ECO Scan July

7/31/2019 ECO Scan July

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ECOSCAN JULY 2010

ECOSCAN July 2010Monthly Report on Indian and Global Economic Scenario

2050

This issu

1. Executive Summary2. Business Outlook3. Global Economic Scenario

Real GDP growth rate YoY %CPI InflationIndustrial Production Growth rates

4. India Economy Performance IndicatorsGDP Growth rateInflation WPI YoY %IIP growth rateRBI Key Ratios

5. External SectorForeign tradeExportsImportsFDIINR exchange Rate

6. Infrastructure7. Commodities

Crude Oil, Natural GasSugarSteel

8. Sector UpdateAutomobiles & InsuranceFertilizers & Tea


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1. Executive Summary

World Economy Highlights

On the whole, the world economy hasenough momentum at present toabsorb th e crosswinds of Europes

fiscal crises. Though growth is unevenacross the major economic regions, aglobal growth of about 4% in 2010 isexpected.

After the worst recession since the1930s, oxygen from public stimulus

programs has helped the U.S. private-sector economy gradually get back onits feet. U.S. growth is expected toremain strong over the rest of 2010and then be slowed in 2011 by thedrag of federal deficit reduction.

Canadas economic gr owth is currently the strongest in the G-7. Domesticdemand has passed the pre-recession

peak and is now in an expansion phase. At this rate, excess capacity will be absorbed within two or threequarters. The Canadian expansion is

likely to remain strong through therest of this year and then slow next year in response to U.S. fiscal austerity.

IMF has revised upward growth forecast for China for 2010 to 10.5 per cent from 10 percent earlier. Based onthese revisions, global economicgrowth forecast too has been revised

from 4.2 per cent (as estimated in April 2010) to 4.6 per cent. Whileadvanced economies are expected torecord a growth rate of 2.6 per cent

emerging economies are expected togrow at 6.8 per cent in 2010.

The GDP of emerging Asia, still theglobal driver, has now passed the pre-recession peak. Exports are also at all-time highs for China and many other countries of the region.

Asia, in short, is doing very well despite headwinds from thedeleveraging of U.S. consumers and

from the substantial exposure of itsexport production to the euro zone.

Indian economy continues to create waves. The International Monetary Fund (IMF)has revised its forecast of Indias economic growth for 2010 to 9.4 per cent from6.4 per c ent made in October 2009, even higher than the Government of Indiasown projection of 8.5 per cent growth for 2010-11.

IMF expects growth in the Oct-Dec of 2010 to be an impressive 10.3 per cent,higher than even Chinas 9.8 per cent for the same period.

With the IMFs vote of confidence in the Asian emerging market economies, andparticularly for India, Indian equities closed at a 29-month high on July 13 a levellast seen in February 2008. With FIIs buying $8 billion worth of stocks this year,Indian equities outperformed peers such as China and Brazil. Adequate cash levelswith domestic institutions and a good monsoon are providing a short-term triggerto the market.

May Industrial production was up 11.5% lower than expectations. Though it wasthe eighth straight month of double-digit growth, the growth rate has slowed down

compared to April 2010, as output lag in the economy appear to have been filled,giving rise to capacity constraints. Slowing growth of the manufacturing sector isnot an indication of lower demand. It is a combination of high demand andcapacity constraints, which is a recipe for higher prices.

Cropped area affected by below-normal rainfall improves this time. Crop areaunder cultivation was up 9.1% as of July 22, 2010 (Typically, volume growth in farmoutput tends to track the area under cultivation). As of July 22, 2010 overall croparea under cultivation for summer (kharif) crop stood at +9.1%YoY compared with+9.4%YoY as of July 15. This compares with decline of 8.6% in crop area undercultivation last year (as of July 17, 2009). With about 60% of the crop sowing

already been completed, the rainfall trend over the next two weeks will be criticalto determine the outlook for agriculture production.

Inflation remaining in double-digits for five consecutive months with the concernbeing continued stickiness in primary articles up 16.3%YoY and the uptrend in non-food manufactured product inflation. Other concerns include the rise in assetprices as well as mounting wage pressures.

The Reserve Bank of India (RBI) has once again increased the policy rates by raisingthe repo and reverse repo rates by 25 bps and 50 bps respectively in its firstquarter monetary policy review for 2010-11. This is the fourth time since February2010 and second time within the month of July 2010 that RBI has increased thepolicy rates.

At this juncture of the economic revival, this is a step in the right direction.However, it is to be mentioned that despite policy rates being hiked four timessince February 2010 its desired impact on inflation has not been visible. Forexample, food inflation still remains in the range of 12-13%. It is believed thedistortions on the supply and distribution sides of food to be the primary reasonfor high food inflation and unless something concrete is done from theGovernment's side in order to address such supply side constraints, monetarytightening itself may not be very effective in taming inflation.


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3. Global Economic Scenario

US GDP grew at a 2.4% annual pace, less than forecast,after a 3.7 % first quarter gain that was larger than

previously estimated. The US economy slowed in the

second quarter as a scarcity of jobs eroded consumer

spending.

Russia s economic outlook continues to improve andthe Govt. may raise its 4% forecast for economic growth

this year.

U.K. economy expanded 1.1% in the three monthsthrough June, the fastest in four years.The peace of U.K.

second quarter economic growth was a blip and it

isn t time for the Bank of England to begin removing

stimulus.

Latest Figures: Brazils industrial production fell 1percent in June from a month earlier, the biggest dropsince December 2008.

U.K. manufacturing increased for a second month inJune in the best calendar quarter for factory productionin more than a decade as the economic recoverystrengthened.

Russias Industrial production might suffer in July-Augustfrom the recent abnormal heat in Russia with hightemperatures of at least 36 degrees Celsius.

U.K. inflation slowed less than economists forecast inJune10 as higher costs of goods from fuel to food keptthe rate of price increases above the Governments 3%limit.

European inflation accelerated to the fastest pace inmore than 1.5 years on rising energy costs andunemployment held at the highest in almost 12 years.

Brazils inflation rate in july rose at the second slowestpace since 2006, cementing expectations the centralbank will soon stop raising interest rates as LatinAmericas biggest economy cools.


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4. India Econom Performance IndicatorsQuarterly GDP Growth

India's economy may grow at 8.4 percent in the currentfiscal year, led by local consumer demand, robustmanufacturing and services growth, as per central

bank survey of economists.

Going forward, incorporating a further easing of thefavorable base effect which in the coming months willlikely to result in industrial growth moderating to 8-9%,It is expected that our FY11 GDP will grow at 8.4%.

Industrial Production

May Industrial production was up 11.5% lower thanexpectations However, it is seen with no need for

undue concern as data trends both at the macro (loangrowth, non-oil imports) and sectoral front (auto,cement, diesel consumption) are healthy. The numbers to moderate from June due to a fadingbase effect, but May data indicates that themoderation has already begun. This is reflectedacross segments though it is more prominent incapital and consumer goods.On a sectoral basis growth was led by manufacturing,up 12.3%, mining up 8.7%, and electricity, up 6.4%Capital goods up 34.3% though lower than the 70%growth seen last month.

Inflation

The CPI for industrial workers saw a slight moderationto 13.7% YoY in June, vs.13.9% the previous month.Reflecting the sustained uptrend in primary articles(which comprise close to 60% of the CPI and 22% of the WPI), the CPI continues to trend higher than theWPI (which stood at 10.6%YoY in Jun)

Reserve Bank has said that it sees headline inflationcooling down to 6 per cent by March 11 from thepresent double-digit level and that its policy action willnow be focused more on ensuring that the inflationmoderates to a comfortable level.


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Ke Interest RatesCash Reserve Ratio 6.00 %

Repo Rate 5.75 %

Reverse Repo Rate 4.50 %

PLR 11.75 %

SLR 25 %

US Federal Fund Rate 0.12 %

1 Month LIBOR 0.29 %

3 months LIBOR 0.42 %

The Reserve Bank of India (RBI) has once again increased the policy rates by raising the repoand reverse repo rates by 25 bps and 50 bps respectively in its first quarter monetary policyreview for 2010-11. This is the fourth time since February 2010 and second time within the month of July2010 that RBI has increased the policy rates.

At this juncture of the economic revival, this is a step in the right direction. However, it is to be mentionedthat despite policy rates being hiked four times since February 2010 its desired impact on inflation has notbeen visible. For example, food inflation still remains in the range of 12-13%. It is believed that the distortionson the supply and distribution sides of food to be the primary reason for high food inflation and unlesssomething concrete is done from the Government's side in order to address such supply side constraints,monetary tightening itself may not be very effective in taming inflation.

Although the steps taken by the RBI may reduce the momentum of economic growth in the short term, it is believedthat the benefits of taming inflation will eventually outweigh the cost of monetary tightening.

Another important step taken by the RBI was the shift of bank's lending rates from Benchmark Prime Lending Rate(BPLR) mechanism to Base Rate system. Effective from 1st July 2010, all banks will be required to price loanswith reference to their base rate which will be published by the respective banks on a regular basis. Banks willnot be allowed to lend money below their base rate as against the earlier practice of lending below BPLR tolarge borrowers. Such a move by RBI will benefit retail (individual) borrowers the most as there will be nomore cross subsidization of loans in favor of big corporate borrowers.

Given the growth and inflation outlook, it is expected that RBI will raise rates by at least 50bps more in 2010.

This may take the repo and reverse repo rate to 6.25% and 5% respectively by Dec 10.

Credit Off-take

In addition to tightening frictional liquidity due to the recent 3G telecom auctions as well as advance taxpayments; there are also signs of tightening structural liquidity. This is reflected in the continued uptrend incredit growth coupled with the deceleration in deposit growth. On a cumulative basis (Apr-July), incrementalloans were Rs 1,576bn vs. Rs200bn in the same period last year, reflecting an increase of 21.3%YoY.


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5. External Sector

Latest Figures: Foreign direct investment (FDI) inflows in the country declined by about 45 per cent to $1.41 billion inJune this year against $2.58 billion in June 2009.

The sectors, which attracted foreign investment, include services, telecommunication, construction activities andcomputer software and hardware.

The government said that FDI during the first quarter of 2010-11 was $5.80 billion against $7.01 billion in 2009-10.

Indias merchandise exports grew more than 30% (in dollarterms) for the fifth straight month in june, boosting economicgrowth.

Exports were driven by Engineering goods, iron ore, gems, jewelry and Chemicals.

The trade deficit for April-June 2010 was estimated at US $32267 million which was higher than the deficit of US $23475 million during April-June 2009.


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Rupee Reference Rates

6. Infrastructure

Rupee Reference Rates

Rupee depreciated on its value during month of July10 against all major currencies except for US $where a marginal improvement is registered.

Morgan Stanley is poised to turn outright bearishon Indias rupee on signs the economy is slowingand as a technical chart signaled the currency maybe poised to weaken.

Although the view of Morgan Stanley is in contrastto Citigroup Global Research August report, butMorgan Stanley is bearish because t he rupeeseconomic fundamentals are deteriorating asgrowth slows, the balance of payments declinesand because monetary policy may not be sufficientto temper inflation they have bearish sentimentsover rupee.

India: Infrastructure Growth

Following the 5%+ growth seen in recent months, thesix core infrastructure industries index moderated to3.4%YoY in June.

Coal production, which expanded by less than 1%, wasthe biggest drag on the core sector output for June.Country's coal production has been remaining flatover the recent months as the mining major Coal Indiahas not been able to get enough rail wagoncombinations or rakes to transport the mined coal.

Crude oil production, which grew by 6.8%, stayedmarginally lower than the petroleum ministry'sprojection.

With the monsoon rains covering all parts of thecountry, the growth in cement production alsomoderated.


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7. Commodities

Henry Hub Natural Gas Index

Natural gas spot prices at the Henry Hub are tradingsignificantly above year-ago levels. At $4.75 per MMBtuin trading on July 28, prices at the Henry Hub werenearly 36 percent, or $1.26 per MMBtu, higher thanyear-ago levels.

EIA expects the Henry Hub natural gas spot price toaverage $4.70 per million Btu (MMBtu) this year, a$0.75-per-MMBtu increase over the 2009 average and$0.22 per MMBtu higher than in last months Outlook .

Crude Oil Index

Crude oil futures continued to gain strength, rising above$82 a barrel for the first time since May, and ignoring a setof disappointing U.S. economic data Tuesday that hurt pricesin other markets.

Baltic Dry Index

After decline of 3 consecutive months BDI has entered inconsolidation zone with mild recovery. It has reached to 2114points on 9th August 2010.


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Commodities : SUGAR

Domestic Sugar Prices rise marginally in July 2010, the domestic Mumbai S-30 priceaveraged about Rs 27,070/tonne, a 2.5% increase as compared to last month prices.

Average International raw and white sugar prices continued their upward trend in July2010 on account of an increase in demand in global market coupled with reports of

lower than expected Brazilian sugar production and logistical problems at Brazilianports.

The government has decided to release 19.20 lakh tonnes of sugar in the open marketand through the public distribution system (PDS) in August, 2010, about 2.55 lakhtonnes more than July 2010 level.

Tamil Nadu State government has announced State Advised Price of Rs.2,000 a tonneof sugarcane for 2010-11. This includes Rs.100 for transport cost to be borne by sugarmills.

India, the world's biggest consumer is expected to initiate moves to free up the sugarsector within three months, but analysts are not hopeful of any reforms in the nearterm.


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Commodities : Steel

Steel prices are firming up on the back of demand from construction and automobile firms and Indian steelmanufactures may revise the rates for its products in the next few months. There is an upward pressure onthe prices; demand in August to September is bound to improve, mainly from sectors like automobile andconstruction.

World crude steel production in June 2010 registered18% growth than June 2009.

Chinas crude steel production for June 2010 was 53.8

mmt, an increase of 9% compared to June 2009.

Crude steel production in the 27 member countries of the European Union increased by 35.7% in Junecompared to June 2009, with the year to date totalup by 44.6% to 90 million tonnes compared with thesame period last year.

Japan produced 9.4 mmt of crude steel in June 2010,u 35.9% com ared to the same month last ear.

The price of key steel products like hot rolled coils whichhad touched a peak of USD 615 a tonne in internationalmarkets in January, had fallen to about USD 550 a tonnein July due to a slump in demand amid economicinstability in Europe and a slowdown in manufacturingactivity in China. HR coil prices have seen someimprovement. They are hovering around the USD 555 atonne level now.


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8. Sector U date : Automobile & InsuranceAutomobile

Insurance

Insurance GWP

- Rs Crore

APRIL-JUNE % ChangeY-O-Y 2010-11 2009-10

Private 4360.7 3585.9 21.61%

Public 6390.8 5243.4 21.88%

Driven by record sales in passenger car and two-wheeler segments, the Indian automobile industryposted its best ever total automobile monthly salesof 12,37,461 units in July 10, beating the previoushigh achieved in March 2010.

The total auto sales has grown by 31.50 per centreaching to 12,37,461 units in July compared to9,41,070 units in the same month last year.

Strong commercial vehicle performance resulted invehicle exports rising 9.2 percent in July 10, but carexports rose only 2.1 percent, as major carcompanies facing capacity constraints put India'sfast-growing market first.

In the April-June 2010 duration, General Insurance industry has achieved a growth of 21.8% in Grosswritten premium as compared to same duration last year. Both the Private and Public sector companiescontributed equally in the sectoral growth with 21.61% and 21.88% growth contribution respectively.

Outlook: As per IRDA, all the public sector companies and the private sector companys growth rate isincreasing in terms of its liability insurance premium collection. The new companies are going to enter inthis field with good number of products lines and get good compilation for the existing ones. Liabilityinsurance is expected to grow at huge rate in the future due to its multi vital uses; it is a very importantfactor in public and private insurance companies.


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Sector U date : Fertiliser & Tea

Fertilisers

Fertilizer Production June 2010 June 2009 % Chan eUrea 1 833.1 1 703.8 7.59%DAP 305.9 585.7 -47.77%10-26-26 188.7 84.8 122.52%12-32-16 169.8 11.0 1443.64%14-35-14 65.1 88.2 -26.19%20-20-0 20.0 12.9 55.04%15-15-15 35.2 31.4 12.10%28-28-0 26.8 22.2 20.72%Total Com lex 756.4 510.3 48.23%

Tea

The production of N at 1.025 million tn duringJune'10 increased by 3.6% overJune'09.However, the production of P at 0.386million tn, registered a steep decline of 13.3%during the period.

While the production of urea and NP/NPKcomplex fertilisers registered significantincrease of 7.6% and 48.2%, respectively, duringJune'10 over June'09, the production of DAPand SSP showed a decline of 47.8% and 4.1%,respectively, during the period.

Tea production in June was affected severely byrain and pest attacks, the latest figures releasedby the Tea Board show. However, exportsregistered an increase of nine million kg inJanuary-June vis--vis last year.

Despite a drop in June production, the country'stea output in January-June stood at 339 millionkg, up 1.5 per cent on year due to higher crop inJanuary-April.

Tea prices in India have been rising for the pastone month due to lower crop in June.


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ECOSCAN July10

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Disclaimer: The information contained herein is obtained from Bloomberg, News articles and various research reports.

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ECO Scan July