Indias Economic Outlook for 2011

Indian policy makers have been boosting growth in Indian Markets at the cost of macro stability risks, reflected in high inflation, a widening present account deficit and tight inter-bank liquidity due to low deposit growth. In 2010/11, we anticipate the value of crude oil imports to be high due to increase in crude costs by virtually 15 per cent and an boost in the quantities imported. The oil import bill is expected to rise to 3 billion in 2010/11 and to0 billion in 2011/12. Amongst the non oil imports we anticipate a comparatively slower growth in the case of gold, silver imports and a stronger growth in the remaining segments. The overall merchandise imports on balance-of-payments basis are expected to rise to nearly 4 billion (up 18 per cent) in 2010/11 and4 billion (up 17 per cent) in 2011/12. WPI headline inflation and non-food inflation have moderated to 7.five percent YoY and 7.9 percent YoY in November 2010 from the peaks of 11 percent YoY and 8.9 percent YoY (in April 2010) respectively. Monthly trade deficit narrowed to 7.1 percent of GDP, annualised in November, from the peak of 10.8 percent of GDP, annualised in August 2010. Inter-bank liquidity really should also improve over the next 3 months as recent aggressive deposit rate hikes will aid enhance deposit growth. Private sector capex has been accelerating over the last 10 months and it will soon start to reflect in the form of commissioned capacity. At the very same time, monetary tightening as reflected in the 300 bps rise in short-term rates (91-day T-bill yields) over the last eight months is beginning to help lessen the above macro stability risks. Overall macro conditions will remain vulnerable over the next 4-five months. Inflation, whilst moderating, will remain above the RBIs comfort zone while we think the present account deficit will also remain fairly high. Recent optimism in the developed world growth outlook has increased the risk of a potential rise in crude oil prices to -120/bbl. Similarly, there is additional risk of pass by means of agricultural and commodity prices. May 21st, 2011Filed under: Agricultural Economics