Equity Research - India

Daily
7 January 2010
Indices
Indices Sensex Nifty CNX Midcap Banking Capital Goods Healthcare IT NASDAQ Dow Jones 6-Jan-10 17,702 5,282 7,655 10,239 14,229 5,165 5,170 2,301 10,574

%Change
1mth 3 3 4 (1) 6 4 8 5 2 3mth 4 6 16 3 3 19 14 9 9 6mth 25 29 45 24 11 44 56 28 28

Economic Perspective

Hemindra Hazari
hemindra.hazari@karvy.com

2009 will be remembered as the year that kicked off on sheer pessimism (estimated GDP growth of 5-6% for 2009-10 against 6.7% in 2008-09) but culminated with a flourish (GDP growth of 7.9% in Q2FY10). However, while GDP growth was unexpectedly impressive, food inflation (19.8% for the week-ended December 12, 2009) remains a worry and will set the agenda for 2010. While 2009 was marked by low inflation, we expect higher inflation in 2010 as food prices could rise. The classic economic dilemma between inflation and growth should play out this year. As India's recent inflationary trends emanated from supply-side issues, monetary measures by the Reserve Bank of India (RBI), including raising interest rates and increasing the cash reserve ratio (CRR), will not only fail to ease the supply-side but also adversely impact economic growth. Typically, inflation is negative for any economy because real incomes decline. Moreover, monetary measures to control supply-side-led inflation also inevitably results in a fall in real income as higher interest rates and a tight monetary policy suppresses economic activity and lowers employment prospects, impacting the income of workers. In other words, even if anti-inflationary measures adopted by the central bank may finally succeed in controlling inflation, it comes in at the cost of real incomes. The government has limited means to combat food inflation. Imports are a solution, but when India becomes a net food importer, international food prices rise as was evident recently in sugar. Therefore, imports may stem a famine but may not result in lower food prices for the Indian economy. A long-term solution is that state governments should invest in agriculture, irrigation, storage and extension services (develop new seeds and facilitate their access to farmers), and expand the Public Distribution System (PDS). All these factors entail larger state involvement in agriculture while the prevailing philosophy has been to privatise such activities. Globally, too, there has been an absence of investment in agriculture, and, hence, there is no short-term solution. In 2010, food prices may become a major issue that could substantially affect India's population, particularly the poor. The Wholesale Price Index (WPI) has less relevance to the bulk of India's population. The National Sample Survey Report No. 527, Household Consumer Expenditure in India 2006-2007, reveals that 52% of the monthly per capita expenditure in rural India has been for food items whereas it is 39.4% in urban India. As around 70% of India's population is rural, inflation in the food category plays a far more decisive role than inflation in the manufactured goods segment. The recent revised statistics also reveal that around 37.2% of India's population is poor, with 41.8% of the rural population and 25.7% of urban residents living

Daily

Net Inflows
Rs bn FII Mutual Fund FII - F&O 5-Jan-10 8.9 0.4 -0.5 4-Jan-10 2.5 -1.9 -6.2 MTD 96.6 -1.5 -4.1 YTD 828.6 -37.0 188.4

Turnover
1,200 1,000 (Rsbn) 800 600 400 200 0 6-Jan-10 5-Jan-10 6-Oct-09 6-Jul-09 BSE NSE F&O 527 187 68 596 197 71 211 64 215 73 887 967

Commodity & Currency% Change 6-Jan-10 Crude (US$/barrel) Gold (US$/Oz) US$ Euro 83.2 1,136.9 46.1 66.2 1mth 9.8 (5.5) (0.2) (5.1) 3mth 16.6 11.5 (2.2) (4.7) 6mth 25.8 21.8 (3.5) (1.9)

Debt
% RBI Repo 10 yr G-Sec yld Spread 1 & 10 yr G-Sec US 10 yr treasury Surplus liquidity (Rs bn) 6-Jan-10 4.8 7.5 2.7 3.8 (953) 1mth 4.8 7.6 4.3 3.5 1,522 3mth 4.8 7.5 4.0 3.2 6mth 4.8 6.9 3.3 3.5

(1,315) (1,279)

below the poverty line. The plight of the poor will further deteriorate with higher food inflation, and the government would have to respond through increased social welfare programmes, adding more pressure on the fiscal deficit. Even if rising interest rates reduce India's economic growth, it would still be higher compared to the global economic growth. As the US continues to maintain low interest rates to stimulate its economy in 2010, global liquidity is expected to flow to the emerging countries, with India being one of the larger beneficiaries. The flow of liquidity into India is expected to benefit the stock market and the corporate sector. The RBI, however, may sterilise the liquidity flows as it would hamper its anti-inflationary policy and create problems for the central bank in managing the inflows. The rupee may emerge stronger in 2010, creating further problems for exporters who are already facing pressures from the global slowdown. The inflow of liquidity in 2010 will help the corporate sector to de-leverage the balance sheets. Most manufacturing sector companies have either toned down their investment plans or put them on the back-burner. Companies that had over-extended themselves through expensive acquisitions or through increasing capacities (like real estate) are expected to recover by tapping into these capital flows. Global liquidity, however, is extremely difficult to predict and its volatility can prove turbulent for an economy like India, although it is still far more resilient than economies that have over-borrowed to fuel consumption. Another issue that will be closely monitored is whether private consumption and investment can continue without governmental support. Globally, and in India, the GDP growth has been strongly influenced by the massive fiscal stimulus in the virtual absence of private investment. The overriding concern is whether growth can pick up (V- or U-shaped curve) once the fiscal stimulus is eased or whether the global economy will once again plunge into recession (W-shaped curve) and recover thereafter. For a sustainable global recovery, the US consumer has to raise consumption levels and the nation should increase its current account deficit to generate sufficient demand to meet the global capacity. This may be difficult in 2010 as the American consumer would continue to be burdened with debt even as high unemployment persists and banks continue to be unwilling lenders. Hence, while the US may witness a positive GDP growth in 2010, employment and private consumption may still be an issue. As 2010 begins, the stock market in India has indicated that whatever the global concerns, India's future economic growth would be higher than other global economies. Moreover, as interest rates in the US are expected to remain benign in 2010, capital flows may continue to find its way into India, thus improving the outlook for the world's largest democracy.

Research Desk (Tel: 91-22-22895000)

Hemindra Hazari Head of Research

hemindra.hazari@karvy.com

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N Subramaniam Head of Institutional Sales

n.subramaniam@karvy.com

Stock Ratings Buy Out Performer Sell Disclaimer

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Absolute Returns > 25% 16 - 25% > (25%)

Stock Ratings Market Performer Under Performer

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Absolute Returns 0 - 15% < 0% - (25%)

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