MAIA Financial Services Pvt Ltd

MAIA
FINANCIAL ECONOMY 360 DEGREES
SERVICES INDIA: NOVEMBER 2009
PVT LTD
JULY 2009
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Index

1) Market View ……………………………………………….

2) Economic Indicators
a. GDP growth and its projection………………………
b. Credit growth………………………………………….
c. Money supply………………………………………….
d. Interest rates…………………………………………..
e. Yield curve……………………………………………..
f. Corporate Bond spreads……………………………....
g. 10 year government bond yield………………………
h. Inflation and its projection…………………………….
i. Core Infrastructure Industry………………………….
j. IIP………………………………………………………
3) Economy Pulse Analysis……………………………………….
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Market View:

In our previous report for the month of October 09, we had stated that we would be
witnessing a 5-10% correction. As we write this report, Sensex is at 16800 which is 5%
lower than the earlier levels.

We are of the view that most likely we could witness a further correction of 5-10% or so. Most
likely it would be a start of intermediate downtrend. However one needs to remember that the
primary trend still remains up. So for the long term investor it would time for accumulating
stocks after major dips.

Our market view comes from the assessment of various economic indicators showing a negative
view. The non food credit remains as low as 11.9%, which is well below RBI’s target of 15%.
The money supply M3 remains at 18.9%. This is higher than the RBI’s expectations and
estimates of 18%. This higher money supply growth can create inflationary problems going
down the line. So we feel that RBI will start looking at lowering the liquidity on gradual basis so
as to achieve price stability. This will not be good for equity markets as such and hence can act
as trigger event for some intermediate correction.

Economic Indicators:
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GDP

The Indian economy posted a growth of 6.1 per cent for Q1 of 2009-10. This is higher than the
expansion of 5.8 per cent in Q4 of 2008-09, but lower than the expansion of 7.8 per cent in the
corresponding first quarter of 2008-09. The year-on-year (y-o-y) deceleration in growth was
broad-based covering all the three major sectors,- agriculture, industry and services.

Agriculture:

The rainfall this year (June - September 30) was 23 per cent lower than the long-period average,
the weakest since 1972(According to the data released by RBI). Twenty three of the 36
meteorological sub-divisions recorded deficient rainfall. The entire central and northern India
received deficient rainfall. The Reserve Bank’s production-weighted rainfall index for 2009 was
73, significantly lower than the index number 104 for 2008.

A deficient rainfall can have a disproportionate impact on overall economic prospects. Poor
output will push up prices and depress rural labour incomes. This could in turn significantly
affect industrial and services sector.

Industry :

The Index of Industrial Production (IIP) increased at a higher rate of 5.8 per cent during April-
August 2009 as compared with a growth of 4.8 per cent in the corresponding period of the
previous year and 0.6 per cent growth in the second half of 2008-09. While the basic,
intermediate and consumer durable goods sectors witnessed higher growth, the performance of
the capital goods and consumer non-durable sectors was relatively modest. The core
infrastructure sector, with a weight of 26.7 per cent in the IIP, posted a growth of 4.8 per cent
during April-August 2009, up from 3.3 per cent in the corresponding period of the previous year.

Services:
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The performance of the services sector during April-July 2009 continued to follow the pattern
witnessed in Q4 of 2008-09. Trade-related services such as cargo handled at major sea and
airports continued to show negative growth reflecting contraction of trade. The number of
passengers handled at international terminals increased, albeit marginally, while the number of
passengers handled at domestic terminals declined. Other domestic activity related services such
as communication and construction have begun to show signs of upturn.

Demand components of GDP:

Continuing the trend witnessed since Q2 of 2008-09, the two major components of demand-
private final consumption expenditure and gross fixed capital formation (with a combined weight
of around 88 per cent) decelerated further in Q1 of 2009-10. Government consumption, which
had increased sharply in Q3 and Q4 of 2008-09 due to the fiscal stimulus measures and the Sixth
Pay Commission payouts, also decelerated in Q1 of 2009-10. External demand continues to
remain weak.
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Corporate performance

Sales of the private non-financial corporate sector declined marginally (0.9 per cent) in Q1 of
2009-10 on a year-on-year basis as also in comparison with Q4 of 2008-09 (1.7 per cent). In the
wake of the downturn, firms responded quickly to the changed cyclical conditions by reducing
their inventories around Q2 of 2008-09. Now, with the onset of recovery in Q1 of 2009-10, the
upturn is characterized by an increase in the stocks to sales ratio. Year-on-year growth in net
profits also witnessed a turnaround in Q1 of 2009-10 after registering negative growth in the
preceding three quarters.

Business confidence

The latest round of the survey conducted during July-August 2009 showed a turnaround in the
business sentiment. The assessment for Q2 of 2009-10 showed continuing upturn with a 7.8 per
cent increase in the Business Expectations Index (BEI) over the previous quarter. Considerable
improvement was noted in key indicators such as production, order books and capacity
utilisation. The financing conditions were also reported to be better.

The outlook of manufacturing companies for Q3 of 2009-10 maintains its upward trend, with the
BEI moving up to 116.4 from 109.9 in the previous quarter. The respondents expect production
and capacity utilization to improve further, working capital finance requirement to grow, the cost
of raw materials to rise and pricing power to return to them. On the back of improved demand
conditions, the manufacturing companies also expect further improvement in their employment
situation.

Inflation:
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The headline inflation, as measured by year-on-year variations in the wholesale price index
(WPI), which remained negative during June-August 2009 due to the base effect, returned to
positive territory in September 2009. WPI inflation was 1.21 per cent on October 10, 2009 as
compared with 11.30 per cent a year ago, and 0.84 per cent at end-March 2009. During the
current financial year (up to October 10, 2009), according to data released by RBI, WPI has
increased by 5.95 per cent reflecting higher food price inflation aggravated by deficient
monsoon.

Credit growth

Non-food credit by scheduled commercial banks (SCBs) declined significantly, with the growth
rate (y-o-y) falling to 11.2 per cent this year (as on October 9, 2009) from 29.4 per cent a year
ago. On a financial year basis (up to October 9, 2009) too, the growth in scheduled commercial
banks’ non-food credit at 4.3 per cent is significantly lower than the growth of 10.5 per cent in
the corresponding period of last year.
According to data which is released by RBI, several factors have contributed to the slowdown in
non-food bank credit.

1] Overall credit demand from the manufacturing sector slowed down reflecting a decline in
commodity prices and drawdown of inventories.

2] Corporates were able to access non-bank domestic sources of funds and external financing –
which had almost dried up during the crisis – at lower costs.

3] Unlike in the previous year, oil marketing companies reduced their borrowings from the
banking sector as oil prices moderated.
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4] A significant amount of bank finance has gone to the corporate sector through banks’
investment in units of mutual funds.

5] Banks have also reined in credit to the retail sector due to the perceived increased risk on
account of the general slowdown. This credit retrenchment was more pronounced in the case of
foreign banks and private banks. This is evident from bank group-wise analysis, which shows
that credit from private banks slowed down sharply, while that from foreign banks actually
contracted. Thus, despite ample liquidity in the system, non-food bank credit expansion slowed
down.

Bank group wise credit and deposit

The above bank group-wise analysis, shows that credit from private banks slowed down sharply,
while that from foreign banks actually contracted. Only the public sector banks have shown a
credit growth of 15% that too is lower by 50% when compared to the previous year figures.
Thus, despite ample liquidity in the system, non-food bank credit expansion slowed down.
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Fiscal deficit position of Central government:

Source: CSO

The Central Government has already completed net market borrowing of Rs. 3,19,911 crore (as
much as 80.4 per cent of the budget estimate) through dated securities during 2009-10 (up to
October 26, 2009)

Yield curve

The yield curve looks to be normal.

Money Supply:
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Major sources of money supply M3

The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009
remained above the indicative projection of 18.0 per cent in 2009. The main source of M3
expansion was bank credit to the government reflecting large market borrowings of the
Government.

10 year government yield

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The yields are rising partly because of the borrowing programme of the Central government and
partly because of the rising inflation numbers.

Corporate Bond spreads:

As can be seen from the charts, the bond spreads have been narrowing continuously. This is a
good sign as it suggests that there is a decrease in the borrowing cost for the corporate.
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Core infrastructure industries

After showing a healthy expansion of 7.1% in August, the growth in core infrastructure sector
dropped to 4% in September. The coal and cement which had led the chart in August by showing
an impressive growth of 12.9% and 17.6% respectively, slipped to 6.5% each in September. On
year-on-year basis, the September growth this fiscal of the six sectors - cement, coal, steel,
electricity, crude, oil and petroleum refinery products—remained unchanged at 4%.

The index of the core industries, which account for a quarter of the industrial production, had
helped the factory output reach a robust 10.4% growth in August. These figures do tell us that
there is some problem with the investment and the consumption demand.

Analysis:
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Economic Indicator Type Comment

Yield Curve Leading Normal.

Corporate Bond Spreads Leading Falling for AAA and AA rated

bonds.

Inflation Coincident WPI falling, however CPI

rising in double digits. Going
down the line, would be bad
for equity markets

Interest rates Coincident Currently stable, however

indicators are signaling that
RBI would sooner or later
start raising the rates

10 year government bond Leading Rising. With the huge

yield government borrowing
programme and inflation fears
the yields have started rising.
This would be bad for equity
markets

Non Food credit growth Leading Declining. It is bad for the

equity markets

CCIL Bond Index Leading Falling. As the yields are

rising, bond prices are falling.
This would be bad for the
equity markets going down the
line

GDP Coincident Growth of 6.1% for the 1st

quarter of the FY10. Better
than the same quarter of the
previous year.

IIP Lagging Good. However the data for

Sep 2009 which is yet to be
released will surely be lower
than the previous month. This
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is because the six core

infrastructure industries data
have been lower compared to
the previous month.

Core Infrastructure Industries Lagging Bad. Growth lower at 4%

compared to that of 7% in the
previous month.

Money Supply Leading Higher than the target

growth rate. This is however
due to increased government
spending and the borrowing
programme.

Business Confidence Lagging Good.

Analyst Name: Avani Mehta Company Name: MAIA Finacial Services Pvt Ltd

Email Id: avani_513@yahoo.co.in Address: C wing, Bsel Tech Park, Opposite

Vashi Station, Vashi, Navi Mumbai.

Contact No: 022 27810674/75/76

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