Economy: Economy expands by 8.8% in Q1FY201

• India’s gross domestic product (GDP) growth for Q1FY2011 came in at 8.8% year on year (YoY). The growth for the quarter was strong due to a revival in the farm sector’s growth coupled with a sturdy growth in the services sector. Going ahead, the GDP growth is expected to remain solid on the back of an improvement in the farm sector growth even as the industrial growth is likely to slow due to a higher base.

• The Index of Industrial Production (IIP)’s growth for July 2010 rebounded to a strong 13.8% YoY after having moderated to single digits in June 2010. The steep volatility in the IIP reading has raised concerns relating to the reliability of such data and there is a possibility of the July 2010 reading being revised significantly downward, as was the case for the June 2010 figure.

• The 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 stood in line with that of the previous month. The inflation figures are based on the new Wholesale Price Index (WPI) series launched with 2004-05 as the base year compared to 1993-94 earlier.

• The trade deficit for July 2010 came in at $12.93 billion, widening 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.

• The US Federal Reserve (Fed) has said that it is willing to ease its monetary policy further to boost the American economy and lower the unemployment rate (read more under Global round-up).

Banking: RBI hikes key policy rates, taking them close to the neutral rat

• In its review of the monetary policy, the Reserve Bank of India (RBI) hiked the repo and reverse repo rates by 25 basis points and 50 basis points to 6% and 5% respectively. After the recent round of rate hikes, the policy rates have been brought close to the neutral rate. As a result, there is the possibility that the RBI may take a decision to pause the rate hike exercise after monitoring the inflation level and the global economic developments.

• The credit offtake (non-food) registered a growth of 19.8 % YoY (August 27, 2010), largely in line with the 19.9% year-on-year (Y-o-Y) growth seen during the previous month (July 30, 2010). The credit offtake could slow down further if banks hike the lending rates after the recent policy rate hikes undertaken by the RBI.

• Deposits registered a growth of 14.4% YoY (as on August 27, 2010). The hike in the reverse repo rate is expected to lead to a further hike in the deposit rates by the banks which would provide an impetus to the deposit growth.

• The credit-deposit (CD) ratio contracted to 70.7% (as on August 27, 2010) as compared to 71.3% as on 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 month-till-date (MTD) period (September1-20, 2010) stood at Rs8,800 crore as compared to a deficit of Rs1,070 crore during the previous month.

• The yields on the government securities (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.

Equity markets: FIIs remain net buyer

• During the MTD period in September 2010 (September 01-17), the foreign institutional investors (FIIs) were net buyers while the domestic mutual funds were net sellers.

• During the MTD period (September 1-20, 2010), the average daily volumes expanded in both the futures and options (F&O) and cash segments.

• The total industry average assets under management (AUM; equity + debt) expanded by 3.3% month on month (MoM) during August 10, 2010. The net resources mobilised in equity schemes during August 2010 stood at negative Rs2,742 crore as redemption resources outpaced the resources raised through the new and existing schemes.

Insurance: Life Insurance growth slows on a higher base

• The growth in the annual premium equivalent (APE) of the life insurance industry slowed to 19% YoY in July 2010 as the low base of the previous year began to wear off. The private players, however, fared well during the month, leading them to regain some of the market share lost earlier, as they pushed sales of the unit linked investment plans (ULIPs) before the new regulations kicked in from September this year.

• In July 2010, the gross premium underwritten for the general insurance industry grew by 22.8% YoY. The private players posted a growth of 24.1% YoY while the public sector players registered a growth of 21.9% YoY during the month.

Banking stocks outperform
Since our last issue (Sharekhan Monthly Economy Review dated August 23, 2010), the BSE Bankex has outperformed the broader market, posting a return of 10.7% as compared to 8.3% for the Sens*x over the same period. The outperformance is likely to have been driven by strong macroeconomic growth indicators such as GDP and IIP numbers. The banking sector has received favour among investors in recent months, as evidenced by its strong outperformance compared to the benchmark indices. As a result, the valuations of the sector in general have turned rather ripe. Hence, we advise investors to turn selective while investing in the banking stocks. Having said that, we remain structurally positive on the domestic banking sector from a long-term perspective.