Domestic Economy
The inflation based on the Wholesale Price Index fell to 9.11% for the month of November’11 against 9.73% % in October’11. The inflation rates for Primary Articles, Fuel and Manufactured Products were at 8.53%, 15.48% and 7.70% respectively in November 11. The inflation rate for food items was at 8.54%. Similarly, the Consumer Price Inflation continues to remain elevated at 9.0% for Agricultural Laborers and 9.1% for Rural Laborers in November’11. The Consumer Price Inflation for Industrial Workers for November’11 was similarly at 9.3%. The gap between the inflation measured by WPI and the various CPI indices is on account of different composition and varying weights of the various index components and base effect impact.
Global agency Moody's upgraded India's short-term foreign currency rating from speculative to investment grade, a development which will help domestic companies to raise funds from overseas markets at better rates. India's foreign currency bond ceiling is unchanged at Baa2, and the foreign currency bank deposit ceiling is now Baa3. The local currency bond and bank deposit ceilings are unified at A1. In addition, the Indian government's local currency short-term rating has been changed to P-3, from NP.
As per BOP data released in December for Q2FY12, current account deficit (CAD) widened to ~3.7% of GDP from ~3.5% in the previous quarter on back of increase in imports, even though exports and remittances also improved. Imports were higher due to elevated oil imports and sharp rise in gold imports. The increase in gold imports is both on account of increase in gold prices and jump in the actual volume of imports. Notably, in the period from April-September 2011 gold imports were at ~USD 28.6bn versus ~USD 14.3bn in the same period last year.
On capital account, net inflows were just enough to fund the CAD with primary support from debt-related flows. Going ahead, Rupee depreciation, slower non-oil imports and stronger NRI remittances should help trim CAD, although capital flows outlook has weakened in recent months.
The Government of India has reviewed the extant policy on the FDI (Foreign Direct Investment) and decided that FDI, up to 100%, under the government approval route, would be permitted in single-brand product. The decision will take effect immediately. This should allow the likes of Idea, Adidas, Gap, Starbucks and the luxury brands to enter. How they comply with the requirement to source 30% of materials from local small producers (less than USD 1mn investment in plant & machinery) is a moot point.
Domestic Debt Market
The Rupee depreciated substantially against the US Dollar in December 11 to close at Rs 53.06 from the level of Rs 52.21 at the beginning of the month. The Rupee traded in a range of Rs 51.00 and 54.20 against the US Dollar during the month. In the global markets, the USD was trading stronger at 1.29 against the Euro in December 11 (close) from 1.34 in November 11. The foreign exchange reserves of RBI stood at USD 300 billion as on 23 December 11. India’s trade deficit stood at $ 13.6 billion in November 11 and at $ 116 billion during April – November 11. Exports during April – November 11 were at $ 192 billion registering a growth of 33% (YoY). Similarly imports growth was at 30% (YoY) during April – November 11 and stood at $ 309 billion.
The liquidity condition in the money market continued to remain tight in December 11 in the wake of advance tax outflows. The overnight rates were at or above the upper end of the LAF corridor in December 11. Reserve Bank of India infused liquidity through the overnight LAF repo window to stabilize the market. The call money rate was in the range of 8.50% - 9.50% during the month while the CBLO rates were generally in the range of 8.50% - 9.00%. The net liquidity infusion under LAF stood at Rs 100,000 cr on 31 December 2011.
The sovereign yield curve shifted downwards by 20 – 30bps during the month, in the backdrop of easing of inflationary pressures and active Open Market Operations by RBI. The indications from Government and Reserve Bank of India that interest rates have peaked and the downturn in the monetary policy cycle is likely aided the market sentiment. In the Mid-quarter Review of Monetary Policy announced the mid-December, the RBI maintained the policy rates. The Government announced an increase of Rs 40,000 cr in the borrowing for the last quarter. The yield on 10 year Government Securities closed at 8.54% as per FIMMDA yield curve, 20bps lower than 8.74% at the close of the previous month. The credit spreads on corporate bonds were more or less stable during the month, though bond yields rallied in the backdrop of a rally in Government Securities. 10 Year “AAA” rated bonds (PSU) were trading at a spread of 69bps over the annualized yields on Government Securities of similar maturity as per FIMMDA valuation, 5 bps lower than 74bps spread at the previous month’s close. The, 5 Year “AAA” rated bonds (PSU) spreads increased to 80bps over the annualized yields on Government Securities of similar maturity indicating a rise of 9bps during the month.
Note: The above data has been generated from sources in public domain.