Friday, March 20, 2009

>India Week Ahead (MERRILL LYNCH)

Grey Holi, but track Chinese data, Asia may be stabilizing
India celebrates Holi – the festival of colors – to welcome the Basant – the spring - Wednesday. Yet, lives get greyer, with the global recession snaking into the economy: we ourselves cut growth recently here. Commerce secretary Pillai estimates that exporters could retrench 1.5/~10mn workers by March. And yet, surely, Holi cant be all bleak? Well, we think the economy’s bottoming, but bottom out will likely stretch end-09. Our Asian economist, T J Bond, expects China’s credit/ industry data to support our above consensus 8% 09E growth here. Do read our GEM strategist, Mike Hartnett, on why Asia is stabilizing here.

(-) 1.3% industrial growth: Oil PSU strike impacts ~40bp
At home, we expect January IIP to contract 1.3% Thursday. February should be worse, given a high base effect. Falling exports – (-)13% Feb 09 – are severely impacting industry. Whither Indian domestic demand? Well, Brazilian and Russian January IP fell ~17%. Note the oil public sector undertaking strike contracted crude petroleum (4.2% of IIP) 8.1%, impacting industrial growth 40bp.

Intervention to balance INR, March credit; US$8bn ‘limit’
We expect continued tactical intervention against contagion from Asian fx volatility. At the same time, the RBI remains circumscribed by credit demand that peaks seasonally in March. We estimate US$8+bn intervention – US$18bn October! - would stress money markets after mid-March ~US$10bn advance tax payments. To support liquidity, the RBI has reverted to selling fx to oil companies against oil bonds. Incidentally, bouts of INR volatility in no way dilute our view of BoP risks overdone here. Lower oil prices have already halved the monthly - February - trade deficit to ~US$4bn. Do find our fx strategists’

To see full report: INDIA WEEK AHEAD