‘Chinese Whispers’: The game of the week.: Kotak Sec

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‘Chinese Whispers’: The game of the week. This was a week where signals from
China dominated in the global markets. In anticipation of inflationary pressures, the
markets were abuzz with news of possible price control measures to be taken by the
Chinese government. Consumer price inflation for October rose to 4.4%, much higher
than the targeted 3%, with food inflation running at around 10%. The markets were
anticipating a hike in the policy rates. The People’s Bank of China hiked the banks’
reserve requirement ratio by 50 bps effective November 29 to 18.5% (for large banks).
This comes on the back of a similar hike in the reserve requirement a fortnight back.
The effects on the commodities markets were most prominent. The LME metals index
fell around 4% over the week with zinc falling by around 8% and aluminum by 4%.
Over the week, the Baltic Dry Index also tanked by around 6.5%. The guessing game
on the Irish bailout is still on with negotiations underway and bond spreads slowly
retracting from the highs. Market sentiments indicated that if the bailout does not
come through, it will be a big negative for the global markets and the contagion effect
might be seen in a more pronounced manner for Portugal. According to latest reports,
Ireland has agreed to a bailout which is expected to total around EUR80-90 bn. The
details of the bailout are still in negotiation phase and are expected to be finalized by
the end of November.





Other key changes in economic indicators during the week
􀁠 For the week-ended November 6, primary articles inflation fell to 13.3% from 14.87% a week
ago. Food articles inflation fell sharply to 10.3% from 12.3%, with the food price index falling
by 0.56 ppt over the week. Energy prices inflation fell marginally to 10.57% from 10.67%.
From previous week, fuel index rose by 0.13 ppt with most of the contribution coming from
petrol price index which rose by 0.35 ppt over the week. Inflation for October remained sticky
at 8.58% against 8.62% in September. August inflation was revised up to 8.82%. Food
inflation came down to single digits at 9.97% from 10.82% in September. Non-food
manufactured products inflation remained around the 5% mark at 5.1%, indicating that
demand-side pressures continued.

􀁠 Indirect taxes for the period of April-October amounted to Rs1.8 tn which is 57.5% of the
budget estimates. Customs tax collection at Rs753 bn is about 65.9% higher than last year for
the same period. Central Excise taxes were around Rs711 bn, 36.2% higher than last year.
Service tax collections stood at Rs338 bn, which is 16.9% higher than last year.
􀁠 For the fortnight-ended November 5, deposits fell by Rs650 bn (1.3%) while credit expanded by
Rs547 bn (1.6%) over the fortnight. On a YTD basis, deposit growth was at 7.2% and credit
growth was at 9% while on a y/y basis deposit growth was at 15.4%, below the RBI target
while credit growth continues to show robustness at around 22%. Investment in SLR securities
was lower by Rs150 bn from last fortnight.

􀁠 According to the Ministry of Commerce, exports in October registered a 21.3% growth
with imports growing by 6.8%. Exports in October were at US$18 bn and imports stood at
US$27.7 bn. Trade deficit for the fiscal year till October stands at US$72.8 bn with exports at
US$121.4 bn and imports at US$194.2 bn with growth rates of around 26% on a y/y basis.