Dr Rupa Rege Nitsure

Chief Economist
Bank of Baroda
+91-22-66985216

Weekly Macro Perspectives

January 1, 2011

(a) Agriculture

• According to India’s Ministry of Agriculture, “India may witness record food grains
production in the 2010-11 crop year, surpassing the previous high of 234.47 mln tns
seen in 2008-09, due to an increase in the acreage under cultivation in the ongoing
Rabi season”.
• Any fall in rice production from 2008-09 levels can be compensated by higher
production of wheat, pulses and coarse cereals. A projected decline of about 4 mln tn
in rice production in the 2010-11 crop year vis-à-vis 2008-09 levels would be largely
compensated by an expected surge in pulses production by 2 mln tn, coupled with
an over 1-mln tn surge in wheat output this year.
• According to India’s Ministry of Commerce, India will export 2.5 mln bales of cotton
by Feb 25, 2011 as prices have almost doubled in the international market within a
year. Out of the 5.5 mln bales of exportable surplus, 3 mln bales have already gone.
For the remaining 2.5 mln bales, the export will start from Jan 11th.

(b) Euro has 1-in-5 chance of lasting decade, says CEBR (UK)

• According to a well-known U.K. based Think Tank – The Centre for Economics and
Business Research [CEBR], the euro currency area has only one-in-five chance of
surviving in its current form over the next ten years because of competitive
imbalances between its members.
• Sovereign debt crises in Greece & Ireland have rocked euro nations this year, leading
some commentators to speculate that Germany could eventually lose patience with
bailing out its more profligate neighbours, triggering a split in the currency bloc.
• According to CEBR, for the euro to survive in its current form, five things need to
happen: - (1) German growth needs to be 3.0%-plus for at least four years, (2) A
European Bail-out Fund sufficient to bail out Spain and Italy needs to be constructed,
(3) A system whereby the EU has some control over economic policy in the weaker
economies needs to be constructed and encapsulated in a new treaty, (4)
Government spending in the weaker economies needs to be cut by around 10.0% of
GDP and (5) Living standards in the weaker economies need to be cut by an average
15.0%.
• The Think-Tank argues that “making all these things happen at the same time is
unlikely to prove either politically or economically acceptable. There is no modern
history of falling living standards in peacetime on the scale necessary to keep the

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 euro in its current form. Therefore, there is at best a one in five chance that the euro
will survive in its current form”.

(c) Indian economic highlights this week

• Based on its all-round performance during the year 2009-10, Bank of Baroda has
been selected as the Bank of the Year for India by the Banker Awards, 2010
(United Kingdom). The Banker’s Bank of the Year Awards, now in its 11th year were
designed to recognise great achievement and are even more important today as the
global banking industry faces huge challenges. The Banker’s awards continue to be
the premier industry competition for recognition in banking.
• Growth in India’s key infrastructure industries fell to a 21-month low of 2.3% (y-o-y)
in Nov.’10 primarily on account of a decline in cement production and petroleum
refining. The production of six core industries had grown by 8.6% in Oct’10 and 5.9%
a year ago.
• Indian government’s gross tax collections grew 26.8% (y-o-y) during Apr-Nov’10 to
Rs 4.181 trln accounting for 56.0% of the budgeted target.
• Indian government’s fiscal deficit declined 39.08% to Rs 1.86 trln during Apr-Nov’10
versus Rs 3.06 trln last year, partly due to the Rs 1.06 trln revenue from the sale of
spectrum for high-speed telephony and broadband services.
• India’s current account deficit widened to a larger-than-expected USD 15.8 bln in Q2,
FY11 from USD 12.1 bln in Q1, FY11 due to a worsening trade deficit. Apart from a
rising merchandise import bill, lower invisible receipts too contributed to widening
of the current account deficit.
• Net capital inflows to India rebounded to USD 20.5 bln in Q2, FY11 on the back of
buoyant equity inflows. Overall the BOP surplus declined from USD 3.7 bln in Q1,
FY11 to USD 3.3 bln in Q2, FY11.
• While Indian Banking Industry’s Non-Food Credit grew handsomely by 23.5% (y-o-
y) as on Dec. 17th, 2010, its Aggregate Deposit growth remained lackluster at 14.7%
(y-o-y) reflecting a huge mismatch of 880 bps in growth. However, Indian Banking
Industry’s investment in corporate securities like CPs, bonds & debentures, shares,
etc. increased healthily by 45.7% (y-o-y) as on Dec 17th..
• While the M3 growth stood at 15.0% (y-o-y) as on 17th Dec., the growth in Reserve
Money was much stronger at 21.3% as on Dec. 21st, 2010 primarily on account of
higher amount of Currency in Circulation.
• India’s Foreign Exchange Reserves (FER) marginally increased by US $429 mln
during the latest reported week and stood at US $295.03 bln as on Dec. 24, 2010.

(d) India’s food inflation shot up to 14.44% (y-o-y) as on 18th Dec., 2010

• Indian inflation continues to stay at uncomfortably high levels.

• Just over a week, inflation in food articles sharply increased by 1.08%, in non-food
articles by 0.82% and in fuels by 0.80%.
• The primary contributors to food inflation in the latest reported week were meat
products, milk, fruits & vegetables (esp. onions), coarse cereals and spices.

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• Elevated levels of non-food articles’ prices and consistent pressures coming from the
global commodity prices pose significant risk to future inflation trajectory.
• Inflation risks have “come to the fore,” the RBI said in a report on its website
uploaded on Dec. 30. The central bank blamed higher food prices on rising wages
and changing consumption patterns. Even the government has revised upwards
its own projection of headline inflation for end-March, 2010.

(e) Weak outlook for government debt market

• The yield on GoI 10-year bond closed at 7.90% on 31st Dec.

• The calendar year 2010 was quite tough for the fixed income markets as they
grappled with liquidity tightness and relentless inflation pressures. The RBI had to
raise policy rates six times this year, though in baby steps.
• Liquidity tightness is expected to continue in the near term also with the government
continuing to pile up cash balances and credit growth of banks outpacing the deposit
growth.
• Banks have been borrowing more than Rs 1 trln daily for the last few weeks leaving
little room for fresh bond purchases.
• Analysts are expecting bond yields to harden further in 2011 with inflation surging
high and likely higher borrowing requirements of the government next year on
account of huge subsidy burden.

(f) Rupee gained 4.1% in 2010, though outlook quite uncertain

• Indian rupee posted its best single-day gain on Dec. 31st (Friday) while it rose 4.1%
(y-o-y) boosted by record foreign fund investments in Indian equity/debt markets.
• Rupee closed the calendar year at 44.70/71 per USD. Most of the gains in rupee on
Friday mirrored the gains in stocks and the dollar’s broad losses versus the major
currencies.
• Indian shares rose more than 17.0% in 2010, to be among the best-performing major
Asian markets this year, after closing 0.6% higher on Friday, with most investors
expecting the rally to continue.
• The FIIs’ investments in equities during 2010 (excluding the last trading session)
totaled US $ 29.2 bln versus US $ 17.5 bln pumped in last year.
• The outlook for rupee remains uncertain for the year 2011 as while India looks well
positioned to attract larger portfolio inflows; rising oil prices, widening current
account deficit and lingering problems in euro area may cap the gains in Indian
currency.

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(g) Stock investors to stay wary of rising cost-push pressures

• In the global context, the biggest gainer this week was India with Sensex gaining
2.2%. The Sensex rounded off 2010 with gains of 17% for the full year.
• Within sectors, all stocks in India closed the week in the positive except for the
energy stocks (which faced uncertainty on account of deregulation of fuel prices).
• While India’s structural growth story remains attractive in relative terms, the rising
cost pressures originating from basic industrial raw materials, commodities, wages
and interest rates are likely to affect the corporate earnings.
• Investment strategies are going to be more sector and stock specific. The sectors that
are likely to be less affected by inflation negatives are likely to outperform the
broader market.

(h) Oil prices at US $ 91.38 a bbl in NY on 31st Dec, 2010

• Crude oil prices increased 12.0% during 2010. They closed the year at US $91.38 per
barrel in New York and at US $ 94.75 a barrel in London.
• “Global demand surged in the third quarter of 2010, led by China and emerging
markets”, according to the International Energy Agency, which advises the U.S. and
other industrialized nations on energy.
• The agency raised its oil demand forecast in December, and now expects demand
next year to grow by 1.3 million barrels a day, adding to the rise in 2010 of 2.5
million barrels a day.
• The New York oil price, which had wobbled for much of the year between US $70
and US $80 broke out of that band a few months ago, spurred by a weakening dollar,
positive demand outlook and the extreme winter weather in the US and Europe.

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