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India’s markets rally but the data remains overwhelmingly negative

Stocks rallied in India today for the fifth consecutive session, fueled by the central bank’s surprise rate cut and reserve requirement reduction, with financials in particular rebounding from earlier lows. Comments from the minister of finance indicated that the Reserve may open 100 billion INR credit lines to both National Housing Bank and Small Industries Development Bank to increase flows for mortgages and small companies -adding to bullish public sentiment. Meanwhile the rupee was up on heavy US Dollar selling by banks.

We expect this relief buying to lose steam as rapidly as it arrived when domestic Indian investors (who are largely funding this rally, despite some media reports that foreign buyers have started to dip their toe in the water again) shift their attention from inflation to dimming growth prospects.

Trade data for September, released yesterday, is hardly encouraging. Export numbers reached their lowest growth Rate since November 2005 while trade deficit figures, despite coming in better than 3 out of 4 prior months due to declining commodity prices, still represents a 133.37% increase over the same month last year.

The current administration’s public stance is that, although a slowdown is now a foregone conclusion, GDP growth should maintain above 7% annually –enough to sustain job growth. This is wishful thinking. In a nation attempting to balance socialism with a stratified society where 25% of the total population subsists below the poverty line, job growth is critical for any party wishing to maintain power. This leaves Singh & co. little choice but to keep promoting a rosy picture before next year’s election.

One part of the government’s narrative -that the diversification of India’s export markets towards greater trade with OPEC nations and emerging Asia will insulate GDP growth from the slowdown in the EU and US, while at the same time heralding cheaper commodity prices as an inflation fix, sounds like suspiciously circular logic.

We continue to take a negative view on India’s short-term and intermediate-term prospects as the combination of a cooling global economy with short-sighted government policies stand to continue weighing heavily on the “I” in “BRIC”.

Andrew Barber