India Outlook: More Pain Ahead

IIP for the month of October 2008 was negative (.4%).   This is the first negative reading in fifteen years!  The lagged affect of high interest rates and tight monetary policy is showing up in official data.

“The situation is much graver than expected,” said Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council. Economists and analysts polled by ET ahead of the data had forecast industrial production growth in October to range between 2.3% and 3%.

Lagged affects work both ways...the effect of recent monetary easing and lower interest rates will take time to work their way through the system.  Unfortunately, recent monetary policy changes have been directed to manage the contagion from global events and ease the panic situation which existed in Indian money markets in October when call rates spiked to 21%.

There has been no action on the growth front...we are just waiting for the fall-out of global events...monetary policy is still too tight fighting an inflation which is faint even in the rear view mirror.  Fiscal stimulus has been an anemic .6% of GDP...and there are confusing signals from authorities about the way forward.

Analysts around the world continue to downgrade the growth projections for India...while the Government continues to forecast a 7%+ growth for this fiscal and the 2009-2010 fiscal...

Morgan Stanley :

cuts its forecast for 2009-2010 to 5.3%....its growth projection for second half of 2008-2009 is 6.2%.

“The bear market is likely to continue in 2009, the Sensex could move in a wide range in the coming 12 months, though our view is that the market is biased for flat-to-downside rather than upside. Our probability weighted Sensex outcome for December 2009 is 8,559,” said the Morgan Stanley research report.

I have been projecting Sensex 8500 and Nifty 2500 levels as fair value -Lee.

Credit Suisse’s Asia strategy report says the Indian economy would grow between 5 and 6 per cent and that corporate earnings growth would be negative in FY09, and flat in FY10.

I have been projecting -10% in FY09 and flat in 2010FY- Lee.

So what do I think about the Indian equity markets...well, they are saying that the tickets are going fast and you will miss the party..I will pass...My view is:

Thank you The Big Picture.

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India Policy: Time to Act is Now

I have always been most impressed with Arun Shourie and in the midst of this crisis he has spoken...the government should forget politics and take heed...create a bi-partisan effort to deal with this crisis...BJP says crisis needs bigger response. Some excerpts:

India needs to restore economic confidence hit by the global credit crisis by helping struggling industries, boosting infrastructure spending and dramatically improving governance, a senior opposition politician said.

He criticised the current Congress party-led coalition for irresponsible off-budget spending, populist schemes that did not boost productive capacity and heavy-handedness in tackling supply-side inflation by simply raising interest rates.

"Money will come forward, the Indian investor will come back. He will certainly come back in government-guaranteed debt... provided he is confident that the government will go ahead with the project and execute it efficiently."

I agree.

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India: Expect cuts in Policy Rates

Inflation for the week ended November 1, 2008 was 8.98%, sharply lower than the previous week's 10.72% reading. Expect further sharp declines in the coming weeks and months...creating substantial room for policy makers to cut rates and provide further liquidity infusions.

Currently:                     Policy rates                        Reserve Ratios
Bank Rate                           6.0%                C.R.R.           5.5%
Rep Rate                             7.5%                 S.L.R.         24.0%
Reverse Repo Rate           6.0%

So we have room of 4% on SLR, 2.5% on CRR and I would expect a reduction of at least 250 basis points more in Policy rates.

As the financial crisis plays out globally, expect inflation expectations in India to vanish from the landscape...the above liquidity infusions combined with targeted stimulus packages and financial sector reforms will be instituted by the government.  There is almost no choice in the matter and a debate will not be required.

With respect to markets, I am now 5% equities and 95% cash...and on the internal Hamlet debate of to buy or Not to buy...I found the following quote amusing:

So who would sell into such a market? The Investor Team's resident academic, Anant Sundaram, puts such sellers into two categories: the clueless and the choice-less. Sundaram, a professor of business administration at Dartmouth, says the former need to take a Prozac, but the latter have more ramifications for the economy. Only those with a gun to their heads, in the form of margin calls or investors screaming for their money back, would sell now, he says, and they must be either hedge funds, statistical arbitrage mavens or private equity players.

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