Back on track, but speed-breakers ahead

The year 2009 was the year of recovery from the global crisis that took place in 2008.

Even though this recovery was largely driven by the government’s stimulus packages and rate cuts by the Reserve Bank of India, it was quicker than most other countries of the world.

On January 1, 2009, the reverse repo and repo rates were 5% and 6.5%. Five days later, the RBI had slashed them by 100 basis points each. The rates were reduced further in March by 50 basis points each, and then in April by 25 basis points each. Currently, the reverse repo and repo rates are at 3.25% and 4.75%, respectively.

On its part, the government offered two stimulus packages of more than Rs 52,000 crore.

“There is reason to be satisfied with 2009-10. the Indian economy rebounded from the slowdown quicker and larger than most other countries in the world. The growth is back to potential levels. Fiscal and monetary stimulus have worked well,” said Mridul Saggar, chief economist, Kotak Institutional Equities.

Signs of growth abound. India’s industrial production rose to 16.8% from a year earlier in December 2009, from 11.8% in November, indicating the fastest pace of growth in 16 years.
In the January review of the monetary policy, the RBI revised its gross domestic product (GDP) growth projection for the current quarter to revised 7.5% from October’s projection of 6%.

For this fiscal, the government announced record borrowings of Rs 4.5 lakh crore. This took a toll on gilt yields, which rose sharply following an almost weekly supply of gilts as the RBI moved to complete the government’s borrowing.

Rising inflation also contributed to the fall in gilt prices. The yield on the 10-year gilt is hovering close to 8%. This wholesale price index, meanwhile, touched 8.56% in January after breaching RBI’s projection of 8.50% for end-March.

In contrast, inflation for the week ended June 6, 2009 was negative 1.61%, the first time it had dropped into negative territory since 1977-78. Inflation remained negative for almost three consecutive months before turning positive. Since then, it has been on the rise, among the main reasons for which was the monsoon shortfall, which led to skyrocketing food inflation.

Economists expect the WPI to turn double-digit by March-end. “WPI inflation can possibly touch double-digit in March, as inflationary pressures in non-food manufactured products and non-administered fuel categories are picking up and can negate any easing of food prices. And, if we see a hike in prices of administered fuels before or during March, then the possibility of a double-digit inflation goes up even more,” said Gaurav Kapur, chief economist at ABN Amro Bank.

Earlier this month, RBI governor D Subbarao said government borrowings may rise slightly in the next fiscal. “In gross terms, the borrowings might be slightly higher because of redemptions,” Subbarao said.

Given this, the yield on the 10-year gilt may touch 8% this fiscal and rise during the next.

“With inflation headed for double-digit by end-March, monetary policy may get a lot more constrained in accommodating the fiscal slippage next year and so yields may firm up in next few months. I expect 10-year at 8% by end-March 2010 and in 8.25-8.5% range in first quarter next year,” Saggar said.

“The absence of scope for de-sequencing/ retirement of market stabilisation scheme bonds and lack of clarity on the size of the open market operations window would also keep yield on dated securities elevated in the next six months,” said Sujan Hajra, chief economist at Anand Rathi Securities.

Going forward, the outlook for 2010 may sound disappointing: “The Indian economy is morphing from a manufacturing investment led growth story to an infra-investment led growth story. While this improves India’s long-term potential growth, there can be short to medium-term disappointments due to inherent differences between manufacturing investment and infra investment,” Hajra said.