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Economy Perspective

April 6, 2013

India GDP growth for Q3FY 2013 stood at a 15-quarter low of 4.5%, with Services sector growth slowing down to a 10-year low rate. GDP Growth for FY13-14 is expected to improve to around 6.1%-6.7% as estimated in the Union Budget. IIP growth accelerates to 2.4% in January, up from contraction of 0.6% in December. India's manufacturing Purchasing Managers' Index rose to 54.2 in February from a three-month low of 53.2 in January, in view of pick up in domestic orders and improvement in business conditions.

India's key eight core sector growth expands 3.9% in January following 2.5% growth in December. Wholesale Price Index (WPI) Inflation marginally rose to 6.84% in February from 6.62% in January. Consumer Price Index (CPI) inflation number came in at 10.91% for February up from 10.79% in January. India’s fiscal deficit for FY13 is expected to stand at 5.2% as against earlier estimate of 5.3%. Fiscal deficit is projected at 4.8% for FY14.

On the Global front, US Fiscal cliff avoided – QE infinity, continued looser monetary policy + recovery, European debt crisis management – Cyprus issue, Austerity impact, China hard landing fears are diminishing, while inflation concerns persist, Emerging markets underperforming the developed economy markets. On the Domestic front , RBI’s monetary stance has softened, though capped by the way inflation trend shapes up Economic Growth has decelerated further as indicated by GDP numbers, but IIP and PMI growth trends indicate bottoming out of economic growth.  Thrust on domestic capital formation and attracting foreign capital through FDI and FII routes. Trade deficit over 10% and Current account deficit over 5% of GDP. These are at unsustainable levels. Fiscal deficit target achievement: Historically, revenue through tax collection have been lower than target. Rupee has significantly weakened in the last 6 years reflecting weak Balance Of Payment dynamics. No concrete signs of investment growth pick up

 Capital Inflow in india market in 2013: Indian markets saw a huge influx of FII money coming into the capital markets in Jan-Feb 2013 buoyed by improving risk sentiments and excess liquidity in the external economies. Cumulative FII inflows in Jan-March 2013 add up to INR 538 bn. Indian market tanked in March on account of event-led volatility caused by Union Budget and weak macroeconomic growth indicators. This dented market sentiments and resulted in net-selling by domestic institutions to the tune of INR 75 bn. Monetary easing in US, UK and Japan is likely to result in high inflow into risk assets including emerging markets in the forthcoming quarters.

 Indian economy upas and down

 Positive: Budget initiatives towards capital formation, boost to Infrastructure and agriculture, Deferment of revised GAAR implementation, FII support to Indian market, Easing investment norms for Foreign investors, Aggressive disinvestment programs to tackle Fiscal deficit management, Start of monetary easing by RBI  and Cooling Inflation numbers and inflation expectations

Negative:  Weak domestic macroeconomic growth in FY13, Higher market borrowing in FY14, Low investment growth, Rupee depreciation, Supply constraint in the economy, restricting inflation easing, High Fiscal Deficit, Rising Trade and Current Account deficit

 Union Budget 2013 has pegged India’s GDP growth at 6.1%-6.4% for FY14; FY13 growth seen 5.0%. Union Budget 2013 has aggressive fiscal consolidation targets through subsidy reduction, direct cash transfers, diesel price deregulation. But the major source of revenue still comes from non-tax and capital receipts. This poses risks to achieving fiscal deficit targets for FY14. Attractive valuationsIndian market has seen good correction in the previous month on account of uncertainty surrounding Union Budget. On the positive side, we see the inflation levels lowering and strong reform measures being taken to tackle fiscal deficit concerns. In short Indian markets are trading at better valuations and also have shown improvement in macroeconomic situation. At 13.5x forward PE level, we recommend continued exposure to Indian Equity markets.

Sectors: Budget announcements hold a good scope for growth in Infrastructure and agriculture sectors. Meanwhile, monetary easing exercise by RBI will make the interest rate sensitive sectors attractive. With investment cycle in the economy expected to turn, cyclical sectors like Auto, utilities like Power sector are expected to perform. RBI has implemented two rate cut of 25 bps each in REPO since the start of 2013, bringing it to 7.5%. To address the liquidity requirements, CRR cut of 25 bps in January (4%) and OMOs.

RBI on global and macro-economic scenario: Headline inflation remains sticky despite core inflation lowering below 4%, WPI inflation to remain range-bound. Reviving investments is a big concern along while sticking to fiscal consolidation road map and bridging supply constraints. Emerging markets could face pressures from rising energy prices, resulting in upward push to domestic inflation.

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