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ECOSCAN JULY 2010

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This issue
1. Executive Summary 2. Business Outlook 3. Global Economic Scenario Real GDP growth rate YoY % CPI Inflation Industrial Production Growth rates 4. India Economy Performance Indicators GDP Growth rate Inflation WPI YoY % IIP growth rate RBI Key Ratios 5. External Sector Foreign trade Exports Imports FDI INR exchange Rate 6. Infrastructure 7. Commodities Crude Oil, Natural Gas Sugar Steel 8. Sector Update Automobiles & Insurance Fertilizers & Tea

ECOSCAN July 2010


Monthly Report on Indian and Global Economic Scenario

1. Executive Summary
Indian economy continues to create waves. The International Monetary Fund (IMF) has revised its forecast of Indias economic growth for 2010 to 9.4 per cent from 6.4 per cent made in October 2009, even higher than the Government of Indias own projection of 8.5 per cent growth for 2010-11. IMF expects growth in the Oct-Dec of 2010 to be an impressive 10.3 per cent, higher than even Chinas 9.8 per cent for the same period. With the IMFs vote of confidence in the Asian emerging market economies, and particularly for India, Indian equities closed at a 29-month high on July 13 a level last seen in February 2008. With FIIs buying $8 billion worth of stocks this year, Indian equities outperformed peers such as China and Brazil. Adequate cash levels with domestic institutions and a good monsoon are providing a short-term trigger to the market. May Industrial production was up 11.5% lower than expectations. Though it was the eighth straight month of double-digit growth, the growth rate has slowed down compared to April 2010, as output lag in the economy appear to have been filled, giving rise to capacity constraints. Slowing growth of the manufacturing sector is not an indication of lower demand. It is a combination of high demand and capacity constraints, which is a recipe for higher prices. Cropped area affected by below-normal rainfall improves this time. Crop area under cultivation was up 9.1% as of July 22, 2010 (Typically, volume growth in farm output tends to track the area under cultivation). As of July 22, 2010 overall crop area under cultivation for summer (kharif) crop stood at +9.1%YoY compared with +9.4%YoY as of July 15. This compares with decline of 8.6% in crop area under cultivation last year (as of July 17, 2009). With about 60% of the crop sowing already been completed, the rainfall trend over the next two weeks will be critical to determine the outlook for agriculture production. Inflation remaining in double-digits for five consecutive months with the concern being continued stickiness in primary articles up 16.3%YoY and the uptrend in nonfood manufactured product inflation. Other concerns include the rise in asset prices as well as mounting wage pressures. The Reserve Bank of India (RBI) has once again increased the policy rates by raising the repo and reverse repo rates by 25 bps and 50 bps respectively in its first quarter monetary policy review for 2010-11. This is the fourth time since February 2010 and second time within the month of July 2010 that RBI has increased the policy rates. At this juncture of the economic revival, this is a step in the right direction. However, it is to be mentioned that despite policy rates being hiked four times since February 2010 its desired impact on inflation has not been visible. For example, food inflation still remains in the range of 12-13%. It is believed the distortions on the supply and distribution sides of food to be the primary reason for high food inflation and unless something concrete is done from the Government's side in order to address such supply side constraints, monetary tightening itself may not be very effective in taming inflation.

World Economy Highlights


On the whole, the world economy has enough momentum at present to absorb the crosswinds of Europes fiscal crises. Though growth is uneven across the major economic regions, a global growth of about 4% in 2010 is expected. After the worst recession since the 1930s, oxygen from public stimulus programs has helped the U.S. privatesector economy gradually get back on its feet. U.S. growth is expected to remain strong over the rest of 2010 and then be slowed in 2011 by the drag of federal deficit reduction. Canadas economic growth is currently the strongest in the G-7. Domestic demand has passed the pre-recession peak and is now in an expansion phase. At this rate, excess capacity will be absorbed within two or three quarters. The Canadian expansion is likely to remain strong through the rest of this year and then slow next year in response to U.S. fiscal austerity. IMF has revised upward growth forecast for China for 2010 to 10.5 per cent from 10 percent earlier. Based on these revisions, global economic growth forecast too has been revised from 4.2 per cent (as estimated in April 2010) to 4.6 per cent. While advanced economies are expected to record a growth rate of 2.6 per cent emerging economies are expected to grow at 6.8 per cent in 2010. The GDP of emerging Asia, still the global driver, has now passed the prerecession peak. Exports are also at alltime highs for China and many other countries of the region. Asia, in short, is doing very well despite headwinds from the deleveraging of U.S. consumers and from the substantial exposure of its export production to the euro zone.

3. Global Economic Scenario


US GDP grew at a 2.4% annual pace, less than forecast, after a 3.7 % first quarter gain that was larger than sdfdfdsd previously estimated. The US economy slowed in the second quarter as a scarcity of jobs eroded consumer spending. Russias economic outlook continues to improve and the Govt. may raise its 4% forecast for economic growth this year. U.K. economy expanded 1.1% in the three months through June, the fastest in four years.The peace of U.K. second quarter economic growth was a blip and it isnt time for the Bank of England to begin removing stimulus.

U.K. inflation slowed less than economists forecast in June10 as higher costs of goods from fuel to food kept the rate of price increases above the Governments 3% limit. European inflation accelerated to the fastest pace in more than 1.5 years on rising energy costs and unemployment held at the highest in almost 12 years. Brazils inflation rate in july rose at the second slowest pace since 2006, cementing expectations the central bank will soon stop raising interest rates as Latin Americas biggest economy cools.

Latest Figures: Brazils industrial production fell 1 percent in June from a month earlier, the biggest drop since December 2008. U.K. manufacturing increased for a second month in June in the best calendar quarter for factory production in more than a decade as the economic recovery strengthened. Russias Industrial production might suffer in July-August from the recent abnormal heat in Russia with high temperatures of at least 36 degrees Celsius.

4. India Economy Performance Indicators


Quarterly GDP Growth India's economy may grow at 8.4 percent in the current fiscal year, led by local consumer demand, robust manufacturing and services growth, as per central bank survey of economists. Going forward, incorporating a further easing of the favorable base effect which in the coming months will likely to result in industrial growth moderating to 8-9%, It is expected that our FY11 GDP will grow at 8.4%. This is based on 4% growth in Agriculture, 9.4% in industry and 9% in services.

Industrial Production
May Industrial production was up 11.5% lower than expectations However, it is seen with no need for undue concern as data trends both at the macro (loan growth, non-oil imports) and sectoral front (auto, cement, diesel consumption) are healthy. The numbers to moderate from June due to a fading base effect, but May data indicates that the moderation has already begun. This is reflected across segments though it is more prominent in capital and consumer goods. On a sectoral basis growth was led by manufacturing, up 12.3%, mining up 8.7%, and electricity, up 6.4% Capital goods up 34.3% though lower than the 70% growth seen last month.

Inflation
The CPI for industrial workers saw a slight moderation to 13.7% YoY in June, vs.13.9% the previous month. Reflecting the sustained uptrend in primary articles (which comprise close to 60% of the CPI and 22% of the WPI), the CPI continues to trend higher than the WPI (which stood at 10.6%YoY in Jun) Reserve Bank has said that it sees headline inflation cooling down to 6 per cent by March 11 from the present double-digit level and that its policy action will now be focused more on ensuring that the inflation moderates to a comfortable level.

Key Interest Rates


Cash Reserve Ratio Repo Rate Reverse Repo Rate PLR SLR US Federal Fund Rate 1 Month LIBOR 3 months LIBOR 6.00 % 5.75 % 4.50 % 11.75 % 25 % 0.12 % 0.29 % 0.42 %

The Reserve Bank of India (RBI) has once again increased the policy rates by raising the repo and reverse repo rates by 25 bps and 50 bps respectively in its first quarter monetary policy review for 2010-11. This is the fourth time since February 2010 and second time within the month of July
2010 that RBI has increased the policy rates. At this juncture of the economic revival, this is a step in the right direction. However, it is to be mentioned that despite policy rates being hiked four times since February 2010 its desired impact on inflation has not been visible. For example, food inflation still remains in the range of 12-13%. It is believed that the distortions on the supply and distribution sides of food to be the primary reason for high food inflation and unless something concrete is done from the Government's side in order to address such supply side constraints, monetary tightening itself may not be very effective in taming inflation.
Although the steps taken by the RBI may reduce the momentum of economic growth in the short term, it is believed that the benefits of taming inflation will eventually outweigh the cost of monetary tightening. Another important step taken by the RBI was the shift of bank's lending rates from Benchmark Prime Lending Rate (BPLR) mechanism to Base Rate system. Effective from 1st July 2010, all banks will be required to price loans

with reference to their base rate which will be published by the respective banks on a regular basis. Banks will not be allowed to lend money below their base rate as against the earlier practice of lending below BPLR to large borrowers. Such a move by RBI will benefit retail (individual) borrowers the most as there will be no more cross subsidization of loans in favor of big corporate borrowers. Given the growth and inflation outlook, it is expected that RBI will raise rates by at least 50bps more in 2010. This may take the repo and reverse repo rate to 6.25% and 5% respectively by Dec 10.

Credit Off-take
In addition to tightening frictional liquidity due to the recent 3G telecom auctions as well as advance tax payments; there are also signs of tightening structural liquidity. This is reflected in the continued uptrend in credit growth coupled with the deceleration in deposit growth. On a cumulative basis (Apr-July), incremental loans were Rs 1,576bn vs. Rs200bn in the same period last year, reflecting an increase of 21.3%YoY.

5. External Sector
Indias merchandise exports grew more than 30% (in dollar terms) for the fifth straight month in june, boosting economic growth. Exports were driven by Engineering goods, iron ore, gems, jewelry and Chemicals. The trade deficit for April-June 2010 was estimated at US $ 32267 million which was higher than the deficit of US $ 23475 million during April-June 2009.

Latest Figures: Foreign direct investment (FDI) inflows in the country declined by about 45 per cent to $1.41 billion in June this year against $2.58 billion in June 2009. The sectors, which attracted foreign investment, include services, telecommunication, construction activities and computer software and hardware. The government said that FDI during the first quarter of 2010-11 was $5.80 billion against $7.01 billion in 2009-10.

Rupee Reference Rates

Rupee Reference Rates


Rupee depreciated on its value during month of July10 against all major currencies except for US $ where a marginal improvement is registered. Morgan Stanley is poised to turn outright bearish on Indias rupee on signs the economy is slowing and as a technical chart signaled the currency may be poised to weaken. Although the view of Morgan Stanley is in contrast to Citigroup Global Research August report, but Morgan Stanley is bearish because the rupees economic fundamentals are deteriorating as growth slows, the balance of payments declines and because monetary policy may not be sufficient to temper inflation they have bearish sentiments over rupee.

6. Infrastructure
India: Infrastructure Growth
Following the 5%+ growth seen in recent months, the
six core infrastructure industries index moderated to 3.4%YoY in June. Coal production, which expanded by less than 1%, was the biggest drag on the core sector output for June. Country's coal production has been remaining flat over the recent months as the mining major Coal India has not been able to get enough rail wagon combinations or rakes to transport the mined coal. Crude oil production, which grew by 6.8%, stayed marginally lower than the petroleum ministry's projection. With the monsoon rains covering all parts of the country, the growth in cement production also moderated.

7. Commodities
Henry Hub Natural Gas Index
Natural gas spot prices at the Henry Hub are trading significantly above year-ago levels. At $4.75 per MMBtu in trading on July 28, prices at the Henry Hub were nearly 36 percent, or $1.26 per MMBtu, higher than year-ago levels.

EIA expects the Henry Hub natural gas spot price to


average $4.70 per million Btu (MMBtu) this year, a $0.75-per-MMBtu increase over the 2009 average and $0.22 per MMBtu higher than in last months Outlook.

Crude Oil Index


Crude oil futures continued to gain strength, rising above $82 a barrel for the first time since May, and ignoring a set of disappointing U.S. economic data Tuesday that hurt prices in other markets.

Baltic Dry Index


After decline of 3 consecutive months BDI has entered in consolidation zone with mild recovery. It has reached to 2114 points on 9th August 2010.

Commodities : SUGAR

Domestic Sugar Prices rise marginally in July 2010, the domestic Mumbai S-30 price averaged about Rs 27,070/tonne, a 2.5% increase as compared to last month prices. Average International raw and white sugar prices continued their upward trend in July 2010 on account of an increase in demand in global market coupled with reports of lower than expected Brazilian sugar production and logistical problems at Brazilian ports. The government has decided to release 19.20 lakh tonnes of sugar in the open market and through the public distribution system (PDS) in August, 2010, about 2.55 lakh tonnes more than July 2010 level. Tamil Nadu State government has announced State Advised Price of Rs.2,000 a tonne of sugarcane for 2010-11. This includes Rs.100 for transport cost to be borne by sugar mills. India, the world's biggest consumer is expected to initiate moves to free up the sugar sector within three months, but analysts are not hopeful of any reforms in the near term.

Commodities : Steel
World crude steel production in June 2010 registered 18% growth than June 2009. Chinas crude steel production for June 2010 was 53.8 mmt, an increase of 9% compared to June 2009. Crude steel production in the 27 member countries of the European Union increased by 35.7% in June compared to June 2009, with the year to date total up by 44.6% to 90 million tonnes compared with the same period last year. Japan produced 9.4 mmt of crude steel in June 2010, up 35.9% compared to the same month last year.

The price of key steel products like hot rolled coils which had touched a peak of USD 615 a tonne in international markets in January, had fallen to about USD 550 a tonne in July due to a slump in demand amid economic instability in Europe and a slowdown in manufacturing activity in China. HR coil prices have seen some improvement. They are hovering around the USD 555 a tonne level now.

Steel prices are firming up on the back of demand from construction and automobile firms and Indian steel manufactures may revise the rates for its products in the next few months. There is an upward pressure on the prices; demand in August to September is bound to improve, mainly from sectors like automobile and construction.

8. Sector Update : Automobile & Insurance


Automobile
Driven by record sales in passenger car and twowheeler segments, the Indian automobile industry posted its best ever total automobile monthly sales of 12,37,461 units in July10, beating the previous high achieved in March 2010. The total auto sales has grown by 31.50 per cent reaching to 12,37,461 units in July compared to 9,41,070 units in the same month last year. Strong commercial vehicle performance resulted in vehicle exports rising 9.2 percent in July10, but car exports rose only 2.1 percent, as major car companies facing capacity constraints put India's fast-growing market first.

Insurance
Insurance GWP - Rs Crore
APRIL-JUNE 2010-11 2009-10

% Change Y-O-Y

Private Public

4360.7 6390.8

3585.9 5243.4

21.61% 21.88%

In the April-June 2010 duration, General Insurance industry has achieved a growth of 21.8% in Gross written premium as compared to same duration last year. Both the Private and Public sector companies contributed equally in the sectoral growth with 21.61% and 21.88% growth contribution respectively. Outlook: As per IRDA, all the public sector companies and the private sector companys growth rate is increasing in terms of its liability insurance premium collection. The new companies are going to enter in this field with good number of products lines and get good compilation for the existing ones. Liability insurance is expected to grow at huge rate in the future due to its multi vital uses; it is a very important factor in public and private insurance companies.

Sector Update : Fertiliser & Tea


Fertilisers
Fertilizer Production Urea 000 tons DAP 10-26-26 12-32-16 14-35-14 20-20-0 15-15-15 28-28-0 Total Complex June 2010 1,833.1 305.9 188.7 169.8 65.1 20.0 35.2 26.8 756.4 June 2009 1,703.8 585.7 84.8 11.0 88.2 12.9 31.4 22.2 510.3 % Change 7.59% Y-O-Y
-47.77% 122.52% 1443.64% -26.19% 55.04% 12.10% 20.72% 48.23% The production of N at 1.025 million tn during June'10 increased by 3.6% over June'09.However, the production of P at 0.386 million tn, registered a steep decline of 13.3% during the period. While the production of urea and NP/NPK complex fertilisers registered significant increase of 7.6% and 48.2%, respectively, during June'10 over June'09, the production of DAP and SSP showed a decline of 47.8% and 4.1%, respectively, during the period.

Tea
Tea production in June was affected severely by rain and pest attacks, the latest figures released by the Tea Board show. However, exports registered an increase of nine million kg in January-June vis--vis last year. Despite a drop in June production, the country's tea output in January-June stood at 339 million kg, up 1.5 per cent on year due to higher crop in January-April. Tea prices in India have been rising for the past one month due to lower crop in June.

other than DAP

ECOSCAN July10

Disclaimer: The information contained herein is obtained from Bloomberg, News articles and various research reports.

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