Sharekhan Special Repor

Monthly economy review 24-

Aug-
2010

Special Report On : Market

In June 2010, the growth of the IIP moderated to a single-digit level of 7.1% yoy.
Economy: Inflation moderates to single digits

 In June 2010, the growth of the Index of Industrial Product (IIP) moderated to a single-digit level of
7.1% year on year (yoy). The slowdown in growth was led by a lower growth in the manufacturing
segment coupled with a higher base year figure. Going ahead, industrial growth is expected to remain in
single digits as the low base of the previous continues to wear off.
 Inflation for July at 9.97% eased to single digits after remaining in double digits for the previous
five months. The moderation in inflation was due to an easing up of prices of manufacturing goods coupled
with a higher base. Going ahead, inflation is likely to moderate further as (1) the low base effect wears off;
(2) food prices moderate after the monsoon, which has been normal thus far; and (3) the impact of the
recent rate hikes undertaken by the Reserve Bank of India (RBI) during its last monetary policy review
meet come into play.
 The trade deficit for June 2010 came in at $10.55 billion, widening by 12.2% yoy but narrowing by
7% on a month-on-month (m-o-m) basis. Exports continued to expand for the eighth consecutive month
and increased by 30.4% yoy. In order to support the export growth the commerce ministry introduced
sops worth Rs1,052 crore to exporters, particularly for the labour-intensive textile, handicraft and leather
sectors.
 The US Federal Reserve (Fed) has said that the pace of economic recovery is likely to be more
modest in the near term than had been anticipated and that it would take more aggressive action to keep
the recovery on track if needed (read more under Global round-up).

Banking: RBI hikes key policy rates, narrows LAF corridor

 In the quarterly review of the monetary policy, the RBI hiked the repo and the reverse repo rates by
25 basis points and 50 basis points to 5.75% and 4.5% respectively. By hiking the key policy rates the RBI
has reiterated its focus of easing inflation and anchoring inflationary expectations. The steeper hike in the
reverse repo rate has led to the narrowing of the rate corridor. The action seems to be driven by a desire
to add teeth to the monetary policy tools, thereby ensuring the desired transmission of policy rate actions.
 The credit offtake (non-food) registered a growth of 19.9% yoy (July 30, 2010), lower than the
22.3% year-on-year (y-o-y) growth seen during the previous month (July 2, 2010).
 The deposits registered a growth of 14% yoy (as on July 30,2010). The deposit growth has been
lagging the credit growth; as a result banks have recently hiked the deposit rates because of which the
deposit growth is expected to improve going ahead.
 The credit-deposit (CD) ratio contracted to 71.3% (as on July 30, 2010) as compared to 72.3% as
on July 2, 2010.
 The liquidity situation improved during the month as the average deficit during the month-till-date
(MTD) period (August 2-20, 2010) stood at Rs73 billion as compared to Rs538 billion during the same
period in the previous month. However, the RBI during its post-review conference call had indicated that
liquidity is likely to remain tight during the current financial year.
 The yield on government securities (G-Secs; ten years) stood at 7.93% as on August 20, 2010, up
by 30 basis points from the previous month’s level and close to the high last seen in May 2010, as traders
trimmed positions on concerns that further issuances in the paper may taper off. The G-Sec yields of all
other maturities too increased during the month despite a fall in the yields globally.

Equity markets: FIIs remain net buyers

 During the MTD period (August 1-20, 2010), the average daily volumes contracted in the futures
and options (F&O) segment while expanding in the cash segment.
 During the MTD period in August 2010 (August 01-19), the foreign institutional investors (FIIs)
were net buyers while mutual funds (MFs) were net sellers.
 The total industry average assets under management (AUM; equity + debt) contracted by 1.5%
mom during July 2010.
 The net resources mobilised in equity MF schemes during June 2010 stood at negative Rs3,207
crore as redemption resources outpaced the resources raised through the new and existing schemes.

Insurance: Life Insurance growth strong aided by low base