Orbis Economics

Orbis Economics' Top 3 posts of 2011

2011-12-28T22:12:00.002+05:30

Orbis Economics’ blog in 2011 hascontinued to touch upon various aspects of the Indian macro-economy such as growth,external sector and issues of global significance. This post lists the onesthat the readers most read, in descending order:

#1. IndiaGDP: No surprise, strong takeaways nevertheless

The year has been challenging forIndia, to say the least. Fraught with high inflation, high interest rates,slowing domestic growth, weak global environment, and potentially high fiscaldeficit in the year; the post was the most read of all as growth tumbled below7%. Orbis Economics argues that the growth trends highlight two policy aspects –our need to tackle inflation differently and allowing more investments into theeconomy.

#2. Eyeon the World Special: The Unrest Economies-Reasons and Implications

The post aimed at capturing someeconomic realities of the countries in the MENA region that saw the eruption ofthe most unprecedented protest across countries. Orbis Economics also broughtout a research paper on the theme earlier in the year. It is available on theSocial Science Research Network, and can be downloaded here.

#3. Canwe relax about the rupee, please!

The recent months have seen asharp depreciation in the rupee owing to a combination of domestic and globalfactors. Orbis Economics maintains that while there is indeed risk to thecurrency, fears of a ‘crisis’ at the present point of time could be overblown.

Whither, rupee?

2011-12-23T02:07:00.000+05:30

Irecently received an e-mail, relevant parts of which are reproduced below:

“Ibought USDs in the range of Rs 45 to 47 & hoped that the situation wouldimprove in the days to come ...

However,the situation seems to be worsening everyday....

Ionly want to understand whether this is a temporary phenomenon and some measureby RBI will bring things under control..or there is is some other factor behindthis...

Pleasehelp me get over the anxiety.”

Firstof all, many thanks for your e-mail. I really appreciate your writing in.

Foryou, and all my other friends who have expressed interest in knowing more aboutthe rupee, here are some of my thoughts.

I was and continue to remain a rupee bull, at least in the medium to long run. For proof, click on this link.

Thereare of course short-term risks in the present turbulent economic scenario, but there arefactors that could still result in rupee continuing to edge upwards. These are:

1. RBI intervention – The central bank hasfinally steppedin to curb the depreciation in the rupee. While the rupee is unlikely tobounce back with a vengeance anytime soon, this is indeed a stabilising factor.

2. Monetary easing ahead – Indiancompanies have been facing the twin challenges of rising cost of capital andrising raw material prices. A poor global environment has not helped either. Itis no surprise that pockets of production in the economy have shown sharp slowdown.However, the days of monetary tightening seem to be behind us now, and the RBIis expected to startcutting rates in 2012, particularly now as food inflation is declining. Thiswill be a shot in the arm for FII flows, which have hit a 3year low recently.

Thatsaid, risks to the rupee are increasingly present as well:

1. The euro zone situation remains the onemammoth risk factor to the rupee. There is no way of knowing right now, whichway the wind will blow on this. Though realistically speaking, it is likelythat there are both ups and downs to be expected over the next year.

2. Slow moving policy, such as that onFDI, could continue to be another dampener for overseas funding waiting to comeinto India.

How these factors bounce off against each other will be crucial in determining the rupee direction. But while pessimismis in vogue these days, there is room for an appreciation from here too.

Can we relax about the rupee, please!

2011-12-13T00:07:00.002+05:30

The rupee’s steep fall downhillhas sent alarm bells ringing, with the word ‘rupee’ and ‘crisis’ often beingheard and read in the same breath. It istrue that the pace of depreciation has been steep and it is in part areflection on India’s weakening economy.

But is it a genuine ‘crisis’?Perhaps not – and for three quick reasons:

Forexreserves – Traditionally, RBI should have 3 months import cover as reserves. Atpresent the reserves are far in excess of that. In other words, India isnowhere close to such dire straits right now.
Exportsgrowth - Currency depreciation is actually salutary for exports. And has anegative impact on imports. Result – a few months down the line, we might actuallywitness a shrinking in trade deficit. For all those who have been worried aboutIndia’s trade deficit, this should be reason to cheer.
Incompletecorrelation with domestic economy – While there is no doubt that the Indianeconomy is showing signs of cooling off (the latest IIP number for October hasshrunk miserably), it is more likely a reflection of global economicuncertainty. It is unlikely that the rupee would have depreciated at this ratein a stable global climate.

That said, the situation is still unresolved. It is likely that it may resolve as soon as it appeared, or it may not. So while an eye needs to be kept on its development, it is too soon to start giving out verdicts.

India GDP: No surprise, strong takeaways nevertheless

2011-11-30T19:00:00.001+05:30

India reported sub-7% economicgrowth in Q2 of 2011-12 (6.9%), a disappointing and even below trend number. Butfor anyone who has kept an eye on India data, it came as little surprise.Monthly industrial production numbers have been sounding out warning bellsthrough much of 2011-12 so far. And the GDP figures clearly show a dip inindustry numbers, with a miserable growth of 3.2% over the same period of theprevious year, while agriculture growth chugged along at 3.2% as well.

Skewed monetary policy impact

Which brings us to the first keytakeaway – services’ growth continues to remain quite robust (growing by ahealthy 9.3%), suggesting the rather skewed impact monetary policy has had onslowing down growth. Indeed, this fact is also borne out by the 18% plus growthin credit as per the latest numbers with the RBI. The major impact of interestrate increases has clearly been only on industry, leaving the largest sector ofthe Indian economy virtually untouched. This raises once more the key policy question - is India dealing right with its inflation problem? Probably not, as the data suggests.

We need more investments

A look at the expenditure side ofGDP (at current prices), brings out a glaring fact – investments are the slowest growing component. While all other components showed double digit growth, Gross Fixed Capital Formation grewby 7.1%. For aninvestment hungry country like India, this should drive home the case for further increases in FDI limits. The GFCF, which represents the domestic component of investments has slowed down, andwhile India has seen strong FDI flows through much of 2011-12so far, the global scenario does not ensure that the trend will continue. Purelyfrom the investment angle, this is one big factor in favour of easing FDI regulations.

A number of economists now expectGDP to slow down further from here, though I am not quite as pessimistic. Agricultureproduction looks robust this Kharif season, and services continue to be strong, essentially covering around 75% of the economy. The industry needsto be watched out for, but that alone should not be scaring us.

India's industrial production continues to lose ground. Here's why..

2011-11-14T16:25:00.001+05:30

Anothermonth, another dismal industrial production number. A slowing down to 1.9percent of production will probably come as no surprise to anyone who has beenobserving the growth patterns overtime.

Why?It is a combination of domestic and international factors. Three, to beprecise.

#1. Rising interest rates – Industrial production responds to costof capital, which has been rising incessantly in India over the past months.Plagued by the sceptre of rising inflation, the RBI has been doing its bit inincreasing policy rates. Commercial banks have duly followed, increasinglending rates in the economy. As a result, manufacturing production, whichaccounts for majority of the Index of Industrial Production (IIP) has cometumbling down as a lagged response to interest rate tightening. For the monthof September, manufacturing has grown by a poor 2.1 percent (in comparison witha comparatively robust 6.9 percent in September 2010). Even comparing with theprevious quarter (Q1 2011-12), the performance this quarter has been very belowaverage at 2.9 percent from 7.7 percent.

#2. Rising inflation – Inflation in India has remained quitehigh, suggesting the limited role that monetary policy can play in reducinginflation at the present point in time. Not only does rising inflation hit thecosts of companies, via increases in price of inputs, it also limits the passon of prices to consumers who are already spending less on discretionaryproducts. Rising prices of essential commodities like food and fuel means thatconsumers have less to spend on other goods. As a result, consumer non-durablegoods’ production has actually shrunk by 1.3 percent in September. Though, inthis case it needs to be noted that there is no difference in theApril-September 2010 and 2011 growth rate (3.8 percent), indicative of consumerresponse to inflation. While consumer durables have shown robust performance inSeptember (8.7 percent), and is one category showing improved performance overthe quarter, a seasonal (read, festive) trend is possibly at play.

#3. Uncertain globalenvironment – The latesttrade press release shows the now widely expected decline in exports growth tojust about double digits. No points for guessing then, which industries will beimpacted most. Capital goods, which is becoming one of India’s significantexports, has shrunk this month by almost 7 percent. This trend is also visiblein other export oriented sectors such as textiles and apparel.

Giveneach of the segments’ linkages with others, it is only expected that the entireIIP basket has softened. With the situation not looking particularly differentin November, it is likely that a decline in IIP will continue to get worsebefore it gets better.

IIP growth across categories (%, yoy)
	Weight	Sep-10	Sep-11	Apr-Sep 2010	Apr-Sep 2011
Overall IIP	100.0	6.1	1.9	8.2	5
Mining	14.2	4.3	-5.6	7.2	-1
Manufacturing	75.5	6.9	2.1	8.8	5.4
Electricity	10.3	1.8	9	3.8	9.4
Use-based Classification
Basic Goods	35.6	3.5	4.5	4.7	6.9
Capital Goods	9.3	7.2	-6.8	16.4	4.6
Intermediate Goods	26.5	4.6	1.5	8.4	1.4
Consumer Goods	28.7	9.7	3.5	9.1	4.5
Consumer Durables	5.4	14.2	8.7	15.9	5.2
Consumer Non-Durables	23.3	5.8	-1.3	3.8	3.8
Source: CSO

Download Orbis Economics research from SSRN

2011-06-18T01:14:00.003+05:30

A few months ago, when the unrest in the Middle East was just about gathering pace, we had brought out a blog-post on the Arab Spring and its implications for India. An expanded form of the same, along with graphs and tables to make our point, is now available for download on the Social Science Research Network.

All you need to do is click on the following link.

Do give us your feedback, we will be happy to hear from you!

Write in at manika.premsingh@orbiseconomics.com

Whats up with the Economy?

2011-06-03T08:38:00.004+05:30

The Indian economy showed its first signs of a slowdown in growth, in line with what we have argued based on our two proprietary indices - the Financial Conditions Index and Index of Services Production, both, in our view, crucial indicators for the 'big picture' on macro-economic conditions. Some changes are in the works, and the latest on both these indicators will be made available shortly. In the meantime, some of our recent views on developments in the Indian economy can be found on FirstPost.com. Some of our recent analysis are:

1. India's growth numbers are raising important issues - a disconnect between agriculture output and prices and whether the RBI has hiked rates too much.

2. Which is not to say, that inflation is not an issue though. In fact, it is probably higher than the numbers suggest. As investors, we might want to readjust our real returns' expectations on equities - some of the stocks that gave seemingly positive returns, have been beaten by inflation.

3. Finally, how despite some solid developments in the economy over the past decade, India is actually much farther behind its closest competitor - China- from a decade ago.

Orbis Economics Index Update: Activity in India slows in January 2011

2011-02-26T19:03:00.002+05:30

The pickup in economic activity over 2010 seems to have hit a low spot in January 2011. Our two proprietary indices that reflect overall activity in the economy – the Orbis Economics Financial Conditions Index and the Orbis Economics Index of Services Production – showed considerable softening in January.

The monthly OE FCI, which provides a single point perspective on asset markets – equities, debt and currencies, reached an eight month low as equity markets tanked and the price index rose. The decline in debt market rates and depreciation in exchange rates was not enough to counter the decline. As a result, the headline index is now slightly below the crucial 100 mark, where 100 denotes a balanced monetary policy. A level below 100 indicates a tight monetary policy given the current state of overall asset markets and vice-versa.

The monthly OE FCI, which serves as a reliable predictor of monetary policy going forward, suggests that the RBI could slow down on the interest rate tightening cycle going forward. Based on our January numbers, this reading is also supported by the OE ISP. The OE ISP is India’s first and only monthly indicator for services production. The annual growth in the 12mma (our preferred variation of the index) fell to the lowest in the 46 months history of the index. This is reflected in a broad based decline in growth across the sub-indices – the Transport and Tourism index, the Banking index and the Communications index. The T&T index as well as the Communications index actually shrank from the corresponding period of the previous year.

The recent softening in the OE FCI as well as OE ISP is a worrisome factor given that the IIP figures have also dipped recently and inflation continues to be high. This is one month of poor outcomes, it does increase the risks to economic growth, particularly as the world scenario looks less supportive with potentially higher fuel prices and their consequent impact on global recovery.

Eye on the World Special: The Unrest Economies - Reasons and Implications

2011-02-18T00:57:00.009+05:30

Introduction

It has been a tumultuous 2011 so far for the Middle East and parts of North Africa as the region witnesses a revolution contagion. It started with Tunisia, where successful mass protests started in December 2010, in a bid to oust the President after 23 years in power. The region came further in focus as another North African country – Egypt – saw a sparking off of similar protests, leading to yet another revolution ending with the ouster of President Mubarak after 30 years in power. The protests have now spread to Algeria, Bahrain, Libya, Yemen and a revival of the protests in Iran.

In this Eye on the World Special, Orbis Economics takes a closer look at the events in these Unrest Economies (henceforth referred to as UEs). We start by unravelling the potential political, economic and social reasons for the recent uprisings. We then try to understand the implications of the uprisings for the rest of the region and finally we explore the possible impact on India.

Analysing the reasons: Oppression, unemployment and poverty

One of the key common factors among all the Unrest Economies is the existence of authoritarian regimes. Oppression and a clamp down on 'freedom of speech' has widely been pointed as a reason for the protests. According to the Economist Intelligence Unit, which has created a Democracy Index across countries based on various facets of political functioning, all the countries currently facing unrest have a low democracy ranking. Of a total of 178 countries ranked, these countries rank between 122 and 146 in number, where 1 is the most democratic and 178 the least democratic country.
We at Orbis Economics looked at other socio-economic indicators as well to understand more underlying reasons for the protests in the UEs. Another common key factor across these economies is high unemployment, where the unemployment rate is the proportion of unemployed labour force in the total labour force. Though we have to add here, that the latest, and even consistent data for the indicator was a challenge to find across these countries. Nevertheless, a broad picture does emerge. The World’s average unemployment rate is 8.8%, but the figure for some of the UEs like Yemen and Libya is as high as 35% and 30%. That these countries have a high concentration of population in the working age group only adds to the significance of this indicator.

The third significant underlying factor is the low per capita incomes. The average per capita income for the UEs put together is at US $ 3,534 for 2009, which is less than half the world average of US $ 8,506. This is despite the fact that the average figure takes Bahrain into consideration with a much higher than world average per capita income of US $ 19,817. Libya, too, is an exception in that it has a high GDP per capita.

Even in Bahraina and Libya, it is likely that the GDP figures for Bahrain and Libya mask the latent inequality in these economies, official figures for which are not available. For instance, a survey conducted by Bahrain Monetary Agency in 2004 had found that poverty rate was rising on the one hand, and the average wealth of the richest 5,200 Bahraini individuals was higher than the world average. That said, however, the income inequality levels across these countries, is not among the highest in the world.

The inequality coefficient ranges between 0 and 100, with 100 showing highest inequality and 0 the least inequality. The income inequality in the UEs is equal to or lower than those seen in the largest emerging markets today – Brazil, Russia, India and China. In fact, some of the most developed countries like US and UK also have a higher level of income inequality. It can be argued that this measure of income inequality is but one measure, looking at other measures like the ratio of the richest 20% to the poorest 20% might yield somewhat different results. However, it does indicate that it is not the most significant underlying factor.

The same is true for corruption. While four of the seven UEs analysed are at the bottom end of the corruption scale, it is interesting to note that Tunisia and Egypt that have successfully overthrown the existing regimes are actually better off on the corruption metric. Much like in the case of income inequality then, corruption is a likely contributing factor, maybe even a significant contributor but clearly not the stand-out cause.

While the existence of both corruption and inequality cannot be denied looking at the figures, in our analysis of poltical, social and economic indicators, they are not statistically the most overwhelming ones. It is more likely that a combination of inability to voice dissent, poverty, unemployment and added to that the existence of inequality and corruption would have created discontent as a whole.

Implications of the UEs for the region: The risk of contagion

While there is no denying that the countries are creating a new chapter in the history of the region as we speak, the key question that arises is - what is the implication of the current uprisings on the rest of the world? These seven countries put together are small even as a group in terms of population and size of the economy. They accounted for a population of 0.2 bn as of 2009, with Egypt being the largest in population followed by Iran. This compares with a world population of 6.8 bn as of 2009 or an over 1 bn population of India. In terms of the size of the economy, together they accounted for less than 1.5% of world GDP in 2009 in nominal terms.

Their key significance is therefore not in the size of the countries per se, but their geographical location. In our analysis, the most significant factors for the protests are then the lack of democracy, large number of poor and a lack of jobs. That these very factors are observable in other Middle East and African economies as well suggests the risk of contagion. The Economist has compiled a ‘Shoe-Thrower’s Index’ as a means to gauge which countries could next see uprisings.

The index considers factors like GDP per capita, democracy, corruption, demographic profile, years for the government in power, as well as censorship. On a scale of 1 to 100 measuring stability or its lack, an index of 100 reflects the least stable country. Other potential countries with an over 50% instability potential are Syria, Iraq, Oman, Mauritiana and Saudi Arabia. While the index covers the Arab world, it is important to note that much of Central Africa is also under authoritarian regimes all of which have the common problems of poverty and high unemployment rates.

The significiance of the Middle East for the rest of the world lies in the fact that 56% of the world’s oil reserves are in this region, and taking Africa into account the proportion rises to 65%. Besides the other countries, that Saudi Arabia is at a risk of revolution contagion has deep implications indeed. It has the largest known oil reserves in the world today and at a time when the world already feels a need for greater energy security, it is indeed worrisome. Already, geo-political strife in the middle east and rising demand from emerging markets has placed stress on crude prices. After the latest unrests, crude prices are already hovering above US $ 100.

Implications for India: Trade and diplomacy

A country like India which has high energy dependence on the rest of the world, the first impact will be on the oil import bill which accounts for a third of the country's merchandise imports. At least in part because of its energy dependence on the oil rich middle east countries, India has strong trade ties with these countries. The UAE, Saudi Arabia and Iran are among India’s top 10 trading partners and account for approximately 16% of the country’s merchandise trade. Among India’s top 25 trading partners are 3 more middle-east countries – Kuwait, Qatar, and Iraq, which take the share of the region up to almost 20%.

Of the UE, evidently then, the strongest ties are with Iran, with which India had a trade of US $ 13.3 bn in 2009-10. That said, however, India and Iran have had their differences on strategic geo-political issues. Egypt is the other UE with which India has had strong historical ties. India is one of the large investors in Egypt and a number of Indian companies like the Tata group, Asian Paints, Ashok Leyland, HDFC and Dabur have a presence in the country. Relationships have been cordial with the other UEs too and diplomatic relations go back decades.

It is too soon to say how the political structures in the UEs will evolve overtime. But it is likely that in the even that the countries transform into genuine democracies there is higher probability of stronger strategic and commercial ties with India based on a common political philosophy.

Orbis Economics Update: Is a rate hike due? A look at financial conditions and services production

2011-01-24T21:08:00.001+05:30

On the eve of the RBI policy meeting, in this Orbis Economics update we ask - is a rate hike due in India? As always, we look to the Orbis Economic Financial Conditions Index (OE FCI) to give us an indication for the RBI policy. Our headline FCI (which is a real monthly index) suggests that conditions are slightly accomodative; which is corroborated by the daily nominal FCI as well. The daily nominal FCI also suggests a slightly above average probability of a hike.

Our real economy indicator also presents a mixed picture for the Indian economy, with a recent bias towards softening. The Orbis Economics Index of Services Production (OE ISP) showed a correction in both the monthly average as well as the 12-month moving average number in December. While the decline is not significant, it does suggest softening in economic activity in this largest sector of the Indian economy. While services accounts for over half of the Indian GDP, we typically rely largely on the government released industrial production trends to get a sense of the ground activity. The OE ISP aims at bridging a significant gap in the data availability and analysis of the Indian economy.

Its interesting to note that of the 3 sub-indices of the OE ISP - 'Tourism and Transportation Index', 'Banking Index' and 'Communications Index', the 'Banking Index' has shown a good uptick in growth also reflected in the credit growth figures for December.

A look at the whole picture suggests that there is a probability of a only a token rate hike tomorrow or none at all. To get a detailed perspective on our FCI, you can subscribe to the reports by writing in at sales@orbiseconomics.com.

OE Update: 10 reason why Indian equities are a bubble, India outlook for 2011, Global data shows some health

2011-01-11T01:04:00.000+05:30

Greetings!

Orbis Economics wishes you a very Happy New Year 2011!

The year 2011 has not exactly started with a bang for the Indian economy. Inflation looking more difficult to contain than expected earlier by policymakers and experts alike as primary articles inflation came in at over 18% at the end of December. The equity markets have not been faring well either. The Sensex fell for the fifth consecutive trading session today, reaching a six week low at 19,224. While it is still much better off than at the low of 2008, experts on markets are questioning whether 2011 will be an year for growth in broad Indian equities. With this as the context, we bring to you our first column for 2011, which actually lists out ten macro reasons why the Indian stock markets could in fact be a bubble.

Despite a relatively subdued optimism to stark pessimism offered by commentators on the stock markets, we at Orbis Economics believe that 2011 will not be a poor year for the Indian economy as such, as we had argued earlier on in our December column. There has been significant improvement in growth rates in the economy wide growth rates over the past year, our proprietary Index of Services Production, has also shown a pickup over the recent months after faltering during the first half of the previous year. This is significant, since services accounts for over half of the Indian economy and strong growth in the sector reflects stability for the economy.

There is some sign of recovery in advanced economies, which brings some cheer as well. The US saw some pretty good PMI results in December, reflecting momentum. Payroll numbers for December were decent too. The US mutual funds flows data also pointed to a possible dominance of equity funds in 2011, reflecting greater faith in economic growth. Euro Zone figures suggest that while there is no strong growth, there are no alarm bells either. Japan is witnessing some barely-there inflation. On the negative side, the housing markets and consumer confidence in the US are wanting, and inflation is likely to be a dampner across economies all through 2011 bringing monetary policy back in focus.

New on OE

OE Column: 10 reasons why India's stock market is a bubble

This dramatic rise is mostly based on the assumption that the economy will grow at over 8% consistently. However there are many external and internal factors that may put this growth rate into jeopardy. As the hot money continues to flow into the Indian markets, I believe investors need to cautious as the risks for downward movement are higher than the rewards for further rise from current levels

Eye on the World, January 8, 2011

So we saw some pretty good PMI results in the US for December, which show that there is a bit of momentum in the US economy. The payrolls figure was good but not great; which may well be the theme for 2011. US mutual fund flows data pointed to a possible reversal of dominance from bond to equity funds for 2011. Over in the EU, conditions are on track but subdued, but of course there are still some relatively concerning risks bubbling away there. And on the monetary policy front, commodities and fast growing emerging markets are set to make this an "interesting" year for monetary policy makers.

Eye on the World, January 1, 2011

So we saw China show a lower PMI figure on the back of uncertainty about the inflation battle. Over in the US there were no positive signs for the housing market in terms of prices in the near term, and consumer confidence is still low - also reflecting where fundamentals are currently at, but let's see what 2011 brings. Then we looked at France's GDP growth, and saw that they're chugging along alright out of the recession. Meanwhile in Japan there's just barely some positive inflation, and unemployment is little changed.

OE Column:10 reasons why India's stock market is a bubble

2011-01-10T17:58:00.003+05:30

It has not been a good start for Indian equity markets in 2011, with the Sensex falling below the 20K mark since the start of the new calendar year. While this does not take away from the fact that it has indeed still come a long way since the sell out that took place in 2008, if continued, it would endorse the view of a number of experts that Indian equities will be relatively tepid this year.

In our first column for 2011, we bring you a perspective on Indian equities from a Macroeconomic perspective. David Hunkar, who is a financial consultant and long time investor, first wrote this article right before Diwali (November 2010). It argues that the rise in Indian equities could be a bubble, and while the actual figures have changed since, the broad arguments remain.

Ten reasons why India's stock market is a bubble

India’s Sensex closed at 20,032 on Friday.This is not far from the all-time high of 20.873 reached in January 2008. During the credit crisis, the index reached a low of 8.160. In just over 18 months the index has rebounded sharply gaining over 150%. This dramatic rise is mostly based on the assumption that the economy will grow at over 8% consistently. However there are many external and internal factors that may put this growth rate into jeopardy. As the hot money continues to flow into the Indian markets, I believe investors need to cautious as the risks for downward movement are higher than the rewards for further rise from current levels.

The following are some of the reasons investors may want to consider before jumping into the Indian markets:

1. Indian equities have become very expensive compared to other emerging markets. For example, the PE of the Nifty index is about 25. India trades at a PE of 23.9 while Brazil and China have P/Es of 12.5 and 14.2 respectively based on Financial Times market data.

2. Foreign investors are pouring money into the markets. They pulled out $14.84 billion during 2008 which led to the crash of the Sensex. But thru September of this year they have plowed back over $15.62B in the markets. Foreign portfolio investment which is highly short-term focused reached over $32.0B in 2009-10 period .

3. Relatively speaking only a few shares of the major companies that are actively are available for trading. Hence large amount of capital chasing a few free-float shares in select companies leads to huge rise in stock prices.

4. Inflation runs at double digits and may rise further if policy makers do not increase interest rates.Inflation remains stubbornly high primarily due to food prices.

5. Some of global commodity prices have risen over 10% this year. This will put pressure on manufacturers to raise prices as their input costs rise.Further increase in prices will lead to higher inflation.

6. Rupee, the Indian currency has appreciated significantly this year against the dollar hurting exports of goods such as textiles, machinery, etc.

7. Unlike Brazil and other countries policy makers have not implemented regulations such as doubling of taxes on foreign capital inflows to slow the flow of capital.Instead regulators and politicians are encouraging the boom of all asset prices continuing the India growth story.

8. While the savings rate in India is one of the highest in the world, domestic investors’ investment in the equity market is very low. The majority of the savings lie in banks earning lower returns adjusted for inflation. This shows the lack of conviction in the markets among the majority of the local population.

9. The corporate debt market is almost non-existent in India. Hence companies have to raise funds either thru the equity markets or banks. The lack of bond markets causes distortion in the channeling of funds from investors to companies.

10. India is a debtor country and the external debt continue to rise due to lavish subsidies offered by politicians.As of October this year, external debt stood at $273.1 billion.

Overall the run-up in equity prices is not justified based on fundamentals and earnings growth. Some experts are predicting a rise of another 10% in the markets due to the upcoming Diwali - the “Festival of Lights” season, liquidity and other factors. However it still does that change the fact that Indian stocks are expensive. “Irrational exuberance” is rampant in the markets which will lead to a painful correction.

David Hunkar (pseudonym) holds a Masters Degree in Finance and Economics. He is a part-time consultant for a financial consulting firm where he manages portfolios for self and family. He has been an investor for the past ten years. David focuses on foreign stocks trading in the US markets including the OTC market. He concentrates on high dividend yield and dividend growth stocks. ETFs are his another favorite investment vehicle.

You can also visit him at his blog TopForeignStocks.com (http://www.TopForeignStocks.com), ADRUniverse.blogspot.com (http://adruniverse.blogspot.com/) and GlobalEconStats.com (http://www.globaleconstats.com/)

Note: The views expressed here are the author's and do not necessarily reflect those of Orbis Economics.

Eye on the World, January 8, 2011

2011-01-10T17:11:00.000+05:30

This week we examine the US PMI results, US nonfarm payrolls, US equity and bond mutual fund flows trends, EU inflation and growth stats, and a review of monetary policy developments over the past week.

1. US PMI

The US had two good results, the manufacturing PMI increased to 57 from 56.6 (driven by strong new orders, production, and prices), and the non-manufacturing shot up to 57.1 from 55 (driven by new orders, business activity, and prices). The new orders part of the results was a cracker, with both sub-indices above 60), showing there may be a bit of momentum to come. Another interesting aspect of the releases was the increase in the price indexes: inflation? And the other notable was a small decline in both of the indexes' employment sub-indexes, which lines up with the good but not great NFP figure below.

2. US Nonfarm Payrolls

As noted, the figure came in a little lower than expected, and not really high enough to pull down the real unemployment rate. The figure was 103k jobs added, + upward revisions in Nov/Oct of about 70k. The unemployment rate went down to 9.4%, but not a good thing because it was participation rate driven (i.e. people who are becoming discouraged and pulling out of the labor force). So a good but not great result, this year should bring more job growth than last year as the recovery picks up (or as conditions normalize).

3. US Mutual Fund Flows

The story of 2010 mutual fund flows was a steady stream of net inflows into bond funds, with pretty lackluster flows for equity funds. But the worm may be turning, November saw the worst month in the year for bond fund flows, and a slight positive for equity funds. What's more, the weekly data through December (Dec monthly data not out yet) showed about -13 billion for bonds and about positive 5 billion for equity fund flows. So does this herald a trend of re-risking? Will we start to see the money go round reverse? ... Will equity flows beat bond flows this year? and of course what will this mean for the stock market?

4. EU Growth and InflationThe EU finalized its GDP numbers for Q3, and released the first estimate of inflation for December, with both results being steady. It's likely both the GDP growth rate and inflation rate will muddle along at a subdued pace. But of course, the key risk for the EU is the "PIIGS", the Swiss National Bank has said it wont take Sovereign debt from Portugal or Ireland as collateral anymore, and well basically none of the problems have gone or even eased yet. So this remains a key risk for 2011. Oh and the ECB meets next week.

5. Monetary Policy Review

In monetary policy, Indonesia and Romania held, Peru raised rate 25bps, Bosnia reduced its RRR, and Chile announced currency intervention moves. But the real interesting development in monetary policy is the commodity story for 2011 - food prices remain high due to supply constraints (as well as some weather impacts), and energy is staging a cyclical rebound, pair that with fast growth in emerging markets and you have a real challenge for monetary policy setters in 2011. So, watch this space!

Summary

Sources

1. US Institute for Supply Management www.ism.ws & Yahoo Finance finance.yahoo.com

2. US Bureau of Labor Statistics www.bls.gov

3. US Investment Company Institute www.ici.org

4. Trading Economics www.tradingeconomics.com

5. CentralBankNews.info http://www.centralbanknews.info/

Article Source: http://www.econgrapher.com/top5graphs8jan11.html

Eye on the World, January 1, 2011

2011-01-10T17:05:00.002+05:30

This week we look at China PMI, US house prices, US consumer confidence, French GDP results, and Japan's unemployment and inflation situation.

1. China PMI

China recorded slightly lower PMI figures for December with the HSBC index falling to 54.4 from 55.3 and the CFLP index falling to 53.9 from 55.2. Clearly there are a few issues bubbling away i.e. a spike in inflation... and more importantly - how the authorities deal with it. That alone will be one of the biggest wild-cards for 2011.

2. US Housing

The US housing market saw further weakness with the October reading of the Case-Shiller index down both on a monthly and annual basis. There's not much else to say on this one, house prices ran ahead of themselves and the market needs to correct - further government measures may put a temporary floor under the market, but the question is how long would that be necessary before the fundamentals finally came around? Another couple of years of flat house prices wouldn't be a surprise.

3. US Confidence

US Consumer Confidence dipped slightly in December, dropping to 52.5 from 54.1, with the weakness being expressed in both the current conditions and futures expectations indexes. Similar story to the housing market really - when will the key fundamentals turnaround? High unemployment and stagnant house prices will continue to weigh on this one in the medium term.

4. France GDP

France saw its economy expand 0.3% q/q vs 0.6% in Q2, with some minor downward revisions. Net exports made a negative contribution, household consumption and government consumption both made a positive contribution. Most are forecasting about 0.4% GDP growth in Q4. So it's chugging along OK for the French economy, not as fast as the Germans, but they're getting there.

5. Japan unemployment and inflation

Japan saw another month of positive inflation in November - barely, with the CPI increasing 0.1% y/y vs 0.2% in October. Meanwhile unemployment stuck around 5% with a 5.1% reading for November. Still many a challenge for Japan - but will the policy makers get it right? (for that matter what else is there left for them to do?)

Summary

Sources

1. CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com & Yahoo Finance finance.yahoo.com

2. Standard & Poor's http://www.standardandpoors.com/

3. US Conference Board www.conference-board.org & US Bureau of Labor Statistics http://www.bls.gov/

4. OECD Statistics Database stats.oecd.org/index.aspx

5. Trading Economics http://www.tradingeconomics.com/

Article Source: http://www.econgrapher.com/top5graphs1jan11.html

OE Index Update: Financial Conditions move to balanced mode

2010-12-21T19:00:00.000+05:30

The Orbis Economics Financial Conditions Index (Real) corrected slightly in November, the first time since May 2010. Even though the correction is minor, it has brought the OE FCI-R closer to a level that reflects a balanced monetary policy stance. This was also observed in the RBI pausing on the interest rate front (and in fact choosing to address the liquidity scenario with a reduction in the SLR by 1 percentage point and conduct OMO). Going forward, we expect the RBI to remain in tightening mode - as reflected by the financial conditions as well as the hawkishness in its recent policy statement, even though the current financial conditions do not reflect a definite hike during the next meeting.

About the OE FCI

The OE FCI is our monthly proprietary indicator that has in the past reliably predicted policy conditions in particular and thrown light on future economic trends too. It is also the only product available that can give a daily update on consolidated financial conditions.

To request a sample copy or subscribe to the OE FCI, please writing in at sales@orbiseconomics.com. We look forward to hearing from you.

Eye on the World, December 18, 2010

2010-12-21T12:37:00.003+05:30

This week we review inflation data from the US and the EU. Also examined is Japan's influential Tankan business sentiment survey, and a check in on US housing starts. Finally we sum up with a look at some of the many monetary policy decisions from the past week.

1. US Inflation

The US recorded a 1.1% y/y headline rate of inflation in November (vs 1.2% in October), and core inflation of 0.7% (vs 0.6% in October). So overall a pretty ho-hum result, inflation at the consumer level is still quite subdued despite inflation pressure beginning to rise at the producer level; particularly in commodities. So the case remains that the Fed still has its work cut out in terms of spurring up inflation - but the question is, when will the new worry of inflation rather than deflation come about? this is one to watch carefully.

2. EU Inflation
Over in the EU, inflation rates were unchanged between October and November, with the EU rate at 2.3%, and the Euro-Area headline rate at 1.9% and the Euro-Area core rate was 1.1%. The same old story of significant diversity across the region applied with the highest rate of 7.7% recorded in Romania, and the lowest rate -0.8% in Ireland. And so the Euro experiment continues, inflation will likely gradually pick up over the next year, provided that the economic recovery doesn't get derailed (and there are a few risks floating around).

3. Japan Tankan

The influential business sentiment survey, the Tankan all companies index had fell to -11 from -10. Large manufacturers declined to 5 from 8, and large non-manufacturers fell to 1 from 2. Small manufacturers improved to -12 from -14 and small non-manufacturers fell to -22 from -21. Thus overall the results were relatively negative, reflecting the challenging economic conditions in Japan. Companies are finding the dual effects of fading stimulus and a stronger Yen to be having a negative impact.

4. US Housing Starts

Housing starts in the US were basically flat again, recording 0.555m vs consensus 0.550m, and previous 0.519. So the results look kinda good, but in a time series (as in the chart below) it's clear the market is still just muddling along. The only real good news out of this piece is that at least it didn't get worse, i.e. there appears to be some stabilizing.

5. Monetary Policy Review

In the past week the central banks of Sri Lanka, US, Hong Kong, Norway, Namibia, Sweden, Botswana, Egypt, Switzerland, India, Poland, Turkey, Chile, Columbia all met to review monetary policy settings. There were a few movements in interest rates with those to tighten being: Sweden +25bps and Chile +25bps, while those that dropped rates were: Namibia -75bps, Botswana -50bps, and Turkey -50bps. While the rest held steady, and the US made no alterations to its quantitative easing program.

Summary
So we saw inflation basically flat-lining in the US for now, over in the EU inflation appears to be gradually picking up but risks remain. Japan saw less than exciting results in the Q4 reading of the Tankan survey, and the US saw flat housing starts as the housing market appears to be stabilizing somewhat. On the monetary policy front we saw a couple tighten, a few drop, and most hold steady as monetary policy becomes more de-synchronized as the global recovery also becomes more de-synchronized.

Sources
1. US Bureau of Labour Statistics www.bls.gov
2. Eurostat epp.eurostat.ec.europa.eu
3. Bank of Japan www.boj.or.jp
4. US Census Bureau www.census.gov5. CentralBankNews.info www.centralbanknews.info

Article source:
http://www.econgrapher.com/top5graphs18dec.html

Eye on the World, December 11, 2010

2010-12-13T21:05:00.003+05:30

This week we look at the international trade stats for the US and China, with some interesting signs in the China data. Then we review an interesting short term trend in US consumer credit, before checking the jobs data out of Australia. Finally we review some of the monetary policy decisions out over the past week.

1. China International Trade

China announced its trade data on Friday, and revealed record numbers on both imports and exports. Exports jumped to an all time high of $153.3bn (up 13% month on month and 35% year on year). Imports also rose, hitting $130.4bn (up 20% m/m and 38% y/y), leaving a trade surplus of $22.9bn and a $233bn rolling 12 month surplus. The results are pretty interesting on a global basis when you think about the climb in imports, but for China the results could be somewhat double-edged. For instance, the surplus will raise pressure on the Yuan, and the strong exports could also impact on inflation.

2. US Trade Balance

The US trade deficit reduced slightly in October to -$38.7billion vs consensus -$44bn and previous -$44bn. The reduction was driven by a fall in the petroleum gap ($19.1bn vs $21.7 bn), but the non-pretroleum shortfall also shrank ($31.0bn vs $34.1bn); with imports down slightly and exports up slightly. Though it's only one month it is an interesting result, if it could be sustained.

3. US Consumer Credit

Over to US consumer credit, the short term trend emerging is somewhat interesting, albeit the figures are year on year so coming off a low base comparator it's easy to look good. But it does initially look like the worm has turned. But if you look at the detail the increase is coming from non-revolving credit (mostly auto-loans), while revolving credit (i.e. credit cards etc) is still contracting.

4. Australia Jobs Growth

Australia beat all expectations with its November job numbers, recording 54,600 new jobs in November, against consensus estimates for 20,000 with 55,100 full-time jobs added. The jobless rate fell to 5.2% from 5.4%. Much of the strength in the Australian economy is coming from the booming resources sector, which is benefiting from high commodity prices, emerging markets demand, and increasing amounts of investment; including several significant projects. Of course the other part of the economy is still chugging along at the same pace as the likes of NZ or the US, but the jobs results show that the mining sector is starting to spin-off some benefits to the rest of the economy.

5. Monetary Policy

Banks in Mauritius, Australia, Canada, Iceland, New Zealand, Serbia, Brazil, Ghana, Korea and the UK announced their monetary policy decisions last week. The standouts were Serbia +100bps and Iceland -100bps. But the main event was yet another 50bp hike to the Required Reserve Ratio by China, which will bring the RRR to 18.50% on the 20th of December. But for the most part central banks held steady as uncertainty ruled, with banks holding rates to help the economy (in the case those with low rates) and others holding to stem inflation (in the case of those with high rates). The theme of emerging market overheating and resultant tightening is still playing through with India saying it could raise rates again, and Russia likely to raise rates later in December.

Summary

So we saw China international trade rocketing along, setting new records on both exports and imports, and cementing its growing trade surplus. Over in the US we saw a slight decline in the trade deficit, but one month does not a trend make. Also from the US we saw the possible beginning of a turnaround in consumer credit, but possibly this is too soon. In Australia the jobs numbers surpassed all expectations as the Australian economy cruises along. In monetary policy there was a couple of outliers, but the main move was no move, apart from China who tightened the RRR once again as it heads into 2011 - the year of "prudent" policy.

Sources

1. China Customs www.customs.gov.cn

2. Trading Economics www.tradingeconomics.com

3. US Federal Reserve www.federalreserve.gov

4. Australian Bureau of Statistics www.abs.gov.au

5. CentralBankNews.info www.centralbanknews.info

Article Source:http://www.econgrapher.com/top5graphs11dec.html

OE Index Update: Services production growth stable in October

2010-12-10T18:25:00.000+05:30

The Orbis Economics Index of Services Production (OE ISP) for India continued to maintain steady growth in October 2010, compared with the same period of the previous year. This is the third consecutive month when growth has been in the whereabouts of 20%, reflecting stability in the sector over the quarter. This is in contrast with the weak to volatile growth witnessed during the first quarter of the year.

Services GDP accounts for over half of India's economy, trends for which are available only on a quarterly basis at a comprehensive level. The OE ISP is a monthly index that bridges the gap in information on this significant sector.

During October, The pickup in the headline OE ISP was largely on account of strong growth in the ‘Banking Index', while the 'Communications Index' was stable, while the ‘Transport and Tourism Index' showed a sharp decline.

The 12 month moving average of the OE ISP is a good directional indicator of the services GDP; with an over 70% accuracy rate. This indicator continues to show sustained growth, reflecting stability in the overall services economy as well.

To read more, please write into sales@orbiseconomics.com for subscription. Or request a sample copy of the report.

Eye on the world, December 4, 2010

2010-12-06T21:00:00.001+05:30

This week we look at the US PMI results; while also reviewing the China PMI data for November. Then we check out the 3rd quarter GDP results for Australia, before wrapping up with a closer look at some US data on the housing market, consumer confidence, and the nonfarm payrolls report.

1. US PMI

The US manufacturing PMI came in at 56.6, a little below consensus 57 and previous 56.9, the non-manufacturing PMI matched consensus at 55.0, and increased vs October's 54.3 reading. So between manufacturing and services there was a bit of variation, also within the results the manufacturing sub-components were not great e.g. falls in new orders, production, employment, exports. But within the services sub-indices there was a bit more positives e.g. rises in new orders, new export orders, employment, etc. So overall the results are generally positive, and not really surprising given where the US economy is at.

2. China PMI

Over to China, the official PMI rose to 55.2 from 54.7 in October; beyond expectations for 54.8. The HSBC Markit index rose to an 8 month high of 55.3 from 54.8 in October. The standouts in the sub-indices were Production (58.5 vs 57.1), Supplier Delivery (48.9 vs 49.3), New Orders was basically flat, but still strong (58.3 vs 58.2), similarly Employees was little changed (52.0 vs 52.1). In general its good to see the index rising, its also positive to see it still in the expansionary zone, and it will give comfort to those watching China's attempt at a managed slowdown as inflation pressures rise.

3. Australia GDP

The Australian economy grew 0.20% q/q in the September quarter, placing Australian GDP up 2.7% year on year. The pace of growth was slower than the expected 0.40% q/q growth, as global volatility, exchange rate pressures on exports, and withdrawal of fiscal stimulus measures took their toll on the Australian economy. Looking forward though the pace of growth is likely to rebound in 2011 as the resources sector surges ahead with a number of large scale mining projects in the pipeline, and farming continues to contribute; and of course the flow on effects to the rest of the economy.

4. US House Prices and Confidence

Two key pieces of data release last week were the Case-Shiller house price index, which showed house prices falling further (no surprise). The other key data point was the Conference Board Consumer Confidence index, which showed a jump to 54.1 (vs consensus 52, previous 50.2). Within the confidence numbers, the present situation index rose to 24 from 23.5 and the expectations index jumped to 74.2 from 67.5 previously. So people are feeling a little better about the future, but just not so much about the here and now. And looking to the housing market, the future may be better, but the short-medium term probably has further downside risk unless the fundamentals sharply turnaround.

5. US Nonfarm Payrolls

The US added 39k nonfarm payrolls in November, vs 151k in October, and well below consensus 168k. Private payrolls were up 50k vs 159k in October. Average hourly earnings were flat, as was the average work week. So overall not a great result, good that it was positive, but basically it lines up with the idea that the US recovery is not going to be linear, and basically that there is going to be choppiness as the US economy muddles through the next year or two.

Summary

So we saw the manufacturing PMI in the US still strong, but with some negatives in the sub-components, the services PMI however was a bit stronger and relatively more promising. Meanwhile in China the manufacturing PMI improved, showing that the concern is rightfully more about the risks of overheating rather than not growing. In Australia, the economy continued to grow, but a little less so as stimulus wore off, but expect the slowdown to be temporary. Back to the US, the housing market is still under the gun, but the consumer is slowly feeling a bit better about the future, in spite of the job market also remaining relatively subdued.

Sources

1. Institute for Supply Management www.ism.ws & Yahoo Financefinance.yahoo.com2. CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com & National Bureau of Statistics www.stats.gov.cn

3. Australian Bureau of Statistics www.abs.gov.au

4. Conference Board www.conference-board.org & Standard & Poorswww.standardandpoors.com

5. Bureau of Labour Statistics www.bls.gov

Article Source: http://www.econgrapher.com/top5graphs-4dec.html

OE Column: India in 2011

2010-12-02T23:00:00.002+05:30

As 2010 draws to a close, Manika Premsingh of Orbis Economics takes a look at what to expect in 2011, drawing from the wheels that were set in motion in 2010. The column, reproduced here was first published in the Slovakian weekly magazine TREND one month ago.

****

The year 2010 will perhaps be looked at as significant for

India

from the perspective of its international image. At a time of a steep global recession,

India

has not only managed to keep its head above water but also show strong growth, making it standout from the rest of the world. On the other hand, it has missed consolidating this strength further in being underprepared for the Commonwealth Games held in the capital city of Delhi in October. The CWG reflected most seriously an underbelly of corruption and the need for stronger planning and execution capabilities. This is particularly glaring in light of the fact that

China

, which

India

is often compared with, made a strong showing at the Beijing Olympics in 2008.

Yet, if the two facts are put together – strong growth coupled with serious constraints to progress - an interesting aspect emerges. The Indian economy now has a momentum of its own. The process of opening up of the economy in 1991 that lifted it out of what was sometimes called the ‘Hindu rate of growth’ of about 3.5% continues to yield dividends. The reforms have been supported by a large domestic economy, favourable demographics and a rapid rise in the private sector. In fact, the World Bank in its recent forecasts states that India’s growth is set to outpace of that of China in 2011 with a growth rate of 8.7% while China grows at a marginally slower 8.5%. The Indian Prime Minister’s Economic Advisory Council pegs

India

’s growth to be even higher at 9%, bringing the size of the economy closer to USD 2 trn mark in the next financial year.

To achieve and maintain these growth rates, it is widely recognized by policymakers and politicians across parties in

India

, that a stepping up in investments is required. To this end,

India

is in the process of further opening up to foreign direct investments. 2011 may then, well be the year when multi-brand retail is opened up to foreign direct investments, which will allow global retail giants like Walmart to enter

India

. In a strong reflection of

India

’s democratic governance, the decision has been hanging in balance since there are concerns that it will displace the unorganized retail sector which is an employer of appreciable size in the country today. The retail sector as a whole employs 7% of

India

’s workforce. On the other hand it is argued that if the sector is opened up, the displaced employment could find a place in the organised sector, it will meet the fast growing demand for

India

’s consuming class at reasonable prices and will have beneficial spill over effects on sectors like warehousing and cold chains.

While Indian authorities have tried to encourage FDI into

India

, an interesting facet with respect to direct investments has been witnessed with a rise of outbound investments from

India

. While outbound FDI is on an average about half of the inbound FDI into the country, it could be a trend that is gaining momentum. With rising global aspirations,

India

’s private companies have in particular been engaged in acquiring abroad. This trend hit a strong growth in 2006, when the value of outbound M&A deals rose to over USD 20bn, up from USD 5bn during 2005. While the numbers dwindled during the recession, in 2010, outbound deals are on an upwards trajectory again. According to some reports, this could gain further momentum in 2011 as European and American companies look to sell off non-performing and non-core assets post the recession.

A rise in outbound FDI flows plays its part in keeping the Indian exchange rate appreciation in check. However, a worrisome aspect over the recent years is the rise in FII flows or hot-money flows. In the year so far,

India

has already witnessed FII flows of over USD 25bn. FII flows have led the recent rally in the Indian equity markets - the Sensex, which is the headline Indian equity index, has risen by almost 20% over the course of the year. With the Indian economy being robust, particularly in comparison with the rest of the world, rising investor risk appetite and falling interest rates in the developed world, strong FII flows are set to strengthen further in 2011.

Strong FII flows are usually followed by currency management by the Indian central bank, the Reserve Bank of

India

, to keep a check on an appreciation of the rupee (which has seen an appreciation of 3.5% since the start of the year). Unabated currency appreciation erodes the competitiveness of employment generating export oriented sectors like gems and jewellery and textiles. However, currency management comes at its own price- it is liquidity generating and hence carries the risk of fuelling inflation. Inflation has been tough to manage for the RBI this year, a base effect and come off in food prices could provide a breather, but liquidity could keep inflation from staying in check in 2011. As a result, balancing liquidity management is likely to be a strong priority for the RBI in 2011. The interest rate hike cycle in

India

has already started earlier during the year, and the central bank could resort to aggressive measures to suck out liquidity from the system going forward.

On the policy front we should expect government focus to shift from managing the impact of the global recession on

India

to inclusive growth in 2011. The ongoing 11th five year plan for

India

(2007-12) stresses on inclusive growth, essentially referring to the fact that high growth should benefit everyone in the economy and not a restricted few. Indeed, the mid-term review of the plan states that since 2004-05 the reduction in poverty is “less than what might have been expected”. Fiscal consolidation is also expected to come back on the radar. The central government was committed to decreasing its deficit as a proportion of GDP overtime. However, the stimulus packages that followed the recession threw the process out of gear.

In sum, 2011 for

India

could see the country grappling with issues similar to those in the pre-recession period. The economy is expected to reflect strong growth, with liquidity management at the core of the central bank’s policies and inclusiveness and fiscal consolidation as priorities for the government at the centre. There could be some headway in allowing foreign investments in hitherto closed sectors like multi-brand retail on the one hand and increasing investments outside the country by

India

’s private companies.

***

Manika Premsingh is the promoter of Orbis Economics. She has worked for the last number of years as an Economist, largely looking at the Indian economy, across industries like the government, equities broking, investment banking, outsourcing and financial media, bringing with her a well-rounded perspective on macroeconomic issues.

Eye on the world, November 27, 2010

2010-11-27T12:30:00.000+05:30

This week we review the Q3 GDP revisions from the US and UK, then we look at the October CPI data from Canada and Japan, before finishing with a summary of a selection of emerging market monetary policy decisions over the past week.

1. US Q3 GDP Revision

US Q3 GDP was revised up to a 2.5% seasonally adjusted annualised rate, from the previous estimate of 2.0%, this was ahead of expectations for 2.4%. Within the results, final demand was revised up, and net exports made a smaller negative contribution. Year on year GDP is up 3.2% vs 3.0% in the September quarter. Overall the result is relatively strong, showing a continuation of the bounce back, and it could well gain momentum, but the more likely outcome is ups and downs over the next year.

2. UK Q3 GDP Revision

UK GDP expanded 0.8% from the June quarter, in line with previous data, placing the UK economy ahead by 2.8% compared to 2009. In the detail, the stronger sectors were construction, manufacturing, exports, and transport, storage and communication services. While the weaker sectors were mining and utilities. The UK economies continues to bumble along out of recession, but it is quite promising that exports are expanding, the test will be how the UK government can manage its budget and how monetary policy plays out from here.

3. Japan Consumer Price Index

Japan saw its first positive year on year inflation rate in October, with CPI increasing 0.2% year on year, vs -0.6% in September. But it can't really be said that deflation is done, as much of the increase in the CPI was related to an increase in tobacco taxes. But it will be a welcome result to the Bank of Japan, which has been trying and trying to stimulate the economy and start inflation going again, instead of the persistent and pernicious deflation.

4. Canada Consumer Price Index

Canada saw a bit of a jump in inflation in October, with the CPI increasing 2.4% year on year vs 1.9% in September. This has caused the market to anticipate further rate rises from the Bank of Canada, which last changed the key policy rate to 1.00% in September, as part of a gradual normalization of monetary policy. Canada in many ways has been relatively lucky in coming through the crisis, and is in some ways similar to Australia, with its rich natural resources.

5. Monetary Policy Review

The past week saw several emerging market economies review their monetary policy interest rate settings, including; Russia, Mexico, Georgia, Kenya, Poland, Nigeria, Angola, and Israel. The main standout was Angola, which slashed its benchmark rate -394 basis points to 18.00% as a new central bank governor took the helm. Nigeria and Israel also made adjustments to the spread between borrowing and lending around the main policy rate, as steps towards policy normalisation following the global recession. But basically the main theme was a lot of holding rates, with much of the justification being that rates were appropriate at current settings either due to inflation being contained or relatively high, and overall balancing the risks of growth and inflation.

Summary

So we saw GDP expanding in the US, and at a faster pace than expected, and with promising signs in the details. Meanwhile in the UK the results were also relatively positive. But for both countries the challenge for their economies will be to carry on the momentum of the initial bounce back - but in a sustainable manner.

On the inflation and monetary policy front, there were positive, but not fabulous results in Japan, as the first positive headline inflation figure came through in almost 2 years. While Canada saw an acceleration of inflation, and speculation of further rate hikes. On monetary policy, there was a few meetings over the week but very little action, as settings were seen appropriate in achieving the balance between growth risks and inflation risks.

Sources
1. US Bureau of Economic Analysis www.bea.gov
2. National Statistics Office www.statistics.gov.uk
3. Trading Economics www.tradingeconomics.com
4. Trading Economics www.tradingeconomics.com
5. Central Bank News www.centralbanknews.info

Article Source:http://www.econgrapher.com/top5graphs27nov.html

OE Index Update: Financial conditions reflect signs of overheating

2010-11-18T21:24:00.003+05:30

Financial conditions reflect signs of overheating

The Orbis Economics Financial Conditions Index (Real) continued to reflect slightly loose financial conditions in October for India; suggesting that the current monetary tightening cycle is far from over. In fact, going by the persistence in accommodative monetary conditions we could well expect the RBI to get hawkish going forward. The suggestion from OE FCI-R is reflected in our monthly proprietary Index of Services Production as well. The recently released index shows consolidation in growth in the recent past after showing a weak but volatile trend through the early part of the year.

About the OE FCI

Details of full report

RBI's next moves - expected and unexpected

Future of policy cycle in India

Projection for the economic scenario

Detailed view of asset market indices comprising the index

You can now request a sample copy of the OE FCI by writing in at sales@orbiseconomics.com

OE Column: Global Recession - Taking stock

2010-11-15T20:45:00.016+05:30

Its been two years since the financial crisis broke out, leading to the still-ongoing-global recession. At this point, we take stock of what has passed and the situation we still face in our guest 'OE Column: Global Recession - Taking Stock' by Dr. Rahul Giri.

***

Even though the National Bureau of Economic Research recently announced that the recession officially ended in the United States in June 2009 (that is when the economy reached the trough) the outlook remains grim because of the large magnitude of unemployment and the excruciatingly slow pace of recovery in most advanced economies of the world. As a result, some have termed this a “jobless recovery”. The biggest challenge facing most countries today is employment generation. How do we stem the increase in unemployment and create jobs?

The answer to this question lies in understanding the reasons behind the crisis, and addressing those issues in a coherent manner. To a large extent the roots of the crisis lie in excessive risk taking on the part of financial institutions with respect to mortgage backed securities and the mispricing of this risk by financial markets in the United States. As the borrowers behind these mortgages started defaulting, the balance sheets of the financial institutions started worsening, and ultimately this led to a full blown housing market crash as well as a balance sheet crisis for the financial sector. The results were large scale foreclosures and bank failures. The globally integrated financial markets implied that many advanced countries with similar symptoms soon faced the same situation. The emerging economies did not get affected as severely as the advanced economies because their financial institutions had much lower exposure to the mortgage backed securities. The main consequence of the crisis was a contraction in demand which arose out of the negative wealth shock associated with plunging home values. This in turn led to a fall in output and employment.

Therefore, in order to generate employment, a two-pronged approach is needed - (i) increasing demand and (ii) restoring the health of financial institutions so that they can carry out their primary role of financial intermediation. To implement this, governments have injected billions of dollars into the economies by (i) buying toxic assets from financial institutions to keep them afloat in the interest of ensuring the flow of credit, (ii) launching programs to help home owners who can no longer afford mortgage payments, (iii) providing subsidies to firms (and in some cases buying firms – General Motors in the US) enabling them to stay afloat and keep employees on their payrolls, (iv) facilitating cheaper credit, and hence stimulating investment and output by keeping interest rates at record low levels, and (v) increasing public expenditure to increase demand and hence generate jobs. Taken together, these actions constitute the largest fiscal and monetary stimulus and the most comprehensive support program for the financial sector in modern times.

However, the efforts to deal with the crisis pose severe challenges.

First, the rising fiscal deficits (due to fiscal stimulus) may not be sustainable, or may impose too high a cost on the future generations. A case in point is the mounting pressure on Greece to get its fiscal house in order even as it tries to deal with the effects of the crisis. Similar concerns are being raised for Portugal, Italy, Ireland and Spain. If the situation worsens, the globally integrated financial markets will ensure that the shocks from these economies are transmitted quickly to the rest of the world which may derail the fragile economic recovery. Thus, economies will have to balance the near-term needs of dealing with the crisis with long-term sustainability of these stimulus packages. A worst case scenario to consider is what happens if and when the US economy starts facing serious questions about sustainability of its stimulus package.

Second, the need for regulating the financial sector in an effort to reduce the likelihood of a repeat of the current crisis may result in over-regulation. The focus of regulations must be to solve the severe moral hazard problems that plague the financial sector, while not suppressing the inherent risk taking nature of financial intermediation. The key here is facilitating disclosure of information and flow of information to allow markets to price risk correctly. International coordination is going to be crucial in order for these regulations to be effective, and that is going to be a challenging task given the complexity of financial markets and conflicts between national versus international interests.

Third, even though developing economies have not been affected severely by the crisis, the poorer economies within this group face a number of risks. Reduced international aid (as result of the stimulus packages) will impede efforts directed towards reducing poverty and increasing education, improving child nutrition and increasing opportunities for vocational training -, which are all important components of the Millennium Development Goals. The developing economies that are heavily reliant on exports would be hurt even more because of the decline in world trade.

Lastly, the efforts to generate employment in the advanced economies have led to calls for a more protectionist international trade regime in the advanced economies. Such policies can undo the benefits that both developed and less developed economies have derived from a more open international trading regime. One cannot ignore that fact that US consumers have benefited tremendously from the cheap imports from China. The costs and benefits of trade are not limited to the effect of trade on labor markets. And, even with respect to labor markets, one would like to focus on net the job loss (jobs lost versus jobs gained). There is yet to be any conclusive evidence to support the claim that trade leads to net job loss. Adopting policies driven by populist sentiment is going to be a very myopic reaction on the part of the advanced economies.

Dr. Rahul Giri is Asst. Professor at ITAM, Mexico and has a specialization in International Trade and Macroeconomics. He is a PhD in Economics from the University of Southern California and a Masters from Delhi School of Economics.

Orbis Economics Index Update: Services production consolidates in September

2010-11-13T23:25:00.011+05:30

The Orbis Economics Index of Services Production (OE ISP) for India gained further momentum in annual growth in September 2010, suggesting recovery on a stronger footing over the past two months. Growth in the index had been largely weak with some volatility during the April-July period of FY10.
The pickup in the headline OE ISP was largely on account of strong growth in the 'Transport and Tourism Index', while the 'Communications Index' was largely flat and the 'Banking Index' showed a decline.

Significantly, the 12 month moving average; a strong indicator for future trends in services GDP is holding up well with an acceleration in its pace for the second consecutive month. This further consolidates the implication in the monthly OE ISP figure of an ongoing recovery.

Get the detailed picture -Subscribe to the OE ISP to read the full report. Write to us at sales@orbiseconomics.com.

We look forward to hearing from you!

Eye on the world, November 6, 2010

2010-11-06T12:39:00.000+05:30

This week we look at the PMI results for China and the US and reflect on their implications. Then we review the monetary policy decisions out over the past week including the announcement from the US FOMC. Then we wrap up with a look at the US employment figures for October.

1. China PMI

China saw a continued rebound in its manufacturing PMI figures for October, with the official CFLP figure rising to 54.7 from 53.8, and the the HSBC index rising to 54.8 from 52.9. Within the CFLP PMI index, the strong points were Production (57.1 vs 56.4), New orders (58.2 vs 56.3), and Inventory (49.5 vs 49.1), while the lower points were Employees (52.1 vs 52.4), and Supplier delivery (49.3 vs 50.4). So overall a reasonably good result, and reflects the continued strength in the Chinese economy - which is showing through into a higher stock market, with the SSE composite rising 15% in October.

2. US PMI

In the US, the October PMI result was also relatively positive with the main index rising to 56.9 from 54.4 driven by strength in new orders, production, and new export orders - with imports falling (a positive sign for net exports). While the non-manufacturing index also rose to 54.3 from 53.2, driven by strength in production, a large spike in prices, and back log of orders. So overall the October results for the US (unless there is some quirk to it) helps provide evidence or support for the non-double-dip scenario. So it is a positive, but at the same time the fundamentals are not quite there yet for economic growth to be anything more than subdued/baseline.

3. Monetary Policy Rates

In monetary policy the main event was the US FOMC announcing the $600 billion asset purchase program, to be implemented at a pace of $75 billion per month. The other major moves were tightening of monetary policy rates in Azerbaijan (100bps), Vietnam (100bps), Australia (25bps), and India (25bps), and loosening of monetary policy rates in Iceland (75bps), and Latvia (12.5bps). Meanwhile other banks held rates due to low inflationary pressures and a desire to keep stimulatory monetary policy conditions to aid the economic recovery e.g. US, EU, UK, Japan.

4. US Nonfarm payrolls

Back to the US, the October nonfarm payrolls pleasantly surprised to the upside, with 151k jobs added in October vs consensus 60k and previous -95k (revised to -41k). Private payrolls grew 159k in October vs 64k in September. Average hourly earnings crept up slightly 0.2% and the average work week was 34.3 hours vs 34.2 in September. So overall, as with the PMI results another good result for the US, a positive from the perspective that it's not going down, but there's still a long way to go before the ground lost during the crisis can be recovered.

Summary

So we saw relatively strong PMI results in China which showed the economy is still running strong in the middle kingdom. The US also showed strong results in its PMI stats, providing some comfort against the double-dip scenario, but not yet being able to offer more than a subdued, sub-trend economic growth outcome. In monetary policy the major banks are holding tight but other banks are acting as the case demands, with several emerging economies opting to tighten or normalise monetary policy as inflation risks trump growth risks. In employment, the US showed a strong result in October. So overall it's a scene of economic recovery, but all is not yet clear and well.

Sources:

1. CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com & Yahoo Finance finance.yahoo.com

2. Yahoo Finance finance.yahoo.com & Institute for Supply Managementwww.ism.ws

3. CentralBankNews.info www.centralbanknews.info

4. US Bureau of Labor Statistics www.bls.gov

5. Statistics New Zealand www.stats.govt.nz

Article Source:http://www.econgrapher.com/top5graphs6nov.html

RBI Rate Hike: In Line with Expectations

2010-11-03T12:08:00.000+05:30

In its policy meeting yesterday, the RBI increased its policy interest rates - repo rate and reverse repo rate - by 25bps each to 6.25% and 5.25% respectively. This move is in line with the expectation based on the Orbis Economics Financial Conditions Indices. Specifically, we had stated that "We expect a token rate hike based on the analysis of financial conditions".

The RBI has a relatively dovish tone in the policy statement, suggesting that it is probably ready to pause on interest rate hikes in the near future. However, it does keep the room for policy changes if the need be. We read this stance largely as maintaining the fine balance between short-term and medium-term conditions. Indeed, our monthly OE FCI for the H1 FY10 indicates that from an overall perspective, policy is balanced. However, future moves by the central bank will determined significantly by how short-term conditions evolve.

To keep up to date with how the policy scenario evolves, please subscribe to our proprietary Orbis Economics Financial Conditions reports. The reports include a monthly look at the overall picture for policy and the economy as well as daily probability of potential policy moves. To know more, write into us at sales@orbiseconomics.com and we will revert as soon as we can.

Update on Financial Conditions: RBI's next move

2010-11-02T00:53:00.000+05:30

The RBI meets tomorrow to announce policy changes. We expect a token hike in interest rates based on the analysis of financial conditions; even though signs of overheating in asset markets are nearly not as severe as they were even until a few days ago.

Our assessment is based on the two financial conditions indices - the OE FCI-Real, a monthly index that indicates the overall scenario and the OE FCI-Nominal, which is a daily index reflecting the more short-term changes on the ground.

To read more, please subscribe to our OE FCI report by writing in at sales@orbiseconomics.com

The detailed report will answer the following questions:

· What will be RBI’s next moves in detail?

· Are any unexpected future moves likely?

· How will monetary policy in India progress in the cycle?

· What do financial conditions say about the current and future macroeconomic scenario?

The OE FCI is our unique proprietary product that

**Quantifies the conditions that determine the RBI's monetary policy, providing clarity on conditions surrounding policy moves

** Has shown a high degree of accuracy in the past in predicting policy moves

** The only product that provides a daily probability of interest rate changes, keeping the reader up to date with the possibility of surprise rate changes

Eye on the world, October 30, 2010

2010-10-30T21:26:00.000+05:30

This week we review the Q3 GDP results from the UK and US, then look at the recent data on the US housing market and consumer confidence. Then we examine some of the monetary policy decisions announced over the week, before wrapping up with a look at the inflation and employment situation in Japan.

1. US GDP

First up is US GDP which grew 0.4% q/q (or 2.0% "annualised" vs consensus 2.0%). On a year on year basis the US economy grew 3.1% vs 3.0% in Q2. Much of the gains were in inventory investment, consumer spending, equipment investment and government spending. So overall, the result was much as expected - relatively ho-hum, showing the US economy recovering - but at a subdued and muddled pace. So of course it's not plain sailing yet, a lot of the damage done during the financial crisis needs to be repaired, and a lot of the excesses need to be unwound before a true sustainable economic recovery can take place in the US.

2. UK GDP

Over in the UK the growth rate was relatively strong at 0.8% q/q, which is a little lower than the 1.2% in Q2, but still respectable and enough to disappoint those that were hoping for another round of quantitative easing from the Bank of England. On an annual basis the British economy grew 2.8%, up from 1.7% in Q2. But as with the US, the all clear can't be signaled yet, and it is too soon to rule out further monetary policy stimulus - especially as the UK government seeks to reign in its budget deficit (maybe a bit of contracting on the fiscal and expanding on the monetary). So all the more reason to watch what happens next week!

3. US Consumer Confidence and Housing

Also out in the past week was the much watched Case Shiller House price report for August, which came in weaker on a monthly basis and slowed its increase on a yearly basis. So a disappointing result, but not a surprising result - there's no fundamental basis to expect a strong upsurge in the US housing market (and relatively small basis for sideways movement in prices). So of course it's also unsurprising to see still subdued results in the consumer confidencenumbers, albeit with a small increase to 50.2 from 48.5 in September. At the margin the result was positive in that much of the increase was driven by an increase in the future expectations index, which is sensible.

4. Monetary Policy

In monetary policy there were no major events this week, the main items of interest were Denmark, and Sweden both increasing interest rates slightly - but signaling a slow move. The other interesting part was Japan, which expanded the scope of its asset purchase program and brought forward the next meeting date (to just after the Fed's meeting next week). On that note, the next week will be a very interesting week monetary policy-wise as the US FOMC, Bank of Japan, Bank of England, RBA, and ECB are all set to announce policy decisions. The main point of attention will be what the US Fed does in terms of QEII - will it go for a shock and awe campaign, or will it go for an incrementalist approach? Either way it almost seems a certainty now that the second quantitative easing campaign is about to commence.

5. Japan Inflation and Unemployment

In Japan, deflation remained persistent with the CPI falling -1.1% vs -1.0% in August, but the jobless rate slipped slightly to 5.0% vs 5.1% in August on the back of increasing payrolls. As pointed out, the Bank of Japan expanded the scope of its asset purchase program to include lower graded corporate bonds in effort to try and stimulate the economy and try and inject a semblance of inflation. Most remarkably though was the move to hold another meeting next week just after the Fed, which signals that the BOJ is ready to act if the US makes moves to devalue the US dollar. This would not be surprising as the Japanese economy is traditionally an export led economy, and with recent trade results faltering somewhat it may make for an interesting week indeed.

Summary

So we saw the US with relatively subdued growth in Q3, but growth nonetheless. But without showing major signs of strength it has all but paved the way for a second campaign of quantitative easing by the US. Meanwhile the UK grew a little faster, and perhaps even blew the case for an extension of the asset purchase program by the Bank of England. We also saw a weakening US housing market and a US consumer stuck in limbo. On the monetary policy front most held, a couple increased, but the real monetary policy action will come next week. In Japan deflation remained, jobless declined slightly, and the BoJ lined itself up to counter any possible dollar devaluing determinations from the Fed next week.

Sources:

1. Bureau of Economic Analysis www.bea.gov

2. UK National Statistics www.statistics.gov.uk

3. Conference Board www.conference-board.org & Standard & Poorswww.standardandpoors.com

4. CentralBankNews.info www.centralbanknews.info

5. Trading Economics www.tradingeconomics.com

Article Source: http://www.econgrapher.com/top5graphs-30oct.html

Eye on the world, October 16, 2010

2010-10-17T00:41:00.001+05:30

After adding columns to our blog last week - we now add another feature - Eye on the World. Eye on the World is a weekly feature that looks at the most important economy related releases from around the globe over the previous week. We believe that as India integrates with the world economy, it is no longer sufficient to cover only India specific trends in order to either understand the current context or forecast future trends. This feature, therefore, provides relevant information on trends that are shaping the world economy and hence impacting the Indian economy as well.

We would like to thank econgrapher.com for allowing us re-publish their report on our website.

Top 5 releases of the week

This week we look at the recent trade data out of the US and China, then we look at developments in the US inflation situation and what implications it may have. We also review the inflation situation in the EU before reviewing the US consumer sentiment numbers.

1. China Trade Data

First up is the September trade data from China, imports hit a record high at $128.1 billion (24.1% y/y), and exports of $144.9 billion (25.1% y/y) leaving a trade surplus of $16.9 billion. The September quarter also saw trade rising on a quarterly basis with both exports, imports, and the trade surplus rising vs the June quarter; also both exports and imports hit a quarterly record high. The rise in imports is perhaps one of the most interesting aspects in terms of China's role in the global economy. But of course the part getting much of the attention is the trade surplus...

2. US Trade Data

The other big trade data out this week was from the US; the August trade deficit ballooned out to -$46.3 billion, above consensus -$44.3 billion, and July's -$42.8 billion. This time the drivers of the expansion in the deficit were not just from petroleum goods, the nonpetroleum deficit grew to $35.9 billion from $33.2 billion - signaling a cyclical normalisation of the the US trade deficit. The point is that the US trade balance started to head towards zero because of cyclical factors, but it will need to be driven by structural factors if the US is ever going to see a positive trade balance.

3. US Inflation Situation

Also from the US this week was inflation data, which showed a considerably subdued inflation situation in the US. Month on month headline CPI rose 0.1%, and was unchanged on a core basis. Year on year the headline rate reduced from 1.2% to 1.1%, and the core rate fell to 0.8% from 1.0%. However looking at the chart below the ISM prices sub-indexes from both the PMI and NMI show a relatively mixed story - it says that businesses are reporting paying higher prices, which means either an eventual pick up in inflation or margin compression.

4. Euro Zone Inflation Situation

In Europe inflation increased in August, with the headline rate rising to 1.8% from 1.6% in July, but core staying flat at 1%. The main drivers were transport, alcohol & tobacco, and housing. Of course the usual extremes were seen with Ireland facing deflation of -1.0%, followed by Latvia with a 0.3% annual rate; while at the other end were Greece with 5.7% and Romania at 7.7%. Thus at least on a headline basis inflation is by no means gone in the EU, but the message of a fragile, gradual, and uneven recovery for the EU remains

5. Reuters/University of Michigan Consumer Sentiment

Finally, the US Consumer Sentiment index slipped slightly to 67.9 from 68.2 in August, and below consensus 69. The future expectations index fell to 60.9 form 62.9 previous, and the current conditions index rose to 79.6 from 78.3 previously; showing that consumers are slightly happier about things now and slightly less optimistic about the future. Much of the uncertainty is driven by delays on decisions around tax cuts, but also the general uncertainty that accompanies such recovery as the one we're seeing... and of course all the talk about QE2 (which is really an implicit admission by the fed that things are not looking good) will hardly help.

Summary

So we saw China producing record trade results in the September quarter, with the trade balance rising and also raising eyebrows, but of course the continued rise in imports is one of the most interesting features. On the other side of the coin, the US is seeing a cyclical reversal of the ground it made in reducing its trade deficit - the message is that the US will continue to see trade deficits until structural forces drive change.

On the inflation front the US September results showed an exceedingly subdued trend in inflation, but the price indexes in the PMI indexes suggested that the string of disinflation could be temporary (but much will depend on the course of the recovery). Over in the EU the inflation picture was a bit different, with headline rates moving up (but core remaining flat) as the fragile, gradual, and uneven recovery unfolds.

Back to the US, the consumer sentiment figures showed a mixed situation for consumers as uncertainty related to the strength or otherwise of the economic recovery weighs in (in spite of a relatively healthy retail sales figure). So it will be interesting to see if the Fed effectively throws in the towel with another round of quantitative easing. Watch this space!

Sources

1. China Customs www.customs.gov.cn

2. Bureau of Economic Analysis www.bea.gov

3. Bureau of Labour Statistics www.bls.gov & Institute for Supply Management www.ism.ws

4. Eurostat epp.eurostat.ec.europa.eu

5. Reuters/Univesity of Michigan customers.reuters.com

Article Source:http://www.econgrapher.com/top5graphs16oct.html

OE Column: Cautious new highs for Indian Equities

2010-10-13T01:45:00.004+05:30

Starting this week we add a new kind of posts to our blog. So far our blog posts have updated you for the latest on our proprietary research. We now introduce columns to the site. This first column by Manika Premsingh addresses the trend of rapidly rising equity markets we have been witnessing recently in the context of the macro-economic backdrop.

******

The recent surge of liquidity in the equity markets is being seen as a bit of an inexplicable phenomenon. But from a purely macroeconomic perspective, it is in fact not so. This column looks at excerpts from a blog-post for my personal blog (Ideas in Economics) I had written on May 24, 2009, when the Sensex was hovering just below 14K.

I had argued that we have strong reason to believe that equity markets would in fact reach new highs by as soon as the end of 2009 or FY10. The post was therefore titled: Sensex at 22K - why not? While the subsequent drought in India and debt problems with select European economies postponed this expected trend is playing out at present.

Reproduced below are relevant excerpts from the post that argue why the equity markets should gain momentum. These explain the current situation as well.

" But the question this post tries to raise is – despite all this, are there reasons why the Sensex could touch giddy highs that breach previous marks in a short span of time (read next 7-10 months)? Lets look at the factors that could get us there:

Liquidity – As the slowdown took root around the world last year and through earlier this year, the policy makers responded swiftly, albeit predictably, by aggressively cutting interest rates, and pumping more money into the system than ever before. In an increasingly integrated international economy, government and central banks around the world came together to pump in cash into the system. The first signs of recovery are appearing on the horizon, though it is still some way off. The question now is, what happens to the surplus liquidity generated in the system. So far it has been relatively clogged by risk aversion, lesser investment avenues and lower demand. But sooner or later, it will find its way into both consumption and investments. Both of which will only impact the equity markets positively.
Investment avenues – As the surplus liquidity finds investment alternatives, it will clearly be with two facts in the backdrop – (i) the still slow paced world economy and (ii) some amount of risk aversion, giving way to fresh financial experiments. In this context, India as a market is likely to look rather attractive to FIIs. The developed world is unlikely to be out of the woods anytime soon. This puts the focus on emerging markets. Among these, stable countries from a structural, political and economic perspective – like India – will be attractive. In essence, higher liquidity coupled with fewer investment options could mean more investments in the select choices available.
Business cycle and reforms – There seems to be reason to believe that the Indian economy maybe one of the first ones to ride out of the slump. For one, its not as badly hit as the trade dependent emerging market counterparts, and we are not even getting into the issues facing the developed world here. Second, the domestic consumption story remains sound. In fact, the weather gods are showing initial signs of kindness – the monsoons have hit A&N islands in time, a recent headline read. Third, we have just witnessed an election with a very pleasing result. This will only add to higher expectations from the country. To the extent that equity markets lead improvements in the real economy, it is clear, that we should expect a steady uptake in the sensex even before the economy starts its process of achieving a set of growth highs.

The three points seen together really say this – going forward India will look an exceedingly attractive market given its potential and the encouraging signs we are seeing on the economy. With excess liquidity generated in the system coupled with fewer investment avenues, and the fact that equity markets lead growth on the ground, its seems plausible that equity markets will grow far in excess of corporate profitability. The question that then remains is, how much? Can the Sensex really cross all time highs at this point of time – it remains to be seen!"

From then to now, we have come a long way - in fact, we are now widely anticipating new highs largely on account of FII flows. It does need to be noted however, that the latest rally is being driven by largely by liquidity as economic indicators in India are looking strong. But, the overall macro-economic context is different from the sustained period of increase we witnessed largely from 2004-2007. We are still operating in a weak global environment and leading indicators for India are not looking indicating runaway growth either. For instance, our proprietary monthly Financial Conditions Index, which is a lead indicator for the economy, is at balanced levels with a bias towards softening. While the strong monsoon provides a basis for growth, a rollback of the stimulus and further weakness in the global economy could keep Indian growth in check.

In sum, while we expect liquidity to drive markets - even to new highs in the short-term, in the medium-term we should be prepared for some correction in both equities and growth.

To read the full post on the blog, click here

Index update: Orbis Economics Index of Services Production shows recovery

2010-10-11T07:29:00.010+05:30

The Orbis Economics Index of Services Production (OE ISP) for India showed a slight pick up in growth rate in August 2010 from its July levels. However, growth in services production is tepid compared with an year ago. While the 12 month moving average is still strong; it does show a decline for the third consecutive month. Our OE ISP 12mma in particular, is a strong indicator for future trends in services GDP.

Services GDP accounts for over half of India's economy,trends for which are available only on a quarterly basis at a comprehensive level. The OE ISP is a monthly index that bridges the gap in information on this significant sector.

While this month's data is a relief from both the incremental and overall perspective; we would like to watch out for development in future trends to ascertain the strength of the recovery.While the global economy is still weak and weighs the services sector down, a good monsoon season is a strong positive for India's economy.

The sectoral indices - the Transport and Tourism Index in particular, have shown a smart pick up in August; reflecting domestic recovery.

To read the full report you could subscribe to the index by writing in at sales@orbiseconomics.com

Primer: Orbis Economics Financial Conditions Index (updated)

2010-09-26T01:52:00.002+05:30

The Orbis Economics Financial Conditions Index (OE FCI) is the first of our proprietary research indices for India. This indicator gives a consolidated view of the prevailing conditions in the Indian financial markets – equity, debt and currency.

Why is the OE FCI required?

For the fast developing Indian economy, the role of asset markets is on the rise. Asset markets are a channel for transmission of monetary policy changes to the real economy and suggest the way forward for policy actions.

The FCI condenses the information contained across asset markets that reflect the financial conditions in the system, even if they are otherwise giving mixed signals. The OE FCI comprises of three asset market indicators – interest rates, exchange rates and equity prices.

What is the usefulness?

The usefulness of the India FCI is evident from its relationship with monetary policy actions and GDP growth. The OE FCI accurately forecasts the monetary policy for India. To forecast monetary policy, we have two types of FCIs - one is a monthly FCI which gives big picture forecasts, in line with the expected trajectory for the economy, the other is a daily forecast which is particularly useful in predicting the probability of unexpected policy moves. The OE FCL also serves as a lead indicator for India's economic growth.

When is the Index released and how can it be accessed?

The monthly update for the index is released during the third week of the month (between the 15-19th of every month) and the daily index, as the name suggest is released for each working day for the financial markets. We typically put up a blog-brief every month. If you would like to subscribe to the index as it releases, please send an e-mail to sales@orbiseconomics.com .

Can the Working Paper on the OE FCI be accessed?

An abstract of the OE FCI Working paper is available free of cost on the Social Science Research Network, a leading site for research papers across disciplines and organisations. The abstract can be accessed by clicking on this link. To purchase the entire paper, please drop an e-mail at sales@orbiseconomics.com. In its free version, the OE FCI Working Paper was now on the ALL TIME HITS for the SSRN e-journal – Forecasting and Simulation (Monetary).

India In Indicators

2010-09-21T14:34:00.005+05:30

The next in Orbis Economics proprietary research

India In Indicators

A guidebook to tracking the Indian Economy

The soon to be released book will...

- Serve as a how-to guide to tracking the Indian Economy

- Be a source of reference for details on India economy

-Provide an insight into recent trends in the economy

To request for an abstract, book a copy or advertise write to us at sales@orbiseconomics.com

or order your copy online for the e-book by clicking the button below

RBI hikes rates: As predicted by our proprietary Financial Conditions Index

2010-09-17T01:39:00.001+05:30

As we mentioned in our post yesterday - our ongoing financial conditions research continues to indicate a high probability of a hike. The RBI delivered a hike of 50bps on the repo rate and 25bps on the reverse repo rate.

Do note, that as per the post we put out yesterday - only by looking at the overall macroeconomic conditions (particularly in terms of a look ahead) we mentioned that we would not expect a hike. It is only the probability indicated by a combination of both our real and nominal indices that indicated as such.

Going forward, we would - now more than ever - keep a closer look at the OE FCI-Nominal. With the overall conditions not warranting a hike, any future hikes would be a function of financial conditions given their inter-linkages with the real economy.

In the current scenario, we do not rule out any unexpected policy tightening. To keep abreast with any unexpected changes in RBI policy, you can subscribe to our proprietary Financial Conditions reports. The reports include a monthly look at the overall picture for policy and the economy as well as daily reports on probability of unexpected policy moves. To subscribe, write into us at sales@orbiseconomics.com and we will revert as soon as we can.

September Update on the Financial Conditions Index: Focus on the RBI

2010-09-15T12:31:00.003+05:30

The RBI meets tomorrow to announce policy changes. The opinion seems divided on whether the central bank will or will not hike policy rates on the street.

As always, we look to our financial conditions indices for guidance.

The headline Orbis Economics Financial Conditions Index (Real) reflects a balanced monetary stance i.e. no change is required at this point. However based on the combination of the real and the daily nominal index (OE FCI-N) we derive a high probability of a hike. This suggests that a tightening in policy, if it happens, would be based more on immediate financial conditions rather than overall macroeconomic conditions.

To read more, please subscribe to our OE FCI report by writing in at sales@orbiseconomics.com

The detailed report will answer the following questions:

· How do the present financial conditions fare against past performance?

· What do the individual asset market conditions tell us?

· What will be RBI’s next moves in detail?

· Are any unexpected future moves likely?

· What do financial conditions say about the current and future macroeconomic scenario?

· How will monetary policy in India progress in the coming cycle?

OE FCI update - Financial Conditions Suggest Mild Tightening Ahead

2010-08-19T08:13:00.002+05:30

Original Release Date: 16th July,2010

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Overview

We began our monthly reports onthe Orbis Economics Financial Conditions Index (OE FCI) in January 2010. Itstarted at a real index that condenses the trends in major financial markets(debt, equity and currency) in India and gives (i) an insight into expectedmonetary policy decisions. It is designed such that at a level of 100 monetaryconditions are seen as balanced, a level above 100 reflects monetary loosenessand below 100 levels suggest that the policy is tight and (ii) serves as a leadindicator for economic growth.

Starting this month, we introducea variation to the existing OE FCI– the OE FCI-Nominal (OE FCI-N). This is a dailyindex that maps financial conditions in India to map policy trends with greatertimeliness. The monthly index will henceforth be referred to as OE FCI-R. Inthe next section, we measure how thepredictive capabilities of our indices have fared against the surprise ratehike by the RBI on July 2. The third section updates the reader on the latesttrends in OE FCI-R and OE FCI-N.Finally, we present an outlook for RBI’s monetary policy meeting scheduled forlater in the month.

Introducingthe Financial Conditions Index - Nominal

So far we have been publishing amonthly report on the OE FCI- the real index (which will henceforth be calledthe OE FCI–R). However, given the fast moving nature of financial conditionsand RBI actions, we felt the need for a more frequent indicator.

To fill this gap, we launched the OE FCI–Nominal onour website a few weeks ago as a daily index. The OE FCI-N keeps an everyday pulse on financial and hence monetary policyconditions, while the OE FCI-R gives us a big picture of the financialconditions and is a lead indicator for economic activity.

The OE FCI-N is released for eachday that the financial markets are open, but with a lag of a day. So, forinstance, the OE FCI-N for July 15,2010 will be available on July 16,2010.Using OE FCI-R and OE FCI–N as weights, we arrive at a daily probability forrate hike by the central bank the following day.

RBI ratehike and the OE FCI

In our previous OE FCI monthlyupdate we had said the following about RBI’s policy released in mid-June:“….we expect that the RBI would like tomaintain a cautious stance than tighten policy in a hurry. This argument ishinged on tight financial conditionsdespite a strong economic growth and elevated inflation. We do, however,believe that if there is a sudden andsteep loosening in financial conditions the RBI would move in swiftly totighten policy.”

This fact has played out in theRBI’s move on July 2, 2010. We observed a significant loosening in liquidity –as was visible from our daily OE FCI-N levels (refer to the Table above). June30, 2010 was the last OE FCI-N update prior to the mid-meeting rate hike.

The index rose by 0.6points overthe previous day, as compared with the average rise of 0.1points for the month.Not surprisingly, we therefore saw a higher probability of a rate hike on thatday at 75% before the RBI actually hiked rates.

Note however, that with a 25bpshike in repo rate and reverse repo rate, the RBI has also signaled that it isnot in a hurry to hike rates – which correlates with our analysis from the OEFCI–R.

The trend inOE FCI

OE FCI-R: The OE FCI-Rfor June showed a pickup from May – reflecting an almost balanced stance forthe Central Bank. It came in at a value of 99.4, up from a value of 97.8 duringthe previous month. It is however weaker than its value of 101.9 during May2009. In terms of components, both the currency and the equities index rosewhich offset the increase in the increase in debt markets index.

OE FCI-N: The OE FCI-Nfor the month of July so far reflects an increase in absolute levels to 126.1from 124.6 during the month of June. However, the average daily change is downto 1.5 points while it was at 2.8 points during June. This means that whilefinancial conditions are loosening, the pace of increase has got checked. Thisis likely on account of the RBI action on July 2 – and indeed we have observedthe debt market index rise as short-term rates have risen.

As of July till date, theprobability of a rate hike is at 59%. While this average figure maskssignificant daily variations – it does bring home the point that theprobability of another rate hike is higher than average.

Outlook forRBI Policy meeting

Given the normalization in the OEFCI-R and the persistent increase in OE FCI-N we expect an increase in RBIpolicy rates – repo and reverse repo – by another 25 bps each, and no more.

We will keep a close watch on thedevelopments in the OE FCI-N to make for any potential modifications to thisview as the meeting draws closer.

What is the probability of tightening by RBI today?

2010-07-27T06:50:00.002+05:30

The chart on the left indicates the probability of a tightening in monetary policy later today.

The probability has been higher than 50% for most part of July 2010 - except the period soon after the surprise rate hike. Note that the probability levels indicate the chance of a rate hike on the next working day.

The probability of a rate hike on June 30, 2010 - the last data available before the surprise hike - was at a high of 75% (after staying at 50% or sub-50% levels on all days but one during the previous month)
The probability estimations are based on our regular financial conditions analysis. This analysis is in the form of the Orbis Economics Financial Conditions Index (OE FCI) - real and nominal. The real index is a monthly indicator which gives the big picture with respect to financial conditions and hence future policy as well as broad economy direction. The nominal index is a daily indicator that tracks developments in financial conditions in a scenario where policy actions are often unpredictable.

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First Look: The Orbis Economics Index of Services Production

2010-07-10T02:23:00.009+05:30

Update:
The OE ISP is now ready to roll. The first issue appears in October. To subscribe to the OE ISP please write into us at sales@orbiseconomics.com and we will get back to you ASAP.
Original Post:
The next in our forthcoming indices is the Orbis Economics Index of Services Production (OE ISP). As the name suggests, the OE ISP traces movements in India's services sector on a monthly basis. The OE ISP is a beta-version in its present form and we will continue to monitor it closely as well as make ongoing changes to improve its performance, even though its performance is clearly above average going by the back-testing.

As an India economist for the last number of years, I often felt the need to track services at a (i) cohesive level and (ii) with higher frequency. So far we have the IIP, released monthly by the CSO as an indicator of economic activity. However,services accounts for about 55% of the Indian GDP, and while it is also the most dependable one with respect to performance, a close watch on it helps in (i) detecting early economic trends and (ii) assessing the turns in business cycles.

The OE ISP comprises of monthly services activity based on meaningful services' indicators. A look at the graph suggests that at a quarterly basis, the index serves as a coincident (to lead) indicator to the services GDP. Its value lies in the fact that (i) it has a monthly frequency, and hence a trend is visible early on in the quarter (ii) the timeliness (around a fortnight after the end of the quarter) gives a heads-up on the GDP figures for the quarter.

We look forward to your feedback!

Monthly report on the Real Index: Orbis Economics FCI – Cautious Monetary Policy Indicated

2010-06-29T21:10:00.006+05:30

Orbis Economics FCI – Cautious Monetary PolicyIndicated

Original Publishing date: June 16, 2010
The Orbis EconomicsFinancial Conditions Index (OE FCI) for India fell to a low of 97.8 in May2010, from a value of 101 during April. The OE FCI condenses movements in three financialmarkets – debt, equity and currency; adjusted for inflation. A balanced monetary stance of the central bank isindicated by a level of 100 for the index. Index values higher than 100 suggestan accommodative monetary stance, while values below 100 indicate a tightmonetary policy.

The sharpdecline in the May index value raises the following questions:

·        What is the cause of thedecline?
·        What are the implications ofthe drop?
·        What does the latest level meanfor RBI’s monetary policy?

Causeof the decline: The decline in theOE FCI is not entirely surprising given the tightening in liquidity observed inMay. The equity markets index declined sharply, reflectingthe trends in the broader equity market movements during the month. Atightening liquidity was also evident from the rise in short-term interestrates, which resulted in a further shrinking of the index.

Small increase in the rupee index due to depreciationin the currency was not enough to contain the overall liquidity tightening. Moreover, inflation in May 2010 came in higherthan consensus expectations at 10.16% yoy also resulted in a shrinking in theOE FCI.

Implications of the drop: The OE FCI at the current levels indicatestight financial conditions. This suggests that monetary policy tightening isnot called for at the present point in time.

That said, we do not see the latest decline asworrisome. For one, it is only one month of tightening in conditions, followinga long period of relatively moderate to accommodative monetary policy measures.However, if this situation continues into a quarter, it would imply asystemically tight scenario.

Second, reports on economic growth are contrary towhat the financial conditions indicate. GDP grew by an above trend 8.6% yoy inQ4 2009-10 and industrial production figures clocked double digit growth forthree straight months, coming in at 17.6% yoy during April 2010. Whilefinancial conditions lead real growth, as is evident from elevated index levelsin the recent past, good growth itself also feeds into the virtuous cycle.

Overall, the key take away from the latest data pointis that while the latest index value is not worrisome, another two months ofsub-100 levels could indicate systemically tight conditions.

Implication for RBI’s policy:The subject of RBI’s nextpolicy move has been debated and discussed a fair amount recently with strongeconomic growth reports coupled with high inflation. May inflation figures camein at a double-digit 10.16% yoy.

Do note that high inflation actually lowers thefinancial conditions index, in contrast with the more direct implication thathigh inflation could mean overheating in the economy.The point of a real index is to look at the netconsolidated impact of financial conditions – strength in financial conditions mayhave little impact on the economy if inflation is already very high.

So how do we reconcile the inflation argument? If we observeaccommodative financial conditions along with high inflation – it reflects aneed for monetary policy tightening. Hence, at the present point in time, we expect thatthe RBI would like to maintain a cautious stance than tighten policy in ahurry. This argument is hinged on tight financial conditions despite a strongeconomic growth and elevated inflation.

We do, however, believe that if there is a sudden andsteep loosening in financial conditions the RBI would move in swiftly totighten policy.

First Look at the Nominal OE-FCI

2010-06-23T22:10:00.003+05:30

The OE FCI-Nominal, is an extension of our monthly headline OE FCI which is a real index. The daily nominal OE FCI helps us keep a more regular pulse on the expected monetary movements of the RBI; while the monthly real index gives a big picture as well as a being a lead indicator to economic activity. More on the OE FCI monthly can be found here.
The chart shows trends in the OE FCI-Nominal. An uptick in June 2010 so far is evident, even though on the whole the index is flat on average. A steeper movement, which will be indicative of the timing of monetary tightening.
The Nominal index, released with the lag of a day, is updated everyday on the right-hand side bar of the site.

First thoughts: Yuan appreciation - implications for India

2010-06-21T17:38:00.005+05:30

With China deciding to allow gradual appreciation in the Yuan overtime, this will have implications for the Indian economy. China accounts for ~9% of India's total goods' trade and over 19% of goods' trade deficit. An appreciation of the Yuan could, overtime, decrease the goods' trade deficit from China as the Indian rupee becomes competitive against it. A significant proportion of India's metal exports are to China, so the sector could benefit. Also, to the extent that that Chinese imports are 'inexpensive', an appreciated Yuan could benefit the manufacturing sector. This is as far as the direct current account implications are concerned.

In terms of capital account implications - (i) the Chinese Yuan appreciation could encourage increased international capital flows into India, in so far as they are seen as competing investment destinations. (ii) Also, this decision also reflects confidence in the strength of the Chinese economy, which is a boost to global capital flows given China's significance in the global economy. (iii) Most significantly - an appreciation of the Yuan has implications for the US current account deficit - and depending on how the decision plays out, could correct some debt of the US economy.

Our forthcoming release...

2010-06-11T03:21:00.026+05:30

The next in Orbis Economics proprietary research

India In Indicators

A guidebook to tracking the Indian Economy

The soon to be released book will...

- Serve as a how-to guide to tracking the Indian Economy

- Be a source of reference for details on India economy

-Provide an insight into recent trends in the economy

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or order your copy online by clicking the button below

Introducing the Orbis Economics Financial Conditions Index

2010-06-11T00:38:00.007+05:30

The Orbis Economics Financial Conditions Index (OE FCI) is the first of our proprietary research indices for India. This monthly indicator gives a consolidated view of the prevailing conditions in the Indian financial markets – equity, debt and currency.
Why the OE FCI required?

The usefulness of the India FCI is evident from its relationship with monetary policy actions and GDP growth. The OE FCI accurately forecasts the monetary policy for India. It also serves as a lead indicator for India's economic growth.
When is the Index released and how can it be accessed?

The monthly update for the index is released during the third week of the month (between the 15-19th of every month). We typically send out e-mails for a detailed version of the OE-FCI. From now on, however, we will also put up a blog-brief every month. If you would like to subscribe to the index as it releases, please send an e-mail to sales@orbiseconomics.com .
Where can the Working Paper on the OE FCI be accessed?

The OE FCI Working Paper is now on the ALL TIME HITS for the SSRN e-journal – Forecasting and Simulation (Monetary)