“If the RBI decides to lower rates then certainly it will help the economy and some of the possible risk areas that we identified will get relief,” he said, referring to the Reserve Bank of India. “Inflation is under control.”

Central bank Governor Raghuram Rajan has rebuffed calls to cut interest rates as he awaits more clarity on whether consumer-price inflation will hit his 6 percent target for January. India has the fourth-highest borrowing costs among 14 Asia-Pacific countries tracked by Bloomberg.

Consumer prices eased to an eight-month low of 3.78 percent in July. Wholesale prices in July fell the most on record, according to data released on Friday.

Rajan left the repurchase rate unchanged at 7.25 percent on Aug. 4 after cutting it three times this year. While two of those cuts have come in unscheduled meetings, he’s held rates at three of four reviews in 2015.

The central bank expects CPI to hit 4 percent in August and rise toward the 6 percent target by January.

 

Japan and India are perhaps the two greatest beneficiaries of weak oil and commodity prices. This is now feeding through to Indian inflation measures and the recent more positive outlook for the monsoon should also help to mitigate inflation. The central bank is understandably cautious about lowering interest rates following the traumatic effect of the Rupee’s accelerating devaluation in 2013. 

Viet Nam's garment and textile export turnover to countries taking part in the Trans-Pacific Partnership (TPP) negotiations increased by 69.66 per cent in the first five months compared with the same period last year, according to the latest report from the Viet Nam Textile and Apparel Association (Vitas).

Exports to this market also accounted for 66.8 per cent of the sector's total export turnover. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Viet Nam are members of the TPP.

Exports to the US ranked top with US$4.05 billion, accounting for nearly 50 per cent of the export value to the countries joining the TPP agreement, a 53 per cent increase on the year.

Viet Nam's textile and garment export turnover to the US is expected to reach $11 billion by the end of the year, Dang Phuong Dung, Vitas deputy chairwoman told Hai Quan (Customs) newspaper.
Textile and garment export turnover to the US has increased dramatically in the past 20 years from zero to $9.8 billion in 2014.

The turnover could be doubled once the TPP is signed, she said, adding that it would benefit local enterprises. Garment products' import taxes would be reduced by 7 to 8 per cent, replacing the current 15 to 16 per cent.

 

The devaluation of the Dong has been a major benefit for Vietnam’s export sector and the fact that inflation is now slowing may raise hopes that the devaluation will continue to pause. 

“One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments,” Jaitley told reporters after the Cabinet meeting. 

The report by Justice AP Shah committee, looking into levying of minimum alternate tax (MAT) on foreign portfolio investors, should be out next week informed Jaitley. He said the Cabinet has also an expenditure of over Rs 8,500 crore on multi-state power transmission system. Welcoming the decision, Dinesh Kanabar told CNBC-TV18 the distinction between different types of foreign investments will no longer remain. 

"I would like to believe that across all sectors, wherever there is no sectoral cap today, we are now breaking the barrier between FDI and FII. You could have done that in any case by passing a board resolution which some of the companies did. But, in effect, what we are now saying is that in sectors where 100 percent FDI is permitted, we could actually have a 100 percent FII holding which is absolutely a very welcome step," he said. 

Echoing the sentiment, Pranav Sayta, Tax Partner, EY said Jaitley has implemented what he had promised in his Budget presentation this year. "I think it will certainly provide much greater flexibility, simplify things, make it far clearer, bring in certainty into ease of doing business."

 

Following an impressive performance last year India underperformed for much of this year and lost the attention of investors as China took off and Europe garnered column inches. However the reform minded government of Narendra Modi has not gone away and India is once again returning to favour as its relative strength makes headlines. The decision to streamline the ability of foreign companies to invest in India is a significant development because it helps to remove uncertainty. 

Reserve Bank of India Governor Raghuram Rajan cut the key rate by 25 basis points and said he will wait to assess monsoon rains before easing further, disappointing investors looking for more reductions to spur weak economic growth. The rainfall will be less than predicted in April, the government said less than two hours after the RBI’s decision. Below-normal showers may fan prices of everything from rice to vegetables in Asia’s third-largest economy, where food costs account for almost 50 percent of the consumer price index.

“This is a time when the economy needs a boost and these little drops of 25 basis points won’t help,” Ajay Srivastava, managing director of Dimensions Consulting Pvt., said in an interview with Bloomberg TV India. “A perfect environment will never exist.”

While retail inflation eased to a four-month low of 4.87 percent in April, staying below the RBI’s stated limit of 6 percent by January 2016, the prospect of inadequate rain and rising crude prices are risks, Rajan said. Consumer prices may drop until August and then start rising to about 6 percent by January, he said.

Despite the fact that India is growing rapidly, agriculture remains the dominant employer and the challenge of feeding more than a billion people is a constant concern. A weak monsoon is inflationary. The effect of rising oil prices, which have been climbing in Rupee terms, is an additional consideration for Rajan who earned his spurs as an inflation hawk. 

The rupee retreated 0.5 percent, snapping two days of gains, to 64.17 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. It touched 64.2650 earlier. The currency had fallen to 64.28 on May 7, the weakest level since September 2013. The S&P BSE Sensex index, India's benchmark equity gauge, slumped 2.3 percent.

"The recent rise in U.S. yields has put some pressure on Indian bonds," said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai. "That, along with weakness in local equities, is pulling down the rupee."

 

In addition to Narendra Modi's charisma and absolute majority, the stability of the Rupee, in the aftermath of an aggressive period of weakness, has been a major contributor to the confidence foreign investors feel towards India's development potential. With a safe pair of hands at the helm of the RBI, in Rajan, the Rupee's acceleration lower stopped in 2013. However its relative strength particularly against the currencies of its major trading partners, over the last year has been a headwind for the economy. 

Platinum – posts an upside key day reversal from above the psychological $1100 area. A clear downward dynamic would now be required to question potential for additional rebound. 

PM Modi’s “Make in India” initiative was endorsed by a global manufacturing giant. General Electric of the US inaugurated its 67-acre plant in Chakan, near the western city of Poona (which is close to Bombay). The new $ 200m manufacturing facility will be an export hub, with plans to send half of its output to the company’s global factories. The new plant is GE’s first multi-purpose manufacturing facility in India and will produce a range of products, including aviation, rail and diesel engines. The company hopes to win increased domestic orders also.

The National Association of Software and Services Companies (NASSCOM) expects India’s $ 150 bn IT outsourcing sector to see export revenue growth of 12-14% in the next fiscal year which starts on 1 April 2015. This compares with an estimated increase of 12% in the current fiscal year which will end on 31 March. The sector’s exports in 2015/16 are expected to touch $ 112 bn, according to NASSCOM. The sector is worth $ 150 bn in total after adding revenue generated from the domestic market. Future growth in the sector will be influenced by increasing demand from global companies for new high value services such as digital technology, mobile applications and cloud computing, according to NASSCOM. However, the export-driven outsourcing industry must focus on building a large pool of skilled workforce to avail of opportunities in the emerging high-end services segment, according to NASSCOM’s Chairman. R. Chandrasekaran. A shortage of qualified engineers to tap this segment poses a risk to the growth prospects of India’s showpiece IT sector. It accounts for about 10% of India’s GDP and employs roughly 3.5 m people who are mainly in the country. As much as 75% of outsourcing IT exports are to the US and Europe.

 

A link to the full report is posted in the Subscriber's Area.

India has long relied on its domestic consumer base to insulate the economy from global issues that have tended to take a toll on export-oriented nations. However if India is to achieve its development goals, not least mobilising its massive young population in order to provide hundreds of millions of people a better wage, it has little choice but to foster a major manufacturing sector. Plans are in the works to achieve this long-term goal by attracting FDI with a proactive attitude, better terms of trade and improving infrastructure. Provided these plans are followed through on and will be supported by successive administrations there is every chance India can achieve its development potential. 

India in a nutshell: India is a large emerging market in terms of population and formal retail is still underpenetrated. E-Commerce spend today is mostly in online travel and future growth of B2C e-tail (physical goods) is likely to be driven by large, well-funded competitors who can speed up online adoption. The key risk is how quickly profitability arrives given the size of the market, the intensity of competition, and consumer behavior. Market estimates1 put the current and future size of the Indian e-commerce market at only 3% to 7% of Chinese levels, with significant upside through consumer adoption. 

Formal retail under-penetrated in India: Market estimates2 put the size of the Indian retail market at cUS$350bn, but formal retail at only 5% of that total.

E-commerce nascent but growing: Market estimates3 look for the overall ecommerce market to grow from US$22bn in 2014 to US$86bn in 2018 (40% CAGR). Within just B2C e-tail, estimates are for expansion from cUS$4bn in 2014 to cUS$18bn by 2018 (45% CAGR).

E-commerce to target the wealthier demographics: c60m households (c25% of the overall population) in India control c60% of retail spend in 2015E; these households are forecast to double in absolute numbers by 2025, with spending power to triple over the same period. Wealth concentration and limited broadband penetration (c11%) could potentially create a two-tier market: 1) wealthy cohorts, where online spend centers on consumer discretionary items (electronics, clothes, etc) and where the longer-term opportunity is in migrating their online spend to include consumer staples (diapers, consumables, food), and 2) the mass-market, where spend levels are likely to be lower but increasing mobile penetration, a lack of formal retail/alternatives, and sheer numbers could prove formidable over time.

Low internet penetration but high growth: Less than 20% of the population had internet access in 2013 (214m) but this figure looks set to grow to c500m by 2018 (c36%), driven by mobile internet penetration leapfrogging desktop5 

Market cap per internet user is low: In Western markets, the market cap for the e-commerce sector on a per internet user basis is nearly 15x that of India. The ratio is nearly as stretched even when compared with similar emerging markets such as APAC, where the e-commerce market cap on a per user basis is nearly 10x that of India. This indicates the huge opportunity left for ecommerce penetration and growth in India. As discussed, India has over 200m internet users but less than 10% of those users purchase online. In the next few years (and decades), more retail spend is likely to shift online, closing the gap with its global peers.

 

A link to the full report is posted in the Subscriber's Area. 

As China’s e-tail companies make large public splashes in the international markets, the question of where India’s online champions are is a relevant one. The country has a similar population size to China but its infrastructure and openness to foreign investment and joint ventures lags far behind its neighbour. Nevertheless as broadband access improves, smartphone penetration increases and online banking spreads the potential for online retailing to take off just as it has elsewhere is high. 

LNG prices in Japan, the world’s biggest buyer of the fuel, will probably plunge 35 percent in 2015 and Indian costs will decline 33 percent, according to Energy Aspects Ltd., a London- based consultant. Costs in Asia will this year average below $10 per million British thermal units for the first time in four years as new projects in Australia and the U.S. boost supply through 2016, Bloomberg New Energy Finance said.

Most LNG in Asia is linked to crude costs with a time lag of several months, so Brent’s 49 percent drop in the second half of 2014 hasn’t fully filtered into prices. Global demand for the gas chilled to minus 170 degrees Celsius (minus 274 Fahrenheit) will rise 9.8 percent this year amid increased imports by India and southeast Asia, after climbing 0.5 percent in the first nine months of 2014, according to Sanford C. Bernstein.

“We are already seeing, at current prices, renewed interest from Indian buyers,” Laurent Vivier, vice president for strategy and market analysis at Total Gas & Power, said Monday by e-mail. “There is some flexibility in the demand as well. When prices fall to current levels, it creates additional demand.”

 

Consumers have bemoaned the link between natural gas pricing and crude oil over the last decade but the pendulum has swung back in their favour over the last six months. As major energy importers without significant domestic supply Japan and India are major beneficiaries of the decline in oil prices. 

For Japan, the fall in oil prices gives the BoJ additional room to stimulate the economy while consumers will see they have additional cash. The Nikkei-225 continues to firm within its three-month range and a sustained move below 16,500 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. 

Improving economics and govt actions increase probability of ratings upgrade
We assign a high likelihood of a sovereign ratings upgrade for India as most macro indicators have exhibited improvements in past 2 years. A rating upgrade will likely entail multi-layered benefits for Indian economy and markets. Over the past decade we have witnessed 4 instances of rating upgrades by S&P and Moody’s and on an average Sensex has returned 9% in the following 6 months and 40% in the following 12 months of ratings upgrade. Boost to capital inflows and improved perception of India on the back of rating upgrade should help moderate volatility associated with US rate normalization and create some headroom for RBI to ease monetary stance.

India likely to remain one of the favored emerging markets
Expectations of normalization by the US Fed and a subdued commodity pricing environment will continue to drive multi-asset differentiation within Emerging markets. India's embrace of long pending, supply side reforms together with an investment driven macroeconomic stabilization will allow it to deepen its relative attractiveness in 2015. Among key EMs, India has demonstrated one of the best improvements on external front with CA deficit now in comfort zone at (2.1% in Sep’14 qtr. 4.7% in FY13), appreciable FX reserves accumulation and sharp uptick in capital inflows.

Government must ensure its economic agenda is not side tracked 
While the urgency in moving ahead on key ordinances is indicative of the commitment to reform, passing bills in parliament will be vital to ensure that reform is structural, enduring and getting institutionalized. Translation of many of the recent ordinances into law in the next session of parliament will be viewed as crucial determinants of the government’s execution prowess. Other risks: Faster- and steeper-than-anticipated Fed rate normalization and any systemic risk associated with steep decline in oil prices.

 

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There are few countries that benefit more from weak oil prices than India so the recent energy market moves represent something of a windfall for Narendra Modi’s government.  This might yet allow the RBI to cut interest rates but the broader question is over how bold the administration will be in its legislative agenda. A great deal of enthusiasm has already been priced into the market and it will be interesting to see how much is delivered upon this year. 

With a large young upwardly mobile population India represents a fertile market for global Autonomies, a number of which maintain listed subsidiaries on the Munbai exchange. Many of these trade on aggressive multiples not least because supply is reasonably thin. 

Our country bank analysts have studied the financing of the local energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

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A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 

The introduction of digital technologies (social, mobility, analytics and cloud)  heralds the start of a new decadal tech cycle, which could potentially lead to significant changes to the existing revenue streams of the Indian vendors.

We believe the Indian IT services industry could still report healthy growth rates over the long term. The IT services market is still fairly underpenetrated from an offshore standpoint (see Figure 10 and Figure 11) and we believe vendors need to follow a three-pronged strategy to gain share: 

1. Deepen existing relationships by achieving strategic vendor status 
2. Geographic and vertical expansion 
3. Capability enhancement to address the threat/opportunities from digital technologies

 

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India’s service sector has been competing successfully on the world stage for more than a decade and was among the greatest beneficiaries of a weak Rupee. As the global outsourcing sector responds to growth in networked services/cloud computing there will be a requirement for more technically proficient staff but also potential for margin expansion given India’s increasingly well education work force.  

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

The Modi administration’s policy initiatives clearly point to India embarking on an East Asian economic model. We expect the steel sector to be a direct beneficiary of the two most important elements of the East Asian model (1) the move to materials intensive growth from an aggressive focus on heavy infrastructure build out and revitalizing manufacturing, and (2) a conscious attempt to keep the currency weak. Importantly, India’s transition to materials intensive growth will coincide with a period of subdued raw material prices.

Our comprehensive 2020 analysis throws up three non consensus takeaways (1) Indian steel consumption growth to reach an inflection point of 15% YoY in FY18, (2) Domestic production will significantly lag consumption despite large expansions by incumbent companies. India to emerge as a large net importer of steel by FY18 with imports constituting 17% of total consumption by 2020, (3) iron ore imports should peak in FY15 at an historic high of 15.5mt. Abating regulatory headwinds over next 2 years should ensure that India not only remains self sufficient in iron ore but also reverts back to being a net exporter from FY16, though at far lower levels compared to its historical averages. Virtuous cycle of cash flow, profitability and balance sheet improvement

Our comprehensive 2020 analysis of steel stocks under coverage suggests (i) the combination of materials intensive growth, INR depreciation and a subdued raw material pricing outlook will expand RoEs (by 870bps to a sector average of 16.2%) and significantly improve cash flows of incumbent companies over the next 5 years resulting in material improvement in balance sheets which have been a key concern, (ii) we see compelling shareholder value creation over FY14-20 in SAIL, Tata Steel, and JSW Steel driven by volume growth, product mix improvement and balance sheet deleveraging. 

 

A link to the full report is posted in the Subscriber's Area.

India has a large young population, with half of 1.25 billion people under 25. A challenge for the new administration will be to deliver upon the improving standards of living this 600 million strong demographic demands. That means jobs, education, infrastructure and consumer goods.  Achieving these goals will be a lot more difficult without infrastructure development and a much stronger manufacturing sector. Modi’s administration knows this as well as anyone which is why he has vocally called for reforms to promote both.  

Both China and India are now in a crucial stage of reform and development. The Chinese people are committed to realising the Chinese dream of great national renewal. We are deepening reform in all sectors. The goal has been set to improve and develop the socialist system with Chinese characteristics and advance the modernisation of national governance system and capability. A total of over 330 major reform measures covering 15 areas have been announced and their implementation is well underway.

Under Prime Minister Narendra Modi’s leadership, the new Indian government has identified ten priority areas including providing a clean and efficient administration and improving infrastructure. It is committed to building a united, strong and modern India — Shreshtha Bharat. The Indian people are endeavouring to achieve their development targets for the new era. China and India are both faced with historic opportunities, and our respective dreams of national renewal are very much aligned with each other. We need to connect our development strategies more closely and jointly pursue our common dream of national strength and prosperity.

As emerging markets, each with its own strengths, we need to become closer development partners who draw upon each other’s strengths and work together for common development. With rich experience in infrastructure building and manufacturing, China is ready to contribute to India’s development in these areas. India is advanced in IT and pharmaceutical industries, and Indian companies are welcome to seek business opportunities in the Chinese market. The combination of the “world’s factory” and the “world’s back office” will produce the most competitive production base and the most attractive consumer market.

As the two engines of the Asian economy, we need to become cooperation partners spearheading growth. I believe that the combination of China’s energy plus India’s wisdom will release massive potential. We need to jointly develop the BCIM Economic Corridor, discuss the initiatives of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and lead the sustainable growth of the Asian economy.

Ahead of Xi’s visit Chinese troops built a rudimentary road on the contested part of the India/China border and Indian troops destroyed it a day later. India boosted support for Vietnam, agreeing to export arms, the day before his visit. The above text is part of a charm offensive where both countries could benefit from greater bilateral trade, but no one is under any illusion about how much room there still is for relations to improve.   

 

A one-quarter drop in local gold prices over the past year has shaken the confidence of Indians in the precious metal as a store of value and dented demand in the world's second-biggest buyer.

The main beneficiary has been Indian stocks, which have been clocking up records on hopes that Prime Minister Narendra Modi can deliver on the promise of "better days" ahead that swept him to power in May's general election.

Beyond short-term sentiment, a major push by Modi for every household to get a bank account, better education and living standards, and falling inflation expectations, could herald a more secular change in investing habits.

"The attachment of Indians to gold will remain," said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities Ltd., referring to gold's culturally embedded role in dowry gifts or decorating Hindu temples.

"But as the banking network expands and literacy rises, people in rural areas will explore other investment products like mutual funds or bank deposits. The mindset is slowly changing."

 

One could argue that having gold as an anchor in a portfolio is justified given its long history as a store of value but favouring it above all other alternatives is generally a sign of distrust in the financial system and value of fiat currency. Indian consumers have had more to fear from currency debauchment than most; with the Rupee susceptible to regular devaluations since independence. However as optimism grows that Prime Minister Modi can deliver on progressively higher standards of living for India’s burgeoning population, it is an open question as to whether India will represent such a potent demand growth region for gold in future. 

Vedanta's planned group restructuring was completed in 2H13 calendar, with the court clearance of Sterlite's merger into Sesa Goa. This was an important step in simplifying the group's structure, reducing the scope for future conflict between majority and minority shareholders. Post the merger of Sterlite and Sesa, we see the group's buyout of the Indian government's stakes in HZL and Balco as critical for maximising cash fungibility across all group entities and expect progress on this in the next 12 months. Beyond this, management has set three near-term priorities for improvement for the group: an iron ore mining re-start, bauxite sourcing in India, and Copper Zambia development. We expect all of these areas to show improvement in 2015. Buy. 

Valuation 
Our price target is set at a 5% discount to our DCF valuation, to reflect some of  the inherent delivery risks within Vedanta's growth plan. Our DCF valuation (10.9% WACC - cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%, ERP 6%)is calculated using life of mine cash flow analysis. 

Risks 
Key downside risks include lower metal prices than we expect, sustained strength in the Indian rupee, higher import duties, slower execution of projects and the slow or noreceipt of government permits for the alternative bauxite mines in Orissa and the Lanjigarh refinery expansion programme. The company has a large capex program which may require further debt funding or capital raising, either at the Sterlite or Vedanta level.

A link to the full report is posted in the Subscriber's Area. 

The new Indian administration under Narendra Modi has lofty ambitions. Urbanisation, export oriented manufacturing and chipping away at the country’s infrastructure deficit are all goals the new government is working towards. Greater per capita consumption of just about all industrial and energy commodities goes hand in hand with these objectives and India needs a concerted strategy for sourcing the resources it needs to fuel growth. 

So, what does the government need to do in order to get firms to invest again? The first and most obvious thing would be to finish the various stalled infrastructure projects. The capital invested in these projects can be made generate output. This will also help the banking system which has seen an increase in its non-performing loans as a consequence of the various delays. However, the longer term agenda would be to make it easier to do business in  India. The World Bank’s “Doing Business Report 2014” ranked India 134 out of 189 countries in terms of the ease of doing business. As one can see from the table below, it performs especially poorly in categories that involve interface with the government – paying taxes, construction permits and so on. The national government cannot resolve all the issues, but Prime Minister Modi’s election slogan of “Minimum Government, Maximum Governance” suggests that he is acutely aware of this issue and, given his administrative record, it is reasonable to expect significant improvement in this space.

While a generic improvement in the business climate would be welcome, Prime Minister Modi’s speeches and actions suggest a more specific economic model. As explicitly stated in the Independence Day speech, one component of his economic model is an emphasis on export oriented manufacturing. Notice that this is not about agnostic free markets but about creating competitiveness by investing in industry clusters. Another component is investment in heavy infrastructure ranging from power to railways. A third element is labour reforms. This is an area that previous government considered too politically sensitive but has already been opened up for reform by the NDA government both at the state and central level. These reforms are clearly a prelude to the mass deployment of labour. Finally, a repeated emphasis on building and expanding cities – urbanization being the spatial manifestation of industrialization. Not only are these elements internally consistent, they also look very much like the economic model used by East Asian countries to rapidly modernize themselves. In other words, for the first time since Nehru, we have a wide-ranging, internally consistent economic model. Moreover, this model follows a well-trodden path

Of course, we are not implying that agriculture and services will be simply ignored. Far from it, the new “investment” based approach will be applied to these sectors as well. Indeed, Narendra Modi’s political rise is partly due to his success in generating agricultural growth during his stint as Chief Minister of Gujarat. This is particularly remarkable given that Gujarat is a semi-desert state that is not naturally well-endowed with either good soil or plentiful water supply. Heavy investment in water management and new technology were responsible for the state’s success. At the national level, however, farm mechanization is only 25% while the productivity levels for rice and wheat have not increased significantly since the 1980s.An important change in the strategy of this government will be its openness to mechanization and new technology even in agriculture. This is consistent with the idea that the farm sector will have to produce more even as industry sucks out workers from it. The latest Economic Survey summarizes this approach as follows “Due to the significant and continuous reduction of agricultural workforce, higher levels of farm mechanization are necessary for sustaining productivity and profitability.” Of course, this will require a wider reform and liberalization of the sector.

A link to both reports is posted in the Subscriber's Area.

India represents a massive potential growth market for the resources sector which couldn’t come at a better time as China’s demand growth trajectory moderates. Following the path to development adopted by so many of its neighbours represents a ground breaking change of pace for India which could be transformational for the stock market if successfully implemented.

This additional report accompanying India 2020 highlights the primary stock market beneficiaries of this development. Fortunately a number of them maintain overseas listings.

Recent developments outlined above suggest that India is not now on the path to replace China in the system. But looking forward, the Modi government’s plan, if implemented, would reload India into the periphery of a Bretton Woods II system. The 2014 election manifesto of the Bharatiya Janata Party announced several economic goals. A country intending to push an export-driven development policy could hardly describe its policies and goals differently. In sum, the manifesto seems aimed at vigorously implementing this strategy. The manifesto espouses: “A strong manufacturing sector will…create millions of jobs and increase incomes for the working class. Above all, it will increase the revenue for the government and lead to import substitution to bring down the import bill. We will make India a hub for cost-competitive labour-intensive mass manufacturing. (p. 29).”

Specifically, the manifesto proposes several policy goals to boost labor-intensive manufacturing. The current account deficit is to be reduced aggressively by focusing on exports and reducing the dependency on imports (italics ours). A program for ports, roads and rail to the interior, and airports is intended to facilitate international merchandise trade by eliminating severe infrastructural barriers. It also intends to eliminate the artificial bureaucratic barriers to commerce. FDI will be allowed in most sectors, except retail, and investment and industrial regions are to be set up as international manufacturing hubs. 

Of course, a political party’s manifesto is a wish list. Full implementation always collides with resource and political constraints. But taking it at face value means that India is readying itself to take up China’s role as the next large periphery in the Revived Bretton Woods system. As we said in Section IV, the key to managing the export-driven strategy at a global macroeconomic scale is the recruitment of FDI. The amount of collateral on hand limits FDI, but a large and persistent current account surplus relaxes the limit. In India, the government is now opening the doors to more FDI; and simultaneously, it intends to reduce the current account deficit. Our caveat is that it cannot expect a China-like attraction of FDI unless it can swing the current account into surplus. The manifesto seems to aim for these conditions, but this is a case of wait-and-see for this next test of the collateral hypothesis.

A link to the full report is posted in the Subscriber's Area.

If you have the time I would recommend reading this report in its entirety not least the portion beginning at the end of page 13 focusing on the role of China’s sanitation of currency inflows on the low interest rates that continue to prevail in the USA and Europe.

When we consider India’s role in the global economy, it has many of the characteristics China is seeking to develop and vice versa. India has a vibrant consumer economy, world class corporations successfully competing internationally, property rights, an independent judiciary and respect for minority shareholder interests. It also runs persistent twin deficits, its manufacturing sector is undeveloped, infrastructure has decayed to the point of obsolescence or does not exist, development planning has been haphazard to say the least, bureaucracy is sclerotic and corruption inhibits growth at every turn. 

India’s ‘actual’ competitive edge lies somewhere in between the REERs estimated by adjusting for ULC and PPI. The OECD’s estimate of ULC likely overstates the country’s competitiveness as the data may be skewed towards the more productive ‘organised’ sector. On the other hand, the PPI-based REER may understate competitiveness as it does not adequately capture productivity gains.

India has sharpened its relative advantage thanks to nominal currency depreciation and faster labour productivity growth and slower wage gains than in its trading partners. Meanwhile, producers have cut back on price increase to gain market share. 

It is one of the very few EMs where the decline in relative unit labour costs has been greater than nominal FX depreciation over the last decade, implying a chunky contribution to competitiveness. However, most of this improvement occurred before the Global Financial Crisis (GFC). After the crisis, the rupee’s nominal decline outstripped that of ULCs on the back of a widening current account deficit. 

Domestic policy errors, poor progress on structural reforms and populist fiscal policies that drove wage growth above productivity growth are largely to blame. Indeed, India appears less competitive after adjusting for CPI (vs. for ULC and PPI), reflecting entrenched inflation expectations and supply-side bottlenecks.

 

India was not the only country to experience currency devaluation last year but the Rupee‘s was among the most aggressive; giving up 30% of its value between May and August. It has since steadied following the intervention of the RBI which suggests that the competitive advantage gained can be held onto. A similar condition is evident in a number of Asian countries. 

I have access to the USD INR in the charts. The charts are for the Indian Rupee (INR) trades off shore. The INR onshore which trades onshore has different and less exaggerated price movement. The INR is not a freely convertible currency as it is regulated by the central bank and hence an onshore chart is more relevant to traders who use the service onshore. Could you kindly share this information with Eoin so that he can consider our request?

Thank you for this informative email and question. I found a number of forwards for onshore Rupee rates on Bloomberg but could not find an onshore spot rate. If you can supply one I would be happy to add it to the Chart Library.

India's insurance business was full of promise when it was thrown open to competition in 2000, but has been hobbled by losses, regulatory change, uncertainty and a sharp slowdown in the economy.

The federal government's approval for a proposal to raise the limit to 49 percent has been kept pending for a long time due to opposition by nationalist politicians, frustrating many overseas investors lured by low penetration rates in India.

Life insurance penetration in India is about 3.2 percent of gross domestic product in terms of total premiums underwritten in a year, much lower than more than 10 percent in Japan and nearly 6 percent in Australia.

Dutch banking and insurance group ING Groep NV and New York Life have quit their Indian ventures in recent years, while some other foreign investors were said to be weighing their options.

At the end of Sept 2013, India had 24 life insurers, which accounts for 80 percent of the sector's business. Only 17 of the 24 reported profits in the fiscal year ended March 2013, according to latest data available with the regulator.

State-owned Life Insurance Corp of India Ltd controls about 70 percent of the life insurance business.

"This measure should provide impetus for spurring growth of the insurance industry and enable foreign players to bring in capital required for growing distribution (and) product suite," said Shashwat Sharma, partner at consultant KPMG.

 

India represents a potent market for western multinationals but has been a disappointing investment for a number of companies who failed to deal effectively with the bureaucratic quagmire, regulatory roadblocks to growth and depreciation of the Rupee. With a new administration and a greater potential share of the profits, internationally oriented companies may be re-enticed to consider India. 

Indians love Switzerland - over half a million visit each year. But Swiss delights are an expensive taste. Take Basel 3 capital norms. Meeting them requires a $40bn recapitalization of India's 26 public sector banks by 2018. But given fiscal constraints where to get the money? Yesterday's budget proposes issuing equity to dilute the government's stakes from a range of 55 to 80 per cent down to 51 per cent. Selling at today's prices however only raises a third of the capital required. Hence to maintain its majority shareholdings New Delhi would have to fork out another $15bn - the same amount spent in the past five years. Worse, India's banks are losing about 40 basis points off their core tier one capital ratios annually according to Deutsche Bank analysis. Recapitalising India's banks feels like running to stay in the same place

A link to the full report is posted in the Subscriber's Area. 

There are some important reasons to be bullish about India’s prospects now that it has a highly capable central bank governor, a market friendly prime minister with a substantial mandate for change, the regulatory changes imposed by the last government to cut bureaucracy as well as constants such as a vibrant consumer sector and powerful demographics. However, a market cannot underperform for such a long time without their being challenges to overcome. The relative health of the banking sector is one such hurdle.  

Over the past one year, marked improvement has been seen in India's macro-economic variables. GDP growth which had dwindled from 6%+ to less than 5% in a matter of 4 quarters, has bottomed out and has been stable at 4.5%]4.7% range in the past few quarters. RBI then was raising interest rates but has now maintained status quo for past two monetary policies indicating peaking out of interest rates. Inflation, which was mounting then, has now seen downward trajectory in the past few months, notwithstanding near term risk from weak monsoon. Fiscal and current account deficits have been well reigned in through measures such as curbs on gold imports and postponement of subsidies to next year. Rating agencies, a year ago, were considering a downgrade in rating for India with a negative outlook on the economy. The outlook for ratings has now been revised to stable. Currency, which was on a depreciating spree and had reached Rs68/US$, has now stabilized in a range of Rs58-61/US$.

With regards to investment cycle, steps were taken by the UPA government which shall fructify in the medium term. These steps include 1) setting up of CCI (Cabinet Committee on Investment) which has cleared bottlenecks of 210 projects worth more than Rs3.8tn across various sectors. 2) Around 85-90% of 173 FSAs have been signed; full completion would ensure fuel supply to 78,000 MW worth of power capacity. 3) Partial mining ban reversals. Furthermore, announcements from the new government have also been encouraging towards this space. With regards to the asset quality in the banking system, after a period of sustained uptrend in NPAs, Q4 FY14 results indicated stable trend.

 

A link to the full report is posted in the Subscriber's Area. 

This report highlights the fact that Mr. Modi represents a transformation in the ability of India to elect a strong, reform-minded government and emphasises the electorate’s demand for progress in standard of living improvements. It also highlights an important fact that a number of important reforms in the planning process were enacted by the last government which will ease the way for infrastructure investment in the next few years.  

The Mid-Cap sector lagged the wider market over the last few years but has experienced a powerful catch-up advance since early May. It is now closing in on the 2008 peak near 10,000. While some consolidation is looking increasingly likely, a break in the short-term progression of higher reaction lows would be required to signal a pause near that level. 

The RBI said further policy tightening won’t be warranted if consumer-price inflation stays on course to hit 8 percent in January 2015 and 6 percent a year later. If disinflation is faster than anticipated “it will provide headroom for an easing of the policy stance,” it said.

Prime Minister Narendra Modi’s landslide win last month is spurring optimism that he’ll take steps to reduce price pressures and lead a recovery among the world’s biggest emerging markets, which are forecast to grow at the slowest pace since 2009. India must move toward fiscal discipline to lower inflation, curb the budget deficit and spur growth, Finance Minister Arun Jaitley said on June 1.

“The RBI extended a welcoming hand to the new Prime Minister,” Frederic Neumann, an economist at HSBC in Hong Kong, wrote in a research report today. “That the RBI remained on hold so soon after the election wasn’t really a surprise. But its dovish tone was.”

 

Much of India’s problem with tempering persistently high inflation are structural in nature. One of the most productive agenda’s the new government could set would be to aggressively tackle regulatory, bureaucratic and infrastructure related obstacles to trade and investment. Considering Mr.Modi’s record in Gujarat, investors have good reason to give him the benefit of the doubt. 

“I noticed that a few of the Indian investment trusts seem to be lagging the market (JPII-close to 13% discount to NAV; New India -14%). Any thoughts?”

And 

“Just saw comment of day-sorry. More specifically-should we expect the ITs to lag the underlying as they are doing (far off from their all-time highs), or is there something in the ITs themselves that would result in such a lag. Thanks”

 

Thank you for this question which may be of interest to subscribers. The value of investment trusts is often influenced by fashion rather than the book value of the assets they hold. Over the last few years, the perception of the Indian government’s ability to tackle structural issues deteriorated considerably. If we recall why India has made headlines over the last few years, we can quickly get a picture for why investment trusts are trading at discounts. 

Falling trend in GDP, investment and co. earnings growth to reverse during 2014, CLSA says in investor note dated yesterday.

Policy environment started improving since last 15 mos.,

2014 will see positive impact, analysts Mahesh Nandurkar, Abhinav Sinha and Rohit Kadam write

Investors to position much in advance for improvement even as it will be visible in 2H of 2014 and fiscal yr 2015

CLSA sees market ¡°developing patience¡± towards companies benefiting from recovery

Recommend cyclicals such as Axis Bank, ICICI Bank, Maruti Suzuki, UltraTech, power utilities, mid-cap property stocks HCL Tech, ITC, Lupin and Zee Entertainment are other buy ideas

CLSA underweight on staples, retail financials

 

2014 is going to be a big year for India as the prospect of a reform-minded prime minister, with a track record of delivering on economic growth, is priced in. However, while this would be a heartening development for investors who have been waiting for a bullish catalyst, the success of the RBI in defending the Rupee is likely to be no less important.

Indian democracy took a turn toward ancient Athens this week after the Aam Aadmi Party (“Common Man’s Party”) went to the people a second time in an attempt to resolve a political dilemma. The fledgling political outfit that earlier this month won 30 percent of the vote and 40 percent of the seats in elections in the city-state of Delhi brought up the notion of “direct democracy” in defense of its decision to hold a referendum in Delhi on the question of whether it should make a bid to form a minority government in the capital.

In its manifesto, the AAP has borrowed from Brazil’s Porto Alegre model of local government by popular consent. This makes it appear all of a sudden that the world’s emerging markets are also emerging as the sites of new developments in democratic thought and practice -- as indeed in the practice of authoritarianism and capitalism. New energies in India and Brazil are reworking forms of representative government that have settled into stasis in the developed world. (It has always been a conceit of the West that its own experience of democracy is somehow foundational and normative, when the reality might be instead that democracy moves in historically and culturally specific directions wherever it takes root.)

The referendum itself was a double-pronged affair involving a range of traditional and 21st-century forms. It offered the citizens of Delhi the option of going to a set of public meetings that would return a single “yes” or “no” answer by popular vote, or of sending in their answers by text message or on by phone. Some skeptics questioned, in my view wisely, the wisdom of such a referendum and the claim of “the will of the people” established by its results. After all, those who had voted for the AAP might be logically expected to be more willing than others to participate in such an exercise and to favor a yes.

And so it turned out, with the party declaring a 75 percent yes vote from individual respondents and a 90 percent yes vote from 280 public meetings. After the referendum, the party’s high command decided Dec. 23 to form the new government of Delhi. Its leader, the 45-year-old former bureaucrat and anti-corruption activistArvind Kejriwal, will take the oath as Delhi’s seventh and youngest-ever chief minister on Saturday at the Ramlila Maidan, a site closely associated with the party’s concerted struggle over the last few years for an anti-corruption watchdog for India.

India’s general election within six months will be hugely important for the country’s development and also for subscribers who have investments in Indian shares.  

Despite the sharply slowing economy there are many success stories. One of them is unlisted company, Micromax. It has become India's No. 2 smart phone brand in just five years after selling its first handset. It started in business selling a cheap $ 30 made-in-China mobile phone. It is now on track to cross $ 1 bn in sales for the year to 31 March 2014. Micromax built up its business by selling basic and cheap handsets in a very price sensitive market among the masses. It was able to gain rapid market share by introducing a cheap model which could take two SIM cards. Hence, users could take advantage of bargains from competing mobile line providers. It has "moved up the ladder" by selling smart phones starting at just $50. This is almost half the price of a comparable Samsung. About 250 mn handsets are sold annually in India, about a fifth of which are smart phones. Among all types of mobile phones, Micromax ranks third after Nokia and Samsung. The company now wants to tap overseas markets like Russia and Romania.

For an underdeveloped economy, India is not short of corporate successes.  Just imagine what will happen when it gets good, economically savvy governance?  That may happen six months from now.

The report quoted above is posted in the Subscriber's Area.

The biggest win, however, was for the Aam Aadmi Party (AAP) which was born only a year ago out of an anti-corruption movement. It shocked both the main parties by winning a close second place in Delhi with 28 seats. This is not far behind BJP's win of 32 seats. The AAP is led by a mild-mannered former civil servant, Arvind Kejriwal. His aim is to end the grip of the two largest parties, Congress and BJP, on Indian politics. And, in the process clean up the rotten elements of Indian politics. Kejriwal was fighting the current Congress Chief Minister, Mrs Sheila Dixit, in her own constituency. He won more votes than Mrs Dixit and Congress combined. The challenge ahead for the AAP is to grow the movement nationally in time for national elections. Even though it has 309 committees across 22 out of 28 states in India this is a tall task. Kejriwal promises transparent political funding in a country where funding for parties often comes from dubious sources. And where parties have offered populist policies in the past to secure votes. One internal survey ahead of the Delhi elections found about a third of the party's supporters wanting Modi as Prime Minister. If the AAP, at national elections, is able to continue its current success, it may become an important voice in any coalition. With its strong anti-corruption stance, it would mark an interesting phase in Indian coalition politics.

Could Modi, if elected Prime Minister at the general elections, be a "game changer" for the Indian economy and markets? Very possibly. In the short run, BJP's win is positive for the market. The SENSEX closed at another new all-time high today of 21, 327, and the Indian Rupee touched a four-month high. This marks an astonishing turnaround compared to June-August when India seemed trapped in its worst economic crisis since 1991. Foreign investors abandoned Indian markets. This led to steep falls in the stock markets and the Indian Rupee. So far in 2013 FIIs have invested $ 18.1 bn, the third highest ever in the 20 years they have been allowed to invest in Indian shares. Not bad, considering 2013's plethora of bad news.

 

Governance Is Everything, as this service has emphasised over the decades, not least for emerging markets.  The return of the BJP now that it is led by Narendra Modi, plus the rise of the AAP in little over a year, not to mention the ruling Congress Party’s decline, demonstrate the anger and frustration of Indians over corruption, inflation and slumping GDP growth in recent years.  The political turnaround after many years of apathy and resignation is nothing short of breathtaking.  

Narendra Modi, 63, BJP's PM candidate has portrayed himself as a "man of the people", rising from humble roots. He wishes to appeal to masses, especially the crucial rural vote of 600+ million. His father was a tea vendor or "chai wallah". He is Chief Minister of Gujarat since 2001. He has promised quick reforms and an early end to policy paralysis that has contributed to the sharp economic slowdown. Modi is widely seen as a business-friendly reformer who has attracted major investments to Gujarat. And boosted economic growth along with badly needed jobs. Modi's political campaign focuses on Congress' failure to control inflation (especially high food prices which hurt the poor), the sharply decelerating economy which touched a decade-low last year, a lack of job creation and poor governance. He urges people to dream of a better future. However, nationally Modi remains a divisive figure tarnished by riots 11 years ago. He strenuously denies failing to stop the violence, and a Supreme Court inquiry found no evidence to prosecute him.

In 2014, I suspect far more Indian voters will be more interested in what Mr Modi’s economic policies have done for Gujarat - an average of 10% per annum GDP growth – than the unfortunate riots of 11 years ago.

India’s benchmark stock index will climb as much as 6 percent to a record by year-end if state election results this weekend confirm gains by the nation’s main opposition party, according to a Bloomberg survey.

Victories by the Bharatiya Janata Party in four of five states that held elections over the past month, a prelude to national voting next year, would send the S&P BSE Sensex index to almost 22,200 from its closing level of 20,957.81 yesterday, according to the average of 10 estimates compiled by Bloomberg.

An exit poll Dec. 4 signaled the BJP, which picked Narendra Modi as its choice for prime minister, will win four states.

Modi’s home state of Gujarat has recorded annual economic growth of 10 percent, lured investments by companies from Ford Motor Co. to the Tata Group and raised power generation capacity more than fivefold since he became chief minister in 2001.

India’s economy posted its slowest growth in a decade last year and suffered its worst power crisis in July 2012, eroding investor confidence in the leadership of Prime Minister Manmohan Singh’s Congress party.

“Investors are extrapolating what Modi did in Gujarat, betting he will be able to replicate that at the national level,” Paras Bothra, vice president for equity research at Ashika Stock Broking Ltd., said in an interview yesterday.

Narendra Modi is benefiting from India’s declining GDP growth and the corruption charges levelled at the Congress Party.  Nevertheless, Modi’s economic record of 10 percent GDP growth per annum since he became Chief Minister in 2001 is exceptionally impressive, as is the fivefold increase in power generation capacity mentioned above. 

 It is difficult to envisage that performance being replicated across India’s widely diversified states if Modi is elected as Prime Minister next year.  Nevertheless, it is a welcoming message for many Indians, not least educated younger voters.  

India's main opposition party is set to win four of five state elections held over the past month, wresting power from the ruling Congress party in one area and giving it momentum ahead of national voting next year.

The Bharatiya Janata Party, which picked Narendra Modi as its choice for prime minister, is set to retain two states, take power from Congress in another and win the most seats in the capital New Delhi, according to an exit poll yesterday conducted by C-Voter and broadcast on the Times Now television channel. Official vote counting in the states, home to about a sixth of India's 1.2 billion people, will take place on Dec. 8.

"The exit poll results indicate there is strong anger against Congress for its failure to check price rises and corruption," said Satish Misra, a political analyst at the Observer Research Foundation, a policy group based in New Delhi. "It seems this trend will be reflected in the general elections, and the BJP will have some edge over Congress."

The state elections are the final test for India's two major parties before a national vote that must be held by May 2014. Prime Minister Manmohan Singh's Congress-led coalition has seen corruption scandals, elevated consumer inflation and the weakest economic growth in a decade erode its popularity.

BJP victories in Rajasthan, Madhya Pradesh, Chhattisgarh and New Delhi may boost Indian stocks, according to Deven Choksey, managing director of Mumbai-based K.R. Choksey Shares & Securities Pvt. The benchmark S&P BSE Sensex, which has climbed 6.6 percent this year, fell 0.7 percent in Mumbai yesterday.

I have been writing about Narendra Modi and India's important General Election for several months but these state elections are the clearest confirmation of his growing support. The BJP will be re-energised by this result which is certainly a wake-up call for Congress.

What might a General Election victory by Narendra Modi mean for India and its stock market (weekly 10-Yr & weekly 5-Yr)?

The Indian economy grew at 5%, a decade low, for the fiscal year to 31 March 2013. Growth slowed even further to 4.4% in Q1 (April-June 2013) of the current fiscal year to 31 March 2014. The Q2 (July-September) GDP figure is expected on 29 November, and fears remain that growth back to 5% looks optimistic. Investors are increasingly concerned that India is stuck in a stagflation (stagnant growth + high inflation) environment. The wholesale price index (WPI) rose to an eight-month high of 7% year-on-year, driven by more expensive energy and manufactured goods. At the heart of India's inflationary pressure is a sharp rise in food prices which are threatening re-election prospects for the ruling coalition Government, led by the Congress party. Food inflation in October rose 18.2%. In the last 60 months food inflation has averaged over 12% per month. Onion prices have risen from Rs 20 per kilo last December to Rs 100 per kilo last month in Delhi and Bombay. The price of salt has rocketed in East India from about Rs 18 per kilo to well over Rs 100 per kilo. With five state elections in progress, the humble onion's power in toppling past Governments is focussing minds.

To state the obvious, governance has never been easy in India's, large and ethnically diverse country. Its coalition governments have been weak and consequently beholden to minority factions. Nevertheless, the Congress Party appointed an impressive Reserve Bank of India Governor, Raghuram Rajan, in September.

India's Sensex Index (weekly & daily) falls back as the rupee (weekly & daily) weakens again, risking higher inflation and interest rates. Historic resistance above 21000 has turned back the stock market rally and underlying trading will be tested unless the Reserve Bank of India Governor Raghuram Rajan can once again turn back the rupee's slide, shown inversely above against the US dollar.

The RBI has said that it faces an unenviable task of trying to address the slowest economic expansion in a decade while tackling the fastest price gains among the largest emerging markets. Local newspapers have reported scuffles at vegetable markets in eastern India and food inflation is set to dominate state elections being held through Dec. 4. High onion prices were cited for the Bharatiya Janata Party losing a 1998 vote in New Delhi.

°We do not see any scope for rate cuts, said Leif Eskesen, HSBC Holdings Plcs chief economist for India and the Association of Southeast Asian Nations. Underlying inflation pressures are rising. The RBI has to maintain a hawkish stance and stand ready to tighten further, if needed.

Food articles, including fruits, vegetables, milk and eggs, accounted for 47 percent of the increase in the benchmark inflation gauge, the wholesale price index. The measure rose 7 percent in October from a year earlier, compared with 6.48 percent the month before and exceeding the 6.95 percent median estimate of 40 economists surveyed by Bloomberg.

Combating inflation has been an intractable task for India not least because so many of the contributing factors are structural rather than monetary. Food price inflation could be moderated by introducing a modern supply chain from farm to table. However, this is no simply task and will require commitment from government to introduce the necessary infrastructure and reform of the retail sector. In the meantime, the RBI has the twin concerns of fortifying the Rupee and maintaining an interest policy which tempers inflation without suppressing growth.