Dr Rupa Rege Nitsure Chief Economist Bank of Baroda +91-22-56985216

Weekly Macro Perspectives

February 11, 2006
{I} Early signs of industrial slowdown

India's industrial growth slowed down to 5.0% in Dec 2005 compared with 8.9% a year earlier and 6.1% in Nov 2005.
Manufacturing sector (comprising 79% of the total weight of the IIP) grew 5.9% in Dec 2005 compared with 9.8% a year ago. Electricity generation grew 2.9% in Dec 2005 compared with 4.5% a year ago, while mining output declined 1.8% compared with a 4.8% rise a year ago. Both capital and consumer goods sectors have slowed down in the month of Dec 2005 compared to their growth rates a year earlier.

{II} Controlled inflation: only a short-term comfort Headline inflation rate based on WPI declined to 4.30% in the week to Jan 28, 2006 from 4.51% a week ago primarily on account of a sharp decline in the prices of manufactured products. Y-O-Y change in the price index for energy items is, however, quite high at 7.95%. Going forward, the country is likely to face the spikes in inflation due to rising global oil prices and rising costs for manufactured products, as revealed by the corporate results for Oct-Dec, 2005.

{III} Hardening of interest rate structure Yield on the most dealt with 7.46% CG 2017 paper has hardened from 6.70% a year ago to 7.41% on Feb 10, 2006. Call rates have increased from 5.0% to 5.25% a year ago to 7.0% to 7.50% on Feb 10, 2006. NSE MIBOR has hardened from 4.81% a year ago to 7.17% on Feb 10, 2006. Many banks have hiked their deposit rates by 25 to 50 bps since Nov 2005 to attract more funds. While HDFC (effective 1st Feb), ICICI Bank (effective 13th Feb) have hiked their home loan rates by 50 bps, IDBI ltd. has raised its retail lending rates by 25 bps. Going forward, tight liquidity, rising domestic demand for credit and rising global interest rates are expected to harden the interest rate structure further.

{IV} Bearish outlook on Indian currency In the month of February so far, Indian currency has depicted a high degree of volatility against the USD. It closed at Rs 44.1850 against the USD on Feb 10, 2006.

There have been strong inflows of dollars, especially from the foreign funds as the stock market is going up. Dollar demand from importers is also strong with most of the demand coming from the oil companies. Though both these factors are keeping a check on Rupee value, going forward we expect RBI to cap the likely gains in the value of Rupee, as it is overvalued by 10% on a trade weighted basis.

[V] Bullish undertone to continue for stock markets Driven by sustained FII inflows, the stock markets turned stronger last week with Sensex gaining 3.78% and Nifty 2.96%. The Bankex too increased by 4.60% in a weeks time, while BOB gained modestly 1.77% on BSE and 2.03% on NSE. Sentiment is expected to remain bullish, as FIIs are still stronger on Indian bourses and domestic MFs are currently flush with funds raised through various unit schemes.

[VI] Oil price outlook is moderately positive

International oil prices declined sharply again last week. The WTI declined by a huge

5% to a four-week low and natural gas fell by 10% to a new seven-month low in New York. The main reason being comfortable inventories levels in both the markets that overshadowed Irans nuclear standoff. The mild US winter is expected to keep the oil prices soft in the short term.

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