Year: 2008

Last week apart from raising interest rates on Foreign Currency Deposits, the RBI also took a some more measures. Permitting back to access the Liquidity Adjustment Facility (LAF) to the extent of 1% of net demand and time liabilities which amounts to an indirect reduction in the SLR and conducting the LAF twice daily. Over the week, the RBI injected liquidity to the tune of Rs 655bn.

RBI has sufficient ammunition to minimize the impact of the financial turmoil on the real economy. Tools include – The un-wind of the market stabilization bonds where the o/s amount is currently Rs1.8trillion. Domestic savings, which are currently at 34.8% of GDP is an additional cushion of liquidity.

India is not insulated from the current turmoil. However, the direct impact is limited and would depend on timely policy response in areas such as easing capital account norms and reduction in SLR/CRR to ensure that adequate credit is available for the real economy.

The IT spending in US Financial companies is likely to see a drop of 4% YoY [Dec-08] This contraction will continue for at least a year and the turnaround could happen only by 2010. Volumes for India IT companies are likely to be severely affected in F2010, although too uncertain to estimate as of now.

Even in the best case for Indian IT companies if the spending is unlikely to be cut down, due to collapse and M&A activities, BSFI segment will easily contract by 2-3%. The business environment has deteriorated considerably faster than what the street may have expected.

Ahead of th results, Analysts expect Infosys to lower its F2009 organic USD revenue guidance by ~2.5% to at least US$4,850mn in the worst case (vs. current guidance of US$4,970-5,050mn). Likewise, Satyam may also lower its F2009 USD revenue guidance to US$2,600mn (21.5% YoY revenue growth) from current guidance of 24-26% YoY revenue growth.

With 10% depreciation of the INR, IT companies are likely to stay on target for their earnings in Rupee terms.

India’s overall textile exports to the US fell by 3.6% while overall US imports fell by 1.7% in July 2008. China’s textile exports in July were up 0.7% yoy. In the apparel category, imports by the US fell by 0.5% while India’s apparel exports fell by 4.9% and China apparel exports grew by 1.1%.

India’s market share in textile export slipped 9bps yoy. China continued to regain market share in August, as its share rose to 37.0%, up about 89 bps yoy.

Despite 12% depreciation of the Indian Rupee versus RMB from Jan 2008 to July 2008. However, India does not seem to have benefited from this relative improvement in competitiveness yet.