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The following is a summary of our new India economics report.
The note looks at why exports were so strong recently (72% YoY
in July) and whether it will continue.
● Since the bottom of the global financial crisis, India’s nominal
exports have risen 125%—way more than any other Asian
country. An anatomy of the country’s export performance shows
that transport equipment has proved a particular success story.
● Looking ahead, the combination of weaker global growth and a
trend strengthening in the real trade weighted exchange rate
points to a considerable softening in export growth in both nominal
and real terms. Our fundamental analysis suggests India is likely
to avoid another period of export contraction in YoY terms,
although the PMI export orders series suggests this cannot be
ruled out (Figure 1).
● Weaker export growth is another reason to be cautious about
India’s prospects for capital spending and, indeed, GDP growth as
a whole. The risks to our bottom of the range 7.2% and 7.3% real
GDP growth forecasts for 2011/12 and 2012/13 are probably on
the downside, while we continue to expect one final 25 bp policy
rate hike, before the cuts start from the April-June quarter of 2012.
We believe India’s export growth is set to slow sharply in the coming
months, possibly turning negative before the current fiscal year is out.
This might seem a little unlikely given merchandise export values
have just recorded their strongest YoY growth rate since the early
1970s. But statistical analysis and survey evidence (Figure 1) point
convincingly in that direction, notwithstanding the recent drop in the
INR.
There are two key fundamental reasons for concern. Import growth
among key trading partners is softening, while the competitiveness
benefits stemming from the collapse in India’s real trade weighted
exchange rate during 2008-09 have now run their course. Transport
equipment is the sector best placed to buck the trend, in our view
Weaker exports are not good news for an economy which is also
beginning to feel the lagged impact of the RBI’s aggressive interest
rate action. Sharply weaker export growth is another reason why we
would not be optimistic that investment growth will rebound any time
soon.
In our view, most forecasters are still too optimistic about India’s GDP
growth prospects for both this financial year and next. Having been
the best part of 1 p.p. below the consensus projection for 2011/12 real
GDP growth, we are now just 0.3 p.p. lower at 7.2%. The bigger
difference is for 2012/13, when we are expecting 7.3% growth
compared with a consensus forecast of 8.0% (Figure 3). If one is
looking for a silver lining it is the likelihood that India is finally just one
25 bp hike from the policy rate peak and six months from the first cut,
in our opinion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The following is a summary of our new India economics report.
The note looks at why exports were so strong recently (72% YoY
in July) and whether it will continue.
● Since the bottom of the global financial crisis, India’s nominal
exports have risen 125%—way more than any other Asian
country. An anatomy of the country’s export performance shows
that transport equipment has proved a particular success story.
● Looking ahead, the combination of weaker global growth and a
trend strengthening in the real trade weighted exchange rate
points to a considerable softening in export growth in both nominal
and real terms. Our fundamental analysis suggests India is likely
to avoid another period of export contraction in YoY terms,
although the PMI export orders series suggests this cannot be
ruled out (Figure 1).
● Weaker export growth is another reason to be cautious about
India’s prospects for capital spending and, indeed, GDP growth as
a whole. The risks to our bottom of the range 7.2% and 7.3% real
GDP growth forecasts for 2011/12 and 2012/13 are probably on
the downside, while we continue to expect one final 25 bp policy
rate hike, before the cuts start from the April-June quarter of 2012.
We believe India’s export growth is set to slow sharply in the coming
months, possibly turning negative before the current fiscal year is out.
This might seem a little unlikely given merchandise export values
have just recorded their strongest YoY growth rate since the early
1970s. But statistical analysis and survey evidence (Figure 1) point
convincingly in that direction, notwithstanding the recent drop in the
INR.
There are two key fundamental reasons for concern. Import growth
among key trading partners is softening, while the competitiveness
benefits stemming from the collapse in India’s real trade weighted
exchange rate during 2008-09 have now run their course. Transport
equipment is the sector best placed to buck the trend, in our view
Weaker exports are not good news for an economy which is also
beginning to feel the lagged impact of the RBI’s aggressive interest
rate action. Sharply weaker export growth is another reason why we
would not be optimistic that investment growth will rebound any time
soon.
In our view, most forecasters are still too optimistic about India’s GDP
growth prospects for both this financial year and next. Having been
the best part of 1 p.p. below the consensus projection for 2011/12 real
GDP growth, we are now just 0.3 p.p. lower at 7.2%. The bigger
difference is for 2012/13, when we are expecting 7.3% growth
compared with a consensus forecast of 8.0% (Figure 3). If one is
looking for a silver lining it is the likelihood that India is finally just one
25 bp hike from the policy rate peak and six months from the first cut,
in our opinion.
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