Friday, February 24, 2012

Indian economy - A status report

The good news first. India's 10 year bond yields have started falling since November 2011 in anticipation of lower inflation and reduction in repo rates.

Since later December 2011, the equity markets have staged a smart rally. The volatility indices like the India VIX too appears to be moving towards the trend rate.

Another sign of the stability returning to the markets is the exchange rate. After its steep decline since March 2011, the exchange rate has been appreciating since the second half of December 2011.

The bellwether HSBC Purchasing Manager's Index (PMI) has been improving since November 2011. The composite index for January which covers both the manufacturing and service sectors rose from December’s 54.7 to 59.6 to signal the sharpest increase in activity in nine months.

However, there are certain disturbing signals. Though India's core inflation rate (Thanks Mostly Economics)appears to be trending downwards, it is well above the comfortable 4% range.

The overall economic outlook, while looking up, is some distance away from normalcy. India appears to have had a double-dip economic slowdown since the Great Recession struck the world economy. Starting 2008, the economy has declined twice and the last quarter of 2011 may be the second trough.

Industrial production too has mirrored the fate of the GDP with two troughs during the same period.

Of greatest concern, as highlighted in the recently released report of the Prime Minister's Economic Advisory Council is the declining rate of investment, savings and gross domestic fixed capital formation. None of these important indicators have recovered from the 2008-09 slowdown.

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