Impact of Fii on the Indian Stock Markets - DOC

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					India Economic: Monthly Economic Report January 2008


a) The Indian Economic growth story continues. As per the revised
   estimates released by the Central Statistical Organisation (CSO)
   India’s economy grew faster than previously estimated, at 9.6 per
   cent in 2006-07 and 9.4 per cent the year before.

b) The Prime Minister’s Economic Advisory Council lowered the 2007-
   08 GDP projection to 8.9 percent, a shade lower than the 9 percent
   growth forecasted earlier. Slower demand for consumer goods and
   tardy growth in the farm sectors are the main reasons for this.

c) Exports for the month of December 2007 witnessed a momentum
   despite the Rupee appreciation. While in dollar terms the
   merchandise exports grew by 16.04 percent, in rupee terms the
   export growth was a mere 2.54 percent.

d) Industrial growth plunged to 5.3 per cent in November 2007 as
   compared to 15.8 per cent growth registered in November 2006
   reporting a 66.45 per cent decline in growth rate year-on-year.

e) Supply-side constraints led to a reduction in the growth rate in the
   index of six infrastructure industries in November 2007 to 5.3 per
   cent from 9.6 per cent a year ago. This is the second month in a row
   in which core sector growth has nearly halved over the previous

f) Indian stock markets were hit by fears of a US recession. The rate
   cut by US Fed failed to bring cheer to the markets, and they remain
   highly volatile.

g) Though the fuel price pass through is yet to happen        inflationary
   pressures are being felt in the Indian economy. The WPI   (Wholesale
   Price Index) measure of inflation, which was 3.57         percent in
   December 2007, rose to a monthly average of 3.85            percent in
   January 2008.

h) On the policy side, the Indian Cabinet approved the FDI (Foreign
   Direct Investment) review that was pending for the last couple of
   months. The review is about the increase in FDI cap in various
   sectors of the Indian Economy.

Macro Economy

According to the revised estimates of CSO, Indian economy grew at 9.6
per cent in 2006-07 and 9.4 per cent the year. This is faster than the 9.4
percent and 9.2 percent estimated earlier for 2006-07 and 2005-06
respectively. The revised numbers put 2006-07 growth at the highest in
18 years. In 1988-89, the economy grew 10.5 per cent. With the latest
revision, India’s economy grew at 7.76 per cent during the 10th Plan
(2002-07), close to the targeted growth rate of 8 per cent. The Indian
Finance Minister P Chidambaram said full-year growth in 2007-08 would
be around 9 per cent. “It is a matter of considerable satisfaction that
despite turbulence and heightened global uncertainties, our economy
grew by 9.6 per cent in 2006-07 and is estimated to grow close to 9 per
cent this year. Which side of 9 per cent it is difficult to say’’. The
numbers come as a surprise to many and also justify the raising of rates
by the RBI last time around.

Fine Tuning the Growth data: Quick Estimates (QE) vs. Revised Estimates (RE)
                                           2005-06                       2006-07
                 Industry                QE       RE                   QE       RE
Agriculture, forestry & fishing       6        5.9                  2.7      3.8
Mining & quarrying                    3.6      4.9                  5.1      5.7
Manufacturing                         9.1      9                    12.3     12
Electricity, gas & water supply       5.3      4.7                  7.4      6
Construction                          14.2     16.5                 10.7     12
Trade, hotels & restaurants           10.4     9.4                  13       8.5
Transport, storage & communication    NA*      14.6                 NA*      16.6
Financing, insurance, real estate & 10.9       11.4                 10.6     13.9
business services
Community, social & personal services 7.7      7.2                  7.8        6.9
Total GDP                             9        9.4                  9.4        9.6
*”Trade, hotels, transport & communication” was a single category earlier and has now been
split into “Trade, hotels & restaurants” and “transport, storage & communication” category

The Prime Minister’s Economic Advisory Council (EAC) lowered GDP
projection to 8.9%. They predicted that slower demand for consumer
goods and tardy growth in the farm sector would pull down the growth
rate of the economy to 8.5 per cent in 2008-09. The EAC also said that
the country’s gross domestic product would be a “shade lower” in 2007-
08 at 8.9 per cent, compared to its earlier projection of 9 per cent. This
is largely on account of a slowdown in the industrial sector, which is
expected to grow at 9.7 per cent as against 10.6 per cent projected
earlier. EAC Chairman Dr C Rangarajan commented, “What made a
difference in the performance of industrial sector is a lacklustre show by
the consumer durables sector.” He also indicated that despite a strong
rupee export growth in dollar terms remained robust at 22 percent. The
EAC’s export target for 2007-08 is $156 billion exports, while the
commerce ministry expects exports to be around $150 billion. The EAC
also endorsed RBI’s efforts to moderate the impact of high capital
inflows (expected to touch $103 billion this year) while suggesting that
the only instrument left for use for the rest of the current financial year
was dollar sterilisation.


Merchandise exports from India in December 2007 grew 16.04 per cent
in dollar terms to $12.31 billion as against a growth of 14.95 per cent to
$10.61 billion a year ago. The rise in export momentum came even as
the rupee appreciated by more than 12 per cent last year. Trade
analysts said exporters were trying to expedite the orders to lessen the
impact of the rupee rise and fulfil Christmas demand in the western
markets. This, they said, led to larger export volumes in October,
November and December. The momentum in exports was mainly
attributed to petroleum, gems and jewellery, and high-value engineering
goods while, labour-intensive sectors like textiles and handicraft saw a
dip in export value over the previous year. The export growth in rupee
terms in December however saw a deep decline to 2.54 per cent as
against 12.92 per cent a year ago. This was due to a lower realisation in
rupee terms.

(in $billion)       Dec 2007      Nov 2007    Dec 2006     YoY % change
Exports             12.31         12.46       10.61        16.1
Imports             17.68         19.83       14.98        18.1
Oil Imports         5.96          5.82        4.82         23.8
Non -oil imports    11.72         14.01       10.16        15.3
Trade Deficit       5.37          7.41        4.36         22.9

Commerce Secretary G K Pillai commented that exports during 2007-08
would cross the $150-billion mark and might touch $155 billion as
against the Commerce Ministry’s target of $160 billion. The likelihood of
a moderation in export growth is due to a combination of factors such as
the hit from the rupee appreciation and softening external demand.
Strong domestic demand and high oil prices should, however, continue
to boost import growth.

Industrial Production

The November 2007 Index of Industrial Production (IIP) numbers
indicates a sharp dip in growth caused mainly due to lacklustre
performance of the manufacturing and consumer sectors. Manufacturing
dipped to 5.4 percent from a high of 17.2 percent in Nov. 06, while
consumer durables slipped from 10.1 per cent in Nov 06 to a negative
4.1 per cent in Nov 07 and the consumer non-durables from 14.8
percent in Nov 06 to a negative 2.1 percent in Nov. 07.

During April-November ’07 Index of Industrial Production (IIP) registered
9.2 per cent growth as compared to the cumulative IIP of 10.9 per cent
in April-November 2006. Power Variations in Indian IIP
generation during April-November        14
2007 declined to 7 per cent from        12
7.3 per cent a year ago, while

mining sector grew by 4.9 per cent       6
against 4.2 per cent during the          2
comparable periods. The growth           0
rate in capital goods sector












increased to 20.8 per cent in April-


November current fiscal as
against 17.4 per cent during the corresponding period last year.

This slowdown renewed demands from the Commerce Minister who
called for loosening of monetary policy, which would stem rupee
appreciation and benefit manufacturers. Acknowledging that a
combination of rising interest rates and an appreciating rupee had
triggered a slowdown in the economy the Prime Minister Manmohan
Singh had constituted a committee to be headed by National
Manufacturing Competitiveness Council Chairman V Krishnamurthy to
devise strategies for reviving growth.

Core Sectors

Supply-side constraints halved the growth rate in the index of six
infrastructure industries in November 2007 to 5.3 per cent from 9.6 per
cent a year ago. This is the second month in a row in which core sector
growth has nearly halved over the previous year. "Most of these
industries like power and petroleum are hit by supply constraints." said
India's Chief Statistician Pronab Sen. In the April to November period,
the core sector index grew 6 per cent against 8.9 per cent in the same
period of the previous year. Five of the six sectors in the index slowed
coal being the only exception. The core sector index has a share of 26.7
per cent in the Index of Industrial Production (IIP). Experts say the
sluggish performance of the index will impact IIP numbers going
forward. "We expect IIP to grow by 7.3 per cent in November against
11.8 per cent a year ago," said Shubhada Rao, chief economist, Yes
CORE CONCERNS - Index of six infrastructure industries
      Sector          Weight(%) Nov- 06       Nov -07 Apr-Nov 06-07 Apr- Nov 07-08
                       in IIP  (%)growth     (%)growth  (%) growth    (%) growth
Crude          4.17              9.8        0.3                           5.4                              0.6
Refinery       2                 16.4       5.2                           13.5                             8.3
Coal           3.22              4.9        7.7                           4.8                              4.3
Electricity    10.18             8.8        5.8                           7.3                              7
Cement         1.99              11.8       4.5                           10.6                             7.6
Finished Steel 5.14              9.3        5.8                           11.6                             5.9
Overall        26.7              9.6        5.3                           8.9                              6
Source: Commerce and industry ministry

Stock Markets

In January the Indian Stock Markets tumbled under pressure as the
Mumbai Stock Exchange Index
(SENSEX) fell from a high of 21000         1500
points (on 11th January) to below          1000
17500 points (on 21st January). The         500
market weakened following reports of          0
a sluggish trend in international          -500
                                                Jan   Jan Jan  Jan  Jan  Feb                                           Feb         Feb
markets due to rising concerns of         -1000
                                                21st 22nd 23rd 25th 28th 1st                                           4th         5th

recession in the world's biggest
economy, the US. Pressure grew due
to the triggering of margin calls as
traders/institutional investors started
unwinding their positions. The markets though have now to some extent
recovered (mainly thanks to some aggressive government intervention).

In the last 51 months, there was more than USD 49 billion of FII
investment the Indian stocks compared to the USD 25 billion of foreign
direct investment (FDI) during the same period. Between January and
November 2007 foreign funds bought Indian shares worth 19 billion
dollars, which is significantly ahead of the full-year record of about 11
billion dollars (in previous calendar year). During this period the Indian
stock market, represented by SENSEX, grew by 290 per cent, with the
SENSEX PE at 22.4. After the correction the PE stood at 17. The central
bank has time and again cautioned against overheating in the capital
markets and real estate sectors.

Inflation                                  WPI Inflation Jan 07- Jan 08
The RBI did not cut interest rates          6
despite signals from most of                4




developed economies. It cited the high growth of the economy and
inflationary pressures as the reasons for the status quo on interest rates.
Inflation in India measured in WPI terms was gradually increasing. This
was because of the increase in commodity/food prices.                  The
government has been mulling over a price hike in the fuel prices for
sometime but without success because of persistent Left parties’
opposition. The last time the fuel prices were hiked in India was when
the international crude prices were at USD 57 per barrel. An increase in
fuel prices would have a cascading effect on inflation.

FDI Review

The Government of India on the 30th January relaxed FDI in 6 sectors.
This bold move aimed at attracting foreign capital in its fast-expanding
economy comes in the face of strong opposition from its Communist
(Left) allies and that too in a year when almost 10 state’s go for their
elections. The decision, taken at a meeting of the Union cabinet, eases
foreign investment norms in cargo and charter airlines, helicopter
services, credit information companies, titanium mining, industrial parks
and construction development projects, where foreign investors—both
partners and financial—are permitted with equity caps ranging from 0%
to 49%.

FDI limits
                                       Existing limit (%)   Revised limit (%)
Petroleum refining                             26                  49
Cargo airlines                                 49                  74
Aircraft maintenance/pilot training            49                 100
Commodity exchanges                             -                  49
Credit information companies                    -                  49
Titanium mining                                 -                 100

Business Chambers applauded the move while analysts felt that the
move would help the respective sectors get not only the funds, but
technological knowledge, further boosting growth in these sectors.

D J Rao/Akansha Bhushan
Economic Section
British High Commission
New Delhi

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