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EELII rebounds to 115 for February
The Edelweiss ET-Now Lead Indicator Index (EELII) rebounded to ~115 for February,
higher than 107 estimated for January and slightly elevated compared to the Q3FY11
number.
EELII, a composite weighted average index of a number of macro variables exhibiting
strong predictive ability of core trends in the Indian economy, has been moderating
over the past three-four months, although it posted an increase for the current month.
The indicator has been effective in capturing the upturn in the economic cycle during
the past few quarters. From a trough of ~73 in Q4FY09, it touched ~128 by Q1FY11,
the fastest in the current decade, and since then it has moved down. Accordingly, after
a strong real non-agri GDP growth of ~10% Y-o-Y in Q1FY11 and ~9.5% Y-o-Y in
Q2FY11, the momentum is likely to consolidate in Q4FY11.
Each of the lead variables constituting the index affects the real economy with
different lead periods. For example, as per our model, the effect of change in policy
interest rates (repo rate) is most pronounced on the economy with a lead of ~9-12
months, while the impact of change in commercial vehicle production is the highest
with a lead of around three months. EELII has historically predicted non-agriculture
GDP growth closely; the adjusted coefficient of determination (adjusted R-squared) for
the multiple regression is ~0.80.
What has contributed to the jump in February?
Primary factors contributing to the uptick in EELII for February have been central
government expenditure and non-oil imports. These sub-indices, as per our model,
lead GDP growth by 9 and 12 months, respectively. For example, a sharp Y-o-Y
increase in government expenditure in May 2010 is now reflecting in the government
expenditure sub-index in our model; the trend in non-oil imports is similar. In addition,
commercial vehicles’ production, which leads the index by three months, also posted
an uptick for February.
However, as we move into FY12, weak trend in cement dispatches during H1FY11,
slowing growth momentum in non-oil imports in Q1FY11, and the lag impact of RBI’s
monetary tightening that began in Q1FY11 will start reflecting in the moderation in
EELII.
Policy environment challenging: Industry moderating; inflation sticky
Industrial activity in recent months has clearly moderated, largely led by weakness in
capital goods and consumer non-durables segment and accordingly, we expect a
relatively weaker IIP growth in Q4FY11. Investment activity seems to be getting
impacted by rising cost of capital, wage pressures, and general uncertainty with
regards to policy reforms.
Meanwhile, the inflation scenario has not been comforting either. In our assessment,
the current bout of inflation has been led by a host of factors such as unseasonal rains
in November, structural increase in demand for protein-rich food items, elevated
global prices of industrial metals, and persistent structural bottlenecks in the economy.
Further, since the economy has returned to a high growth trajectory, expansionary
fiscal policy is exerting upward pressure on prices.
Apparently, the policy environment is challenging. Monetary policy has to tackle
inflation without impacting growth significantly. At the same time, the government has
to balance the need to expand its inclusive growth agenda with the urgency of fiscal
consolidation. This is because an expansionary fiscal policy is exerting upward
pressure on domestic prices, especially when the economy has returned to a high
growth trajectory. If the government does not rein in expenditure growth, the burden
of tackling inflation will solely fall on monetary policy, which will negatively impact
growth prospects of the economy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EELII rebounds to 115 for February
The Edelweiss ET-Now Lead Indicator Index (EELII) rebounded to ~115 for February,
higher than 107 estimated for January and slightly elevated compared to the Q3FY11
number.
EELII, a composite weighted average index of a number of macro variables exhibiting
strong predictive ability of core trends in the Indian economy, has been moderating
over the past three-four months, although it posted an increase for the current month.
The indicator has been effective in capturing the upturn in the economic cycle during
the past few quarters. From a trough of ~73 in Q4FY09, it touched ~128 by Q1FY11,
the fastest in the current decade, and since then it has moved down. Accordingly, after
a strong real non-agri GDP growth of ~10% Y-o-Y in Q1FY11 and ~9.5% Y-o-Y in
Q2FY11, the momentum is likely to consolidate in Q4FY11.
Each of the lead variables constituting the index affects the real economy with
different lead periods. For example, as per our model, the effect of change in policy
interest rates (repo rate) is most pronounced on the economy with a lead of ~9-12
months, while the impact of change in commercial vehicle production is the highest
with a lead of around three months. EELII has historically predicted non-agriculture
GDP growth closely; the adjusted coefficient of determination (adjusted R-squared) for
the multiple regression is ~0.80.
What has contributed to the jump in February?
Primary factors contributing to the uptick in EELII for February have been central
government expenditure and non-oil imports. These sub-indices, as per our model,
lead GDP growth by 9 and 12 months, respectively. For example, a sharp Y-o-Y
increase in government expenditure in May 2010 is now reflecting in the government
expenditure sub-index in our model; the trend in non-oil imports is similar. In addition,
commercial vehicles’ production, which leads the index by three months, also posted
an uptick for February.
However, as we move into FY12, weak trend in cement dispatches during H1FY11,
slowing growth momentum in non-oil imports in Q1FY11, and the lag impact of RBI’s
monetary tightening that began in Q1FY11 will start reflecting in the moderation in
EELII.
Policy environment challenging: Industry moderating; inflation sticky
Industrial activity in recent months has clearly moderated, largely led by weakness in
capital goods and consumer non-durables segment and accordingly, we expect a
relatively weaker IIP growth in Q4FY11. Investment activity seems to be getting
impacted by rising cost of capital, wage pressures, and general uncertainty with
regards to policy reforms.
Meanwhile, the inflation scenario has not been comforting either. In our assessment,
the current bout of inflation has been led by a host of factors such as unseasonal rains
in November, structural increase in demand for protein-rich food items, elevated
global prices of industrial metals, and persistent structural bottlenecks in the economy.
Further, since the economy has returned to a high growth trajectory, expansionary
fiscal policy is exerting upward pressure on prices.
Apparently, the policy environment is challenging. Monetary policy has to tackle
inflation without impacting growth significantly. At the same time, the government has
to balance the need to expand its inclusive growth agenda with the urgency of fiscal
consolidation. This is because an expansionary fiscal policy is exerting upward
pressure on domestic prices, especially when the economy has returned to a high
growth trajectory. If the government does not rein in expenditure growth, the burden
of tackling inflation will solely fall on monetary policy, which will negatively impact
growth prospects of the economy.
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