Inflation breaches RBI’s 2010 estimate; trade deficit down

Inflation breaches RBI’s 2010 estimate; trade deficit down

Trade deficit for February came in at $8.96 billion, down 13% on a sequential basis, as export growth outpaced import growth.

Exports expanded by 12% sequentially while non-oil imports contracted by 1.31% and oil imports expanded by 8.27% sequentially.

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The Index of Industrial Production (IIP) for February, aided by the low base of the previous year, registered a strong growth of 15.1% year-on-year (y-o-y). The manufacturing segment posted the highest growth of 16% y-o-y, followed by the mining and electricity segments with 12.2% year-on-year (y-o-y) and 6.7% y-o-y growth, respectively.

The inflation rate for March came in at 9.9% y-o-y, breaching the Reserve Bank of India (RBI)’s expected rate of 8.5% for FY10.

In order to rein in inflation and inflationary expectations, the central bank hiked key policy rates along with the cash reserve ratio (CRR) by 25 basis points each in its annual monetary policy review meet on 20 April. Globally, the macro economic data is showing signs of revival with improving leading indicators and higher manufacturing production.


The credit offtake (non-food) registered a growth of 16.9% y-o-y (as on 26 March), exceeding the 16% credit growth estimate set by RBI for FY10.

RBI remains optimistic about a revival in growth in FY11 and has estimated a credit growth of 20% for the fiscal.

The credit-deposit (CD) ratio expanded to 71.1% (as on 26 March). Meanwhile, the incremental CD ratio, too, increased to 70.9% for the period under review compared with 67.1% in the previous month. The liquidity situation remained comfortable in the banking system. On average, banks parked Rs66,389 crore worth of money with RBI under the reverse repo window during the month-till-date (MTD) period (1-21 April).

The yields on the 10-year government securities stood at 8% as on 21 April. Government securities yields of short-term maturities (one- and three-year) contracted on a sequential basis, largely due to lowerthan-expected rate hikes announced by RBI in its annual policy review meet. This is also reflected by contraction in bond yields after the policy announcement.

Meanwhile, government securities yields of long-term maturities expanded on a sequential basis.

In addition to the rate hikes, RBI also introduced proposals to encourage bank funding to the infrastructure sector. By hiking key policy rates and CRR, RBI reinforced its stance of containing inflation and anchoring inflationary expectations. However, real interest rates remain negative.

Thus, with the domestic economy displaying a sustained recovery over the past few months, we expect RBI to undertake further tightening measures, albeit in a calibrated manner.

Equity markets

During the MTD period, the average daily volumes contracted in the futures and options segment, while expanding in the cash segment. The total industry average assets under management contracted by 4.3% sequentially during March.

The net resources mobilized in equity schemes during March stood at Rs1,854 crore as redemptions outpaced resources raised through new and existing schemes. During the MTD period in April, foreign institutional investors remained net buyers, while mutual funds remained net sellers.