India Economy: On the Road to Recovery?

March 11, 2009Marketsby CaraTan

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New Delhi, 11 Mar. Top Indian economic adviser Suresh Tendulkar recently reported that the nation’s economy could be on the path to recovery. This came with the Reserve Bank of India (RBI) cutting the reverse repurchase rate to 3.5% and the repurchase rate to 5%.

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New Delhi, 11 Mar. Top Indian economic adviser Suresh Tendulkar recently reported that the nation’s economy could be on the path to recovery. This came with the Reserve Bank of India (RBI) cutting the reverse repurchase rate to 3.5% and the repurchase rate to 5%.

Other positive signs were a decline in inflation and a rise in car sales in February. Car sales jumped 22% last month compared to the same month last year. This is despite tight credit and fear over job cuts, but can be explained by low lending rates offered by banks and tax cuts passed along by firms.

“Some finance has started flowing into the market,” Society of Indian Automobile Manufacturers director general Dilip Chenoy announced, “But not in a significant way for two wheelers and commercial vehicles. Everyone is focusing on cars.”

Tendulkar even went so far as to say that the Indian economy was approaching its bottom – news every investor wants to hear. He also added that banks are being too conservative, and should respond to recent cuts in the deposit rate with lending rate reductions. This sounds like an appropriate reaction, but until real, sustained growth happens, it will be difficult for banks to make such moves.

Goldman Sachs forecast the RBI to chop the cash reserve ratio (CRR) by 150 basis points by the end of June, 2009. The CRR is the percentage of cash deposits banks need to hold. The CRR is now at 5%.

Regarding additional reverse repo rate cuts, a Goldman Sachs spokesman commented, “...it will be politically inexpedient for the RBI to cut the administered rate during an election, and reducing the reverse repo below the savings rate would hurt bank profitability.”

Software and business process outsourcing (BPO) sectors have also experienced troubles, but Moody’s expects India will continue to be a global outsourcing leader.

“India will remain a top outsourcing destination because of its tech-savvy and English-proficient urban workforce whose wages are much lower than their western counterparts,” said Sherman Chan from Moody’s economy.com.

The BPO export and software sector in India is worth $40 billion, with almost two-thirds of its business coming from the US. Now with a major US slowdown, the immediate effects are being felt in the BPO and software industries in India.

India’s economy, the third-largest in Asia, grew 5.3% in the December quarter, its slowest rate in six years, versus the 9-10% growth enjoyed in the past three years.

The economic troubles have resulted in significant wage and job cuts, and even resulted in a credit freeze in India in October 2008.

Charles Cole, EconomyWatch.com

 

 

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