India underperforms other emerging markets

16 June 2007

Indian stock markets recovered partly from last week''s 5 per cent fall on better than expected industrial growth for April. Very strong manufacturing growth has helped ease concerns of a growth slowdown this year. However, higher interest rates have led to a decline in demand growth, particularly visible in home mortgages and automobile sales. India''s central bank is likely to hike interest rates next month and may also tighten reserve ratios of banks to manage excess liquidity.

The MSCI India index returned 1.96 per cent for the week in US dollars as compared to 4.25 per cent returned by the MSCI Emerging Markets index.

For the year, MSCI India index has returned 12.74 per cent in US dollars as compared to 16.47 per cent returned by MSCI Emerging Markets Index. Returns in Indian rupees on the MSCI India index at 4.08 per cent continue to lag US dollar returns because of the rupee appreciation against dollar.

Among Indian large-cap domestic indices, the 50-share Nifty index at the National Stock Exchange gained 0.64 per cent for the week. The 30-share BSE Sensex added 1.09 per cent for the week.

Industry growth higher than expected in April: Indian industrial output for the month of April increased at an annual rate of 13.6 per cent from a year ago. Higher interest costs and rupee appreciation have surprisingly not impacted domestic output growth. Though the growth rate is lower than 14.5 per cent achieved in March, it is much higher than 9.9 per cent achieved during April last year. Indian industry had expanded 11.5 per cent for the last financial year ended March.

Manufacturing, which accounts for more than 79 per cent of the industrial index, continues to drive overall industry growth. The sector expanded at an annual rate of 15.1 per cent in April from a year ago, after growing 12.5 per cent for the year ended March. Electricity generation and mining, which accounts for slightly more than 10 per cent each of the index, expanded at annual rates of 8.7 per cent and 3.4 per cent respectively.