Indian policy makers have been boosting growth in Indian Markets at the cost of macro stability risks, reflected in high inflation, a widening current account deficit and tight inter-bank liquidity due to low deposit growth.
In 2010/11, we expect the value of crude oil imports to be high due toincrease in crude prices by almost 15 per cent and an increase in the quantitiesimported. The oil import bill is expected to rise to $103 billion in 2010/11 and to$120 billion in 2011/12. Amongst the non oil imports we expect a comparativelyslower growth in the case of gold, silver imports and a stronger growth in theremaining segments. The overall merchandise imports on balance-of-paymentsbasis are expected to rise to nearly $354 billion (up 18 per cent) in 2010/11 and$414 billion (up 17 per cent) in 2011/12.
WPI headline inflation and non-food inflation have moderated to 7.5 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 should also improve over the next three months as recent aggressive deposit rate hikes will help improve deposit growth. Private sector capex has been accelerating over the last 10 months and it will soon begin to reflect in the form of commissioned capacity. At the 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 reduce the above macro stability risks.
Overall macro conditions will remain vulnerable over the next 4-5 months. Inflation, while moderating, will remain above the RBI’s comfort zone; while we believe the current account deficit will also stay relatively high.
Recent optimism in the developed world growth outlook has increased the risk of a potential rise in crude oil prices to $110-120/bbl. Similarly, there is additional risk of pass through of agricultural and commodity prices.
