Economics Markets Strategy - the DBS Vickers Securities Equities ...
Economics Markets Strategy - the DBS Vickers Securities Equities ... Economics Markets Strategy - the DBS Vickers Securities Equities ...
Economics: India Economics – Markets – Strategy Chart 4: Mfg PMI points to decent growth in industrial production ahead % QoQ, saar, 2qma 25 IPI PMI: Output index, sa; 50= no chg 70 20 15 65 10 60 5 0 Latest: Mar08 (IPI), Apr08 (PMI) -5 Jan-06 Jan-07 Jan-08 55 50 The economy slowed in Jun07- Sep07 and has recovered nicely since then (see Charts 5 - 9 ) Year-on-year numbers to rise rapidly ahead, as month-on-month already has There is a concern that growth has begun to slow in the last six months due to declining year-on-year industrial production growth numbers. Such concerns have been delaying rate hikes to control inflation. However, growth has not begun to slow now, it slowed in Jun07-Sep07 and has rebounded in the last six months. To a great extent, focus on year-on-year numbers have distorted the interpretations of India’s economic data recently. To understand this, we go back to what happened in 2007 and how that has affected growth patterns. The RBI’s postponement of much needed rate hikes in 2006 (quarter-on-quarter inflation was rising rapidly then following fuel price hikes) merely led to even higher year-on-year inflation in first quarter of 2007 and application of sudden brakes by the RBI in the first half 2007. Interest rates had to go up suddenly and sharply as the increase came later than it should have. This sudden 200-400bp increase in borrowing costs led to a temporary soft patch in consumption demand that extended from Jun07-Sep07. Consumer demand and credit have rebounded sharply since then broadly in line with our expectations. We expected consumption to recover as we believed that rates were not at a restrictive level per se but that the speed of the increase in rates simply had to temporarily hurt demand. Hence, our expectation was for growth to recover Chart 5: Mfg goods production Levels, SA, 3mma 300 290 280 270 260 250 240 230 Interest rate "shock" phase Latest: Mar08 Jan-06 Jan-07 Jan-08 Chart 6: Consumer goods production Levels, SA, 3mma 320 300 280 260 240 Interest rate "shock" phase Latest: Mar08 Jan-06 Jan-07 Jan-08 96
Economics – Markets – Strategy Economics: India Chart 7: Credit growth - heading towards 25% % YoY, 3mma & % MoM, saar (6mma) 30 25 20 Chart 8: Broad money % YoY, 3mma 25 20 RBI intervention kept money growth high even in the interest rate "shock" phase 15 10 5 RBI comfort level (~20%) Credit % m/m saar (6mma) Credit % YoY (3mma) Interest rate "shock" Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 15 10 RBI comfort level (~17%) M3 % YoY (3mma) Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 from this interest rate “shock” in the latter half of 2007 and it has. This recovery is evident in the month-on-month growth trends not only in the industrial output data (Charts 5 & 6) but also in the credit data (Chart 7). In fact, credit growth is heading towards 25% growth rate again. Money growth at 22% (YoY) is also much higher than RBI comfort level of 17% (Chart 8) though there was no period of material moderation in money growth. This is because large capital flows and RBI intervention kept money growth strong in the interest rate “shock” phase also. This is why we believe worries about growth slowdown at a macro level are presently misplaced. Inflation to continue to rise With growth rebounding nicely from the interest rate “shock” and worries about a US recession expected to ease, inflation risks are mounting. WPI has already breached 8% (YoY) as on week-ended May17. In fact, inflation may already be in double digits as suggested by large revisions to back dated data (week-ended Mar15 WPI was revised up by 200bps). In any case, WPI is underestimated due to oil subsidies. As such, we think manufacturing WPI, a measure of core inflation, risks staying above 5% RBI comfort level in the next 12 months (Chart 9). Chart 9: WPI Manufacturing % YoY Inflation: two pitfalls to avoid 4 (1) Inflation is *not* simply due to basis effects that 2 will “disappear” in a few months: In fact, similar to the trend in consumer durable goods 0 output and credit numbers, inflation also has been rising sharply in sequential terms after the “halt” in price growth in the interest rate “shock” phase (Chart 9). Therefore, inflation should not be brushed aside as a base effect phenomenon. Certainly, basis effects exaggerate the inflation reading and we can expect a decline in inflation in year-on-year terms especially if food price inflation moderates. (2) Inflation is not simply led by “global” factors: The fact that global commodity prices are driving up inflation should not be taken to mean that inflation is due to “global” factors (as opposed to “domestic” factors). In an integrated global market, domestic demand pressures of emerging markets like that of China and India can together drive commodity price inflation even though a single country’s demand may be too small to alter global prices. 12 10 8 6 RBI comfort % YoY WPI manufacturing price level (RHS) Interest rate "shock" phase Jan-06 Jan-07 Jan-08 Jan-09 Levels, s/a 210 190 170 97
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<strong>Economics</strong>: India<br />
<strong>Economics</strong> – <strong>Markets</strong> – <strong>Strategy</strong><br />
Chart 4: Mfg PMI points to decent growth in industrial production ahead<br />
% QoQ, saar, 2qma<br />
25<br />
IPI<br />
PMI: Output<br />
index, sa; 50= no chg<br />
70<br />
20<br />
15<br />
65<br />
10<br />
60<br />
5<br />
0<br />
Latest: Mar08 (IPI), Apr08 (PMI)<br />
-5<br />
Jan-06 Jan-07 Jan-08<br />
55<br />
50<br />
The economy<br />
slowed in Jun07-<br />
Sep07 and has<br />
recovered nicely<br />
since <strong>the</strong>n (see<br />
Charts 5 - 9 )<br />
Year-on-year numbers to rise rapidly ahead, as month-on-month already has<br />
There is a concern that growth has begun to slow in <strong>the</strong> last six months due to<br />
declining year-on-year industrial production growth numbers. Such concerns<br />
have been delaying rate hikes to control inflation. However, growth has not<br />
begun to slow now, it slowed in Jun07-Sep07 and has rebounded in <strong>the</strong> last six<br />
months. To a great extent, focus on year-on-year numbers have distorted <strong>the</strong><br />
interpretations of India’s economic data recently. To understand this, we go<br />
back to what happened in 2007 and how that has affected growth patterns.<br />
The RBI’s postponement of much needed rate hikes in 2006 (quarter-on-quarter<br />
inflation was rising rapidly <strong>the</strong>n following fuel price hikes) merely led to even<br />
higher year-on-year inflation in first quarter of 2007 and application of sudden<br />
brakes by <strong>the</strong> RBI in <strong>the</strong> first half 2007. Interest rates had to go up suddenly and<br />
sharply as <strong>the</strong> increase came later than it should have. This sudden 200-400bp<br />
increase in borrowing costs led to a temporary soft patch in consumption demand<br />
that extended from Jun07-Sep07. Consumer demand and credit have rebounded<br />
sharply since <strong>the</strong>n broadly in line with our expectations.<br />
We expected consumption to recover as we believed that rates were not at a<br />
restrictive level per se but that <strong>the</strong> speed of <strong>the</strong> increase in rates simply had to<br />
temporarily hurt demand. Hence, our expectation was for growth to recover<br />
Chart 5: Mfg goods production<br />
Levels, SA, 3mma<br />
300<br />
290<br />
280<br />
270<br />
260<br />
250<br />
240<br />
230<br />
Interest rate<br />
"shock" phase<br />
Latest: Mar08<br />
Jan-06 Jan-07 Jan-08<br />
Chart 6: Consumer goods production<br />
Levels, SA, 3mma<br />
320<br />
300<br />
280<br />
260<br />
240<br />
Interest rate<br />
"shock" phase<br />
Latest: Mar08<br />
Jan-06 Jan-07 Jan-08<br />
96
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