October, 2007
INDUSTRY RESEARCH:  LATEST UPDATE

• Despite buoyant capital goods, industrial growth to moderate

The strong macroeconomic fundamentals of the economy and continuedinvestment momentum will lend support to the ongoing industrial growth. However, the monetary tightening measures undertaken by the RBI over the last few quarters have started to affect interest-sensitive sectors like consumer durables. We expect overall industrial growth to continue to be buoyant in 2007-08, albeit, at a moderate rate at 9.2 per cent.

• Exports resilient to rupee appreciation; imports to be buoyant

• Global crude oil and domestic food prices, critical risks to inflation

Inflation has moderated considerably due to a positive base effect and moderation in the interest-sensitive sectors. Further movement of inflation depends on rising crude oil prices and food price inflation. Future movement of primary articles inflation hinges on the performance of the monsoon. We expect inflation to hover around 5 per cent in 2007-08.

• Credit off take to moderate

Credit growth has picked up this month after a significant moderation earilier in the year. It is unlikely, however, that credit growth will gain further momentum. Due to policy measures taken by the RBI, considerable amount of liquidity has been sucked out from the system. Overall, we expect credit offtake to moderate in this fiscal compared to the last year.

• Rupee to trade at 40 against the dollar

With inflation below 4 per cent, the Indian debt market looks attractive, more so after the interest rate cut by the US Fed. Going forward, we expect the RBI to maintain the current interest rate stance in the forthcoming credit policy review. Barring a few exceptions, call rates will settle between the RBI’s signal rates of repo and reverse repo of 6.0-6.5 per cent. In the short run, the yield on the 10-year G-sec is expected to decline further with an improvement in the liquidity situation. In the long run, however, we expect it to remain in the range of 7.8-8.0 per cent.

• Global outlook

An interest rate cut by the US Fed, aimed at easing the pressure created by the sub-prime crisis, is expected to help revive the growth in the US economy. Although slowdown in the US economy’s growth is expected to bear on export-dependent countries in Asia, their own strong domestic fundamentals will partially offset this impact. Rise in China’s inflation as a consequence of sharp rise in food prices and overheating in some sectors also raises the fear of a sharp slowdown. While the Euro Area and Japan are already witnessing some slowdown. Thus while global growth continues to be robust it is expected to be moderate from the previous year.

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