[T.S.R:18064] Fwd: India: Signs Of An Entrenched SlowDown (Nomura)

India: Further signs of a slowdown We expect real GDP growth to remain below potential and inflation to moderate as tight monetary policy and weaker global growth cap demand. Activity: We expect real GDP growth in Q3 to slow to 6.9% y-o-y from 7.7% in Q2, reflecting a broad-based slowdown in private consumption, fixed investment and, more recently, exports. We expect GDP growth to remain below 7% y-o-y in Q4. Although we expect GDP growth to rise in 2012, the downside risk to the economy has risen, mainly due to prolonged turbulence in global financial markets.

Inflation:

Headline WPI inflation in October remained high at 9.7% y-o-y, unchanged from September. Although we expect WPI inflation to stay above 9% in November, it is likely to moderate to around 8% in December and fall to below 7% by March 2012 on base effects, lower commodity prices and weaker growth, the weaker rupee notwithstanding. Our expectation of a slightly negative output gap in 2011-12 and lower commodity prices should keep inflation at around 6-7% y-o-y in 2012-13.

Policy:

The Reserve Bank of India (RBI) in October indicated that further rate hikes are unlikely as long as inflation continues to moderate, as the RBI expects. Our view is that the RBI will stay on hold as we also expect inflationary pressures to wane and the growth slowdown to broaden in coming months. On the fiscal front, rising subsidies and lower revenues should result in a higher fiscal deficit of 5.5% of GDP in FY12 versus a budget estimate of 4.6%. We expect similar fiscal slippage in FY13 and FY14, which leaves little room for a fiscal policy boost, if required, especially given public debt is the highest in emerging Asia, at 65% of GDP.

Risks:

If global conditions continue to deteriorate, we believe exports will be further hit and corporate investment will slow on weaker demand expectations. Further depreciation of INR due to weak capital inflows and a large trade account deficit would mitigate any positive effects on inflation from falling commodity prices. Revival of the reform process is the key upside risk.  

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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