All eyes on the upcoming Union Budget

Economy: All eyes on the upcoming Union Budget

• India’s Q4FY2009 gross domestic product (GDP) growth at 5.8% year on year (yoy) came in as a positive surprise and was well ahead of street expectations. The higher than expected growth in the GDP for the quarter was achieved on the back of a strong performance in the agriculture sector. Surprisingly, the GDP growth for Q3FY2009 has been revised upwards to 5.8% from 5.3% reported earlier. For the full year ended March 31, 2009, the GDP growth now stands at 6.7% vis-à-vis 9.0% in FY2008. After the decisive political mandate, which was strongly cheered by the markets, all eyes will now be on the Union Budget to be presented on July 6, 2009, as expectations from the new government, regarding growth-promoting reforms and policies, are running high.
• India’s trade deficit contracted for the fourth consecutive month in April 2009 and stood at USD5.0 billion, down 42.8% yoy. Importantly, on a month-on-month (m-o-m) basis the trade deficit grew by 23.7% after declining for seven consecutive months. We believe the continued decline in exports and the recent increase in the crude oil prices are likely to affect the trade deficit in the coming months.
• After contracting for two consecutive months, the Index of Industrial Production (IIP) grew by 1.4% yoy in April 2009. The improvement in the industrial production primarily stemmed from the healthy performance of the manufacturing and electricity segments during the month. Notably, the IIP growth rate for March 2009 has been revised upwards to a 0.8% year-on-year (y-o-y) decline (from a 2.3% y-o-y decline earlier) after the first revision. The growth in industrial production returned to the positive zone in April 2009 after declining for two consecutive months. The pick-up seen in some of the leading indicators and the overall industrial activity has started reflecting in the IIP numbers. We believe a stable new government at the centre is likely to provide the much-needed thrust to the industrial sector and bring the investment cycle back on track. Consequently, the overall industrial growth is likely to pick up in the second half of FY2010.
• The inflation rate for the week ended June 6, 2009 entered the negative territory as it fell sharply to –1.61% from the previous week’s level of 0.13% and is at its lowest level on record. The sharp decline in the inflation rate is mainly on account of the high base effect of the previous year. We believe the negative inflation rate is more statistical in nature and not a result of any significant fall in the consumption demand. Though such a sharp fall in the inflation rate puts up a strong case for monetary easing by the central bank, we believe any such move is unlikely considering the ample liquidity in the system and the fears of higher consumption led inflation, on account of expectations of economic recovery in H2FY2010.
• Globally, the real economies showed some improvement during the last month as the pace of deterioration continued to slow. Lately, there have been signs of a pick-up in some of the leading indicators as well as the overall industrial activity of major global economies. However, the situation has still not improved completely as some macro head winds persist (read more under “Global round-up”).

Banking: Credit growth losing steam

• The non-food credit growth (as on May 22, 2009) decelerated sharply to 16.1% yoy from 18.1% seen a month ago. Notably, in May 2009 the deposit growth remained strong at 22.6% yoy, largely stable as compared with the 22.5% y-o-y growth registered in the previous month.
• The deployment rate (ie the credit-deposit [CD] ratio) dipped to 67.5% in May 2009 vs 68.6% in April 2009. However, the incremental CD ratio fell sharply to 50.8% as compared with 57.2% in the previous month.
• The money supply (M3) growth remained largely stable on a sequential basis and stood at 20.5% as on May 22, 2009 vs 20.8% as on April 24, 2009.
• The yields on government securities (G-Secs; ten-year) stood at 6.89% as on June 15, 2009, up from 6.41% seen in the previous month. The yields have come off their recent peak of 7.07% in March 2009. However, the movement in the bond markets is likely to be volatile in the coming months on the back of the huge borrowing plan of the government.

Equity markets: Volumes continue their upward march

• After taking a short breather in the last month, the average daily volume in the futures and options (F&O) segment continued its upward march. In May 2009 the average daily volume in the F&O segment came off a bit as it declined by 8.8% on an m-o-m basis while the average daily volume in the cash market grew by 21.0% month on month. However, during the month-till-date (MTD) period in June 2009 (June 01–15, 2009), the average daily volume in the cash and the F&O segment continued to move upwards as compared with the volume seen in the previous month. For June 2009, the MTD fund flows indicate the foreign institutional investors (FIIs) have remained net buyers while the local mutual funds (MFs) have remained net sellers.
• On the MF front, the total industry assets under management (AUMs) registered a growth of 6.4% yoy, breaking the declining trend of the previous seven months. On an m-o-m basis, the total industry AUMs increased sharply by 15.9% and stood at Rs639,847 crore as in May 2009.

Insurance: Premium contraction slows down

• After contracting for five consecutive months, the annualised premium equivalent (APE) for the life insurance industry grew by 7.7% yoy in April 2009. The growth was mainly led by a 14.1% y-o-y increase in the APE registered by Life Insurance Corporation (LIC) largely due to a low base of the previous year. Meanwhile the APE for the private players grew at a much slower pace of 3.8% yoy during the month.
• In the non-life insurance business, the gross premium underwritten for the industry registered a growth of 4.0% yoy in April 2009, lower compared with the 7.6% y-o-y growth seen in the previous month. The growth in the gross premium underwritten of the public sector players fell to 8.1% yoy from 10.5% seen in the previous month. Notably, the gross premium underwritten for the private sector players declined by 1.3% yoy vs a 3.0% y-o-y growth seen in the previous month.