New Investment Policy 2012; structurally positive but gas-linked subsidy cap causes uncertainty: The empowered group of ministers (EGoM) has finally given an in-principle nod to the New Investment Policy (NIP) for urea manufacturers in order to attract new investments in the segment. Currently, India produces around 22 million tonne of urea as compared to the domestic consumption of 28-29 million tonne. The remaining gap is bridged by importing urea at a high cost. Thus, any move to attract fresh investments in urea capacity expansion (greenfield and brownfield both) will be structurally positive for the sector and the major fertiliser players looking to expand, eg Rashtriya Chemicals and Fertilizers (RCF), Tata Chemicals, Zuari Industries and Chambal Fertilisers and Chemicals. However, the proposal to link the subsidy in urea with the gas price within a band of $6.5-14 per mmbtu has caused some uncertainty and the domestic players have requested the government to increase the gas price limit to $20 per mmbtu. The policy will have to be cleared by the Cabinet Committee on Economic Affairs (CCEA) before it can be implemented.
SHAREKHAN SPECIAL
Monthly economy review
Economy: Industrial growth remains subdued; inflation continues to decline
In December 2011 the Index of Industrial Production (IIP) grew by 1.8%, which is a tad lower than the market's expectations. The relatively subdued growth was led by a weak performance in the manufacturing sector and a sharp decline in the capital goods sector. On a year-till-date (YTD) basis, the IIP growth stands at 3.6% as against 8.3% in the corresponding period of FY2011.
The Wholesale Price Index (WPI)-based inflation for January 2012 came in at 6.55%, slightly lower than the Street's expectations. However, the inflation rate for November 2011 has been revised upwards to 9.46% from the provisional figure of 9.11%.
The trade deficit for January 2012 expanded to $14.7 billion from 12.7% in December 2011. On a year-on-year (Y-o-Y) basis, the trade deficit increased by 117.9% and remains at higher levels. The growth in exports remained weak showing an increase of 10.1% YoY (up 6.7% in December 2011). Imports grew by 20.3% YoY (up 19.8% in December 2011).
Banking: In view of tight liquidity another CRR cut expected
In its last policy meeting, the Reserve Bank of India (RBI) had reduced the cash reserve ratio (CRR) by 50 basis points. In line with the continued liquidity pressure and the need to support growth we expect the RBI to continue with its liquidity easing measures and expect another cut in the CRR in the forthcoming mid quarter policy review meeting.
The credit offtake registered a growth of 15.7% YoY (as on February 10, 2012), which was higher than the growth of 16.4% recorded in the previous month (as on January 13, 2011). The credit growth is lower than the RBI's guidance of 16%.
The deposits registered a growth of 15% YoY (as on February 10, 2012), which was lower than the 17.2% Y-o-Y growth seen during the previous month (on January 13, 2012). The growth in deposits has fallen due to the higher yields offered by the other debt instruments.
The credit/deposit (CD) ratio was at 75.6% (as on February 10, 2012), higher than 75.1% as on January 13, 2011. Meanwhile the incremental CD ratio increased to 96% for the period, which was higher than the ratio seen during the previous month.
The yields on the government securities (G-Secs; of ten-year maturity) stood at 8.21% as on February 24, 2012, in line with the previous month's levels. The G-Sec yields across the long-term maturities have increased on a month-on-month (M-o-M) basis.
Equity market: FIIs remain buyers
During the month-till-date (MTD) period in February 2012 (February 1-15), the foreign institutional investors (FIIs) were net buyers of equities and the domestic mutual funds were net sellers of equities. For the MTD period in February 2012 (February 1-15), the FIIs bought equities worth Rs13,222 crore while the domestic mutual funds sold equities worth Rs1,015 crore.
