It?s almost as if the stock markets had anticipated the GDP numbers, so resilient have they been despite all the bad news from the Eurozone, the weakness in markets abroad and concerns surrounding inflation and interest rates. After coming off by nearly 11 % from its early April peak, the Sensex has already recovered almost 6% and rules at 16,945. India?s GDP for 2009-10 has coming in at a strong 7.4% and even if it?s on a low base of 6.7%, is ahead of expectations. The number was boosted by the March 2010 quarter GDP of 8.6% and the the good news is that the growth is being powered by investment and manufacturing; fixed investment growth recovered 7.2% year-on-year.
What was particularly stunning about the March 2010, number was the growth in manufacturing which came in at a stunning 16.3%. The trend has been reflected in the results of India Inc; net sales for a sample of 2,500 companies (excluding financials and oil companies) grew just under 30% in the three months to March 2010 and although some of it is due to the low base effect and some due to the sharp rise in the prices of commodities, it?s nonetheless impressive. Of course, some of the larger companies have turned in numbers that were below the Street?s expectations; also the Indian operations of companies like Tata Motors didn?t fare as well as estimated.
A look at the numbers for 2009-10 shows that for a sample of 1977 companies, the increase in net sales has been just under 11% which is below the 19% reported in 2008-09. Going ahead, the top line could be under some pressure, partly because of the higher base, the moderation in the prices of some commodities and also because companies will have less pricing power as competition intensifies.
Already, the consumption numbers have been disappointing rising just 2.6% year-on-year, down from 5.3%, the impact of raging food inflation. But, as HSBC Global Research points out, with agricultural prices now easing, consumption should get a kick over the coming quarter, helped too by rising incomes as a tightening labour market spurs wage growth. More important, investment rose 17.7% in the three months to March 2010, partly due to infrastructure spending. Given that the growth momentum is likely to persist, there is a belief that the Reserve Bank of India (RBI) would be prompted to increase interest rates; HSBC beliefs there would be some urgency to the tightening cycle, in other words a surprise hike before the next meeting in late July. That?s because easing headline inflation is mainly due to the sequential decline in food prices and doesn?t signal a cooling of underlying prices.
As of now the bond markets aren?t showing any signs that rates will be upped in a hurry. They have been surprisingly steady with the yield on the ten-year benchmark ruling at levels of 7.55%. That?s way below the 8% that has been anticipated by the market given the large quantum of government borrowings, of around Rs 3.32 lakh crore for 2009-10. Indeed bonds recouped their losses after the RBI set a higher- than ?expected cut off price on the benchmark bond; contrary to expectations, the cut-off yield was 7.6% against expectations of 7.62%.