India Booms

One key theme has been how well many emerging market economies have held up while the world’s biggest economies slow. India’s Q2 GDP report fits into that theme. The 8.8% year-over-year growth represents an acceleration from the 8.6% y-o-y pace in Q1. Its strong growth and elevated inflation keeps the door open to additional tightening. The central bank meets on Sept 16 and has already increased rates four times this year.

India, unlike many emerging markets, is not as reliant on exports. They account for less than 20% of the GDP. That said, the most recent data, covering last month, showed exporters increased at the slowest pace since the start of the year and Indian officials have acknowledged it might not reach its export target this year.

Growth in India was led by services (55% of India’s economy), which expanded by 9.7% and manufacturing, which expanded by almost 12.5%. Mining expanded by almost 9%. Agriculture output, which accounts for about 20% of India’s GDP, expanded by 2.8% after 0.7% expansion in Q1.

Wages in India are reportedly growing the fastest in Asia. Some economists expect wages to rise as much as 10% this year after 6.6% last year. Some of the inflation India is experiencing, however, is not a function of higher wages, but rather industrial bottlenecks. Facing shortages, for example, some auto companies have re-introduced waiting lists for customers.

The US dollar is in a large consolidative pattern against the rupee in the recent months–in the May dollar peaked near INR47.75 and a month later set a low near INR45.60. It has been confined to that range ever since. A large wedge pattern is being formed and the dollar is testing the upper end now near INR47.15. The bottom of the wedge comes in near INR46.12.

With the risk of tighter monetary policy, we are more favorably disposed to Indian equities than fixed income. India’s major equity indices are among the better performers of the large countries in the region this year–and easily the best performer among the BRICs.

Marc Chandler | Global Head of Currency Strategy