• India’s GDP for Q1FY2011 came in at Rs1,132,778 crore, up 8.8% YoY. The GDP growth was in line with the consensus estimate and higher than the 8.6% Y-o-Y growth seen in the previous quarter.
• The GDP growth for the quarter was strong due to a revival in the farm sector’s growth coupled with a strong growth in the services sector. Further, the community expenditure for the quarter stood at 6.7% YoY, higher than the 1.6% Y-o-Y growth seen in the previous quarter. Meanwhile the industrial growth, though sturdy at 10.3% YoY is showing signs of moderating sequentially as the high base of the previous year comes into play.
• Going ahead, the GDP growth is expected to remain strong on the back of an improvement in the farm sector’s growth even as the industrial growth is likely to slow due to a higher base. The government anticipates the GDP growth for the fiscal to remain strong and exceed the 8.5% growth as projected by the RBI. 

• The trade deficit for July 2010 came in at $12.93 billion, widening by 76% YoY and 23% sequentially. Exports continued to expand for the ninth consecutive month but the rate of expansion slowed to 13.2% YoY from 30.4% YoY seen in the previous month. Meanwhile the rate of expansion for imports increased to 34% YoY from 23% YoY seen during the previous month. The import growth was led by the 50% Y-o-Y expansion in the non-oil imports.  

• The IIP’s growth for July 2010 rebounded to a strong 13.8% YoY after having moderated to single digits in June 2010 and stood well above the consensus estimate of 7.8%. The volatile growth displayed by the index is largely due to the erratic growth trend displayed by the capital goods segment. The year-to-date (YTD) growth now stands at 11.4% as compared to 4.7% for the previous year.
• Although the lower base for July as compared to June did have some part to play in the robust growth figures for the month under review, yet its role stood limited as revealed by a strong month-on-month (M-o-M) growth figure of 7%. On an absolute basis, the July 2010 IIP reading came in at 330.8 as compared to 308.4 in the previous month.
• The growth in the industrial output during July 2010 was led by the manufacturing segment, which posted a growth of 15% YoY followed by the mining and electricity segments with 9.7% and 3.7% Y-o-Y growth respectively. The growth in the capital goods segment rebounded to an all-time high of 63% YoY (vs a drop of 0.3% in the previous month), dispelling concerns about a slowdown in investments.
• The steep volatility in the IIP reading has raised concerns relating to the reliability of such data and there is the possibility of the July 2010 reading being revised significantly downward, as was the case for the June 2010 figure. Nevertheless, the IIP growth for the year is expected to be in double digits, indicating that the economy seems on course to meet the 8.5% GDP growth target as estimated by the RBI.

Leading indicators:

• The sales of commercial vehicles (heavy, medium and light) registered a growth of 32.2% YoY in August 2010 but on a sequential basis, however, the growth was lower at around 1.8%.
• The cement dispatches for July expanded by 4.5% YoY after contracting by 3.5% YoY in June 2010. 
• The total telecommunications (telecom) subscriber base (total GSM subscribers) in the country grew by 2.9% MoM in August 2010, higher than the 2.6% growth seen in the previous month. 
• Capital goods production grew by a robust 63% YoY for July 2010 from a drop of 0.3% YoY in the previous month.  

• The Y-o-Y inflation rate for August 2010, aided by a higher base, eased to 8.51% as compared to 9.78% recorded in the previous month. On a sequential basis, however, the index reading stood in line with that of the previous month.
• The inflation figures are based on the new WPI series launched with 2004-05 as the base year compared to 1993-94 earlier. The new series has 676 items compared to the 435 commodities earlier and includes items that have a higher relevance. Additionally, the number of sources for collating the price data is around 5,000 vs around 2,000 previously, leading to an index that is more relevant today 
• On an annual basis, among the categories, inflation in primary articles eased to 15.76% on the back of a higher base and lower food articles inflation. Manufactured products inflation came in at 4.78%, remaining within the RBI’s comfort zone of 4-5%, and that for fuel power & light was at 12.55%.
• Going ahead, inflation is likely to moderate further as (1) the low base of the previous year wears off; (2) food prices moderate after the monsoon, which has been normal so far; and (3) the impact of the recent rate hikes undertaken by the RBI come into play.

• The credit offtake (non-food) registered a growth of 19.8 % YoY (August 27, 2010), largely in line with the 19.9% Y-o-Y growth seen during the previous month (July 30, 2010). 

• Deposits registered a growth of 14.4% YoY (as on August 27, 2010), higher than the 14% Y-o-Y growth seen during the previous month (July 30, 2010). The deposit growth has been lagging credit growth; as a result the RBI during its monetary policy review, hiked the reverse repo rate by 50 basis points even as the repo rate was hiked by 25 basis points. The hike in the reverse repo rate is expected to lead to a further hike in the deposit rates by banks which would provide an impetus to deposit growth. 

• The CD ratio contracted to 70.7% (as on August 27, 2010) as compared to 71.3% as on July 30, 2010. Meanwhile, the incremental CD ratio too contracted to 92.7 % for the period under review as compared to 96.6% seen during the previous month. 
   

• The growth in the current account and savings account (CASA) deposits declined to 12.1% YoY (as on August 27, 2010) compared with the 17% Y-o-Y growth seen for the previous month (as on July 30, 2010). 
• As a result, the CASA ratio as on August 30, 2010 at 12.9% was lower than the 13.5% seen as on July 30, 2010.
   

• The money supply (M3) growth as on August 27, 2010 stood at 15.1% YoY, higher than the 14.7% Y-o-Y growth seen for the period ending July 30, 2010.

• The liquidity situation deteriorated during the month due to the payment of advance tax by corporate houses. The average deficit during the MTD period (September 1-20, 2010) stood at about Rs8,800 crore as compared to a deficit of Rs1,070 crore during the previous month.

• For the MTD period (September 1-20, 2010), the call money rates expanded to about 5.09% from about 5.05% in the previous month. The increase in the money market rates was on account of the tight liquidity situation as well as the 25-basis-point increase in the repo rate undertaken by the RBI during the month. 
• During its monetary policy review meet, the RBI narrowed the widtth of the liquidity adjustment facility (LAF) corridor by inducing a steeper hike of 50 basis points in the reverse repo rate while raising the repo rate by 25 basis points. The action seems to be driven by a desire to add teeth to the monetary policy tools, thereby ensuring desired transmission of policy rate actions.  

• The yields on the G-Secs (ten-year) stood at 7.98% as on September 20, 2010, up by around four basis points from the previous month’s levels. The G-Sec yields across almost all maturities expanded on a M-o-M basis. However, the expansion was flattish as the bond market had already factored in a hike in the key policy rates prior to its announcement. 

• With the yields for almost all maturities rising on an M-o-M basis, the yield curve shifted upward as compared to its position in July 2010.  

• The chart above plots the quality spread (AAA Corp less G-Secs for ten-year maturity). Spreads at 76 basis points as on September 20, 2010 were lower than that seen during the previous month as the ten-year treasury yield increased while the yield on corporate bonds contracted.

• The Indian Rupee appreciated against all the other major currencies of the world during the month. The rupee appreciated by around 2% against the US Dollar and the Japanese Yen while appreciating by 1.4% and 0.1% against the British Pound (GBP) and the euro respectively.

• The commercial paper rates for three-month maturity contracted by seven basis points. Meanwhile the rate for the six-month and 12-month maturities expanded by eight basis points and 25 basis points respectively as on September 20, 2010 over that of the previous month. 
• The spread between the OIS spot rates and one-year x one-year forward contract rates stood at around 59 basis points, which indicates the Street expects a 59-basis-point hike in the key policy rates over the next 12 months. The spread is down from the 72 basis points seen in the previous month due to the policy rate hike undertaken by the RBI during the month.  

• During the MTD period (September 1-20, 2010), the average daily volumes expanded in both the F&O and cash segments. 
• During the MTD period, the average daily volumes in the cash segment expanded by 6.44% MoM while the F&O volumes expanded by 23.29% MoM. 

• During the MTD period in September 2010 (September 1-17), the FIIs were net buyers while the domestic mutual funds were net sellers. For the MTD period in September 2010 (September 1-19) the FIIs bought equities worth Rs13,620 crore while the mutual funds sold equities worth Rs2,440 crore.

• The total industry average AUM (equity + debt) expanded by 3.3% MoM during August 2010
• The net resources mobilised in equity schemes during August 2010 stood at negative Rs2,742 crore as the redemption resources outpaced the resources raised through the new and existing schemes. 

• In August 2010, Reliance Mutual Fund retained its leadership position with a 15.2% market share, largely in line with that of the previous month. 
• Meanwhile, HDFC Mutual Fund and Birla Sunlife Mutual Fund gained market share during the month while ICICI Prudential Mutual Fund lost market share during the month.

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