freakin' day ...You can see the original HERE.Gazprom expects oil to hit $250 a Barrel "in the foreseeable future". And at the same time, Citigroup boosted its 2008 Brent outlook 22 percent to $116.60 a barrel, while Merrill Lynch raised its forecast by 14 percent to $114. The International Energy Agency lowered its estimate for non-OPEC output this year by 300,000 barrels a day to 50.04 million, in its monthly report today. Saudi Arabia Calls for Summit on Energy Costs After a cabinet meeting led by King Abdullah, the Saudi government said, â€œthe increase in prices isnâ€™t justified in terms of market fundamentals,â€ according to a statement from the official Saudi Press Agency. No date was given for the energy summit. XX Sean's note -- talk is cheap.Bernanke Tries to Talk Up the Dollar, Vows Pigs Will Fly XX Okay, that's not the real headline on this Bloomberg story, but it might as well be. Bernanke also says on inflation, "Who you going to believe? Me or your lying eyes?" Or as Bloomberg puts it ...Federal Reserve Chairman Ben S. Bernanke said policy makers will "strongly resist'' any surge in inflation expectations, delivering his clearest message yet the central bank is done lowering interest rates.Trade Gap in U.S. Widened in April to $60.9 Billion on Record Oil Imports The U.S. trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years. Corn Crop in U.S. May Shrink 10% as Midwest Rains Reduce Yields, USDA Says The U.S. corn harvest will be 10 percent smaller than a year ago as Midwest rains lower yields, the U.S. Department of Agriculture said. Inventories are projected to fall to a 13-year low. Global Growth to Slow in 2008 on Higher Oil, Food Prices, World Bank Says Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis, the World Bank said. Putting a face on "demand destruction." Senator Bernie Sanders collects stories of hardship caused by rising fuel costs and a downward economy. Some examples ... â€œWe have at times had to choose between baby food and heating fuel.â€ â€œBy February we ran out of wood and I burned my mother's dining room furniture.â€ â€œWe also only eat two meals a day to conserve.â€ â€œMy husband and I are very nervous about what will happen to us when we are old.â€ Here is the IEA's latest Oil Market Report. And here is the EIA's International Petroleum Monthly. Some highlights of both ... Global oil supply rebounded by 490 kb/d in May to average 86.6 mb/d, lifted by higher OPEC crude supply. The rise however comes after extensive downward revisions to 1Q08 non-OPEC production. Global oil product demand is expected to average 86.8 mb/d in 2008, according to the IEA. So, you can see that supply already has trouble keeping up with demand. According to the IEA, in April, oil production fell by a whopping 1.09 million barrels per day, not 400,000 barrels per day as they thought last month. That's because the IEA comes out with their estimate way before the vast majority of countries report their production. So they can do nothing but guess. Non-OPEC production reached its current plateau in November of 2003, 4.5 years ago. In march non-OPEC production was 40.99 mb/d. According to the EIA, World oil (crude and condensate) production in March was down by 134,000 barrels per day to 74,494,000 barrels per day. Production in January and February were revised downward. March saw OPEC production drop 110,000 bp/d and non-OPEC production drop 24,000 bp/d.

India Inflation May 24 2008

Edward Hugh — Fri, 06 Jun 2008 08:41:00 +0000

India's inflation jumped in the week ending 24th May to 8.24 percent, the fastest pace since August 2004, adding pressure on the central bank to raise interest rates. Wholesale-price gains accelerated for a seventh straight week, after increasing 8.1 percent in the previous week, the commerce ministry said in a statement in New Delhi today.

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.

The change in foreign-currency assets is partly because of changes in the value of the dollar against the euro, the yen and other currencies during the period, the central bank said.

India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $106.2 billion in the past year.

Meanwhile, money supply in India grew 22.5% in the two weeks ended May 23 from a year earlier, compared with 22% in the prior two weeks, the central bank data showed.

M3, which mainly comprises currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 40.8 trillion ($955.6 billion) on May 23, the Reserve Bank of India said.

Rupee

The rupee declined again this week on concern stock sales by overseas funds and rising oil prices will boost demand for foreign currency. The currency pared back last week's 0.6 percent advance as data from the capital markets regulator showed overseas investors sold more Indian shares than they bought on 11 of the past 12 trading days. The rupee also weakened on speculation quickening inflation, which erodes the value of the returns from investments in the currency, will prompt funds to sell more local assets.

The rupee dropped 0.5 percent to 42.665 per dollar this week as of the 5 p.m. close in Mumbai. This makes the rupee the worst performer at the moment among the 10 most-actively traded Asian currencies excluding the yen in the past month, with a 4.2 percent loss. The rupee has dropped 7.7 percent this year after gaining 12.3 percent in 2007, the most in more than three decades.

Funds based abroad sold a net $4.3 billion in Indian shares after buying a net $17.2 billion last year, according to the Securities and Exchange Board of India.

India's trade deficit widened to a record $25.4 billion in the December quarter, according to the central bank. The cost of oil imports rose to an all-time high of $8.03 billion in March, government data show. Crude oil prices almost doubled in the past 12 months.

India Inflation May 3 2008

Edward Hugh — Fri, 16 May 2008 12:54:00 +0000

India's inflation rate rose again in the week ended 3 May 2008, to the highest in 3 1/2 years, adding pressure on the central bank to raise borrowing costs further to tame prices. Wholesale prices gained 7.83 percent in the week ended May 3 from a year earlier, after climbing 7.61 percent in the previous week, the government said in a statement in New Delhi. In all probability the rate is now over 8% since today's inflation rate will undoubtedly be revised upwards in two months when India's government reviews the figures after receiving additional price data. The Commerce Ministry today increased the inflation rate for the week ended March 8 to 7.78 percent from 5.92 percent, and this kind of upward revision has been normal in recent weeks.

The price index for fruits, vegetables and other food items rose 0.5 percent in the week ended May 3 from the previous week, while that for manufactured products gained 0.3 percent.

The provisional inflation data based on wholesale price index (WPI) hasn’t crossed the sensitive 8% threshold yet, but the latest revision by a whopping 1.9% points in annual rate of inflation for the week ended March 8 make it not unreasonable to believe that inflation is now well above that mark.

In just two months, the inflation rate has risen by two percentage points - from 5.66% for the week ended February 16 to the present 7.83% for the week ended May 3. Delayed data about the revisions in metals prices among other items were blamed for the spike. The scale of the recent revisions suggests the inflation rate seen since March (the index rose 3.6% points during March-April) will almost certainly be up significantly be even when the final estimates for the month are eventually announced.

The rupee declined on the inflation news since it added to concerns that the central bank will be forced to raise interest rates from a six-year high just as economic growth is slowing. The rupee declined to as low as 42.915 against the dollar, the weakest since April 2007, after the inflation data. The yield on the benchmark 10-year bond rose to 7.95 percent, the highest in more than two weeks.

The central bank on April 29 kept its benchmark repurchase rate, or the overnight lending rate, at 7.75 percent. The government has persuaded steel and cement makers in the past week to cut prices and help slow inflation. India's central bank twice asked lenders to set aside more funds last month, raising the so-called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent.

Foreign Exchange Reserves

There has been a visible slowdown in RBI intervention in the forex markets of late. After two consecutive weeks of contraction in reserve accumulation, foreign exchange reserves rose only $200 million to touch $312.7 billion during the week ended May 9. The entire growth in reserves during the week was a result of growth in foreign currency assets.

All other components of reserves — gold, SDR and, reserves with IMF remained unchanged. Of late, though forex assets expressed in dollar terms are slowing down, those expressed in rupee terms continue to show growth. This could be interpreted as meaning that the central bank is accumulating currencies that are depreciating against the dollar.

The Rupee

The rupee declined for the fourth consecutive week this week on concern near-record oil prices will boost the import bill, widening the trade and current-account deficits.

The currency declined as much as 0.5 percent today to a 13- month low as demand for dollars needed to pay for crude oil increased after the commodity climbed to an all-time high of $126.98 per barrel this week. The rupee pared losses on speculation the government will ease curbs on overseas borrowings by companies, allowing more capital inflows.

The rupee weakened 2.2 percent to 42.5075 a dollar this week in Mumbai, adding to last week's 2.3 percent slide, the worst in a decade. It earlier dropped to 42.915, the lowest intraday level since April 12, 2007. The currency's 7.6 percent decline this year now makes the rupee the third- worst performance among the 10 most-traded Asian currencies after the South Korean won and the Thai baht.

The rupee has now fallen 8.1 percent over the past six months as crude oil has advanced 33 percent, boosting the value of India's oil imports to a record $8.6 billion in March. India depends on shipments from abroad to meet approximately three-quarters of its energy needs.

India's trade deficit widened to an all-time high of $25.4 billion in the three months through December, according to the central bank. The current-account shortfall, a measure of trade and investment flows, increased to $5.4 billion in the same quarter from $4.7 billion.

The annual pace of growth in India's industrial production more than halved to 3 percent in March from 8.6 percent in the previous month. The gain was the smallest since February 2002.

South Korea Exports and Trade Deficit March 2008

Claus Vistesen — Wed, 02 Apr 2008 06:18:00 +0000

South Korea's exports accelerated sharply in March on the back of rising shipments of oil products, cars and mobile phones to Asia and Latin America. Overseas shipments rose 19.1 percent from a year earlier, quickening from February's 18.8 percent gain, the economics ministry said in Gwacheon today.

Increased shipments to China and emerging markets have helped exporters to withstand faltering sales to the U.S., where the economy may be in a recession. Still, South Korean factory output fell in February and manufacturers' confidence for April deteriorated, reports showed yesterday, signaling companies expect demand may slow.

Commenting on the general situation in South East Asia, Vikram Nehru, the World Bank’s chief economist for east Asia and the Pacific (ie not including Japan and Australia), said on Tuesday the shift in export orientation was taking place faster than expected. “I didn’t expect such a rapid shift towards non-US markets as we are seeing,” he told the Financial Times yesterday "That is a sign of very adept marketing, as exchange rates and incentives change."

While annual export growth from emerging east Asian nations initially slowed from 22 per cent in January of last year to 15-16 per cent in the third quarter, it has since rebounded to 18-19 per cent.

The World Bank also said more sophisticated domestic production was allowing China to source more of its input needs internally.

“If this trend continues and if other east Asian economies are able to exploit these new opportunities in China’s domestic market then, over time, China is also likely to become an increasingly independent growth pole for the rest of east Asia,’’ the bank said.

Exports advanced to $36.2 billion in March and imports gained 25.9 percent to $36.9 billion, today's report showed. But Korea also posted a trade deficit of $668 million, the fourth consecutive shortfall. However, the March deficit was smaller than that in the first two months of 2008 as soaring oil prices reduced oil imports to 72 million barrels per day, down 10.8 percent from February. South Korea had previously enjoyed a monthly trade surplus for a number of years before starting to generate a deficit in December 2007.

Exports to China climbed 31.5 percent and sales to the European Union gained 21.4 percent in the 20-day period, outpacing a 10 percent increase in shipments to the U.S. China is South Korea's largest overseas market, buying 22 percent of exports. Manufacturing activity in China, the world's fastest-growing major economy, accelerated in March, a survey of purchasing managers showed recently.

South Korea's exports to central America and South America surged 49.6 percent in the first 20 days of last month from a year earlier, today's report showed. Shipments of oil products jumped 83.4 percent in the first 20 days of March and exports of mobile phones gained 48 percent. Exports of cars rose 28.5 percent in the 20-day period.

The Kospi index has dropped 10 percent and the won has fallen 5.8 percent this year on growing concern fallout from the U.S. housing recession and global credit-market slump will cool economic growth in coming quarters.

The 2008 trade surplus is likely to ``miss'' the government's target of $13 billion because of rising oil prices, Oh Jung Kyu, director general for trade and investment at the ministry told reporters in Gwacheon today. Import costs have increased as the price of Dubai crude oil, an Asian benchmark, surged 70 percent since the start of 2007. South Korea buys 97 percent of the fuel it needs from overseas.