India's Economy Is a Little Less Awful Than Before

Photograph by Dhiraj Singh/Bloomberg

India’s weak economy may be on the mend. After a dizzying fall for the country’s currency over the summer, the rupee has stabilized and investors are returning to the country’s equity markets. The rupee (which traded at 56.5 to the dollar at the start of June) plunged to nearly 69 by late August but has since strengthened and is now back to 62.25, thanks in part to tightening by the Reserve Bank of India that has increased rates by 50 basis points since September,

Stocks have bounced back, too, with the benchmark Sensex index up 7.7 percent so far this year. Indeed, Indian stocks are the surprise leaders among the BRIC nations: Russia’s Micex Index is flat for the year, China’s CSI 300 is down 3.8 percent, and Brazil’s index has dropped nearly 14 percent.

Overseas investors who had been running away from the market over the summer now seem bullish on Indian stocks, having purchased a net $1 billion in November, according to Bloomberg News. That’s the third consecutive month of inflows, contributing to the $17.3 billion in foreign purchases of Indian stocks this year, second only to foreign purchases in Japan.

Some data released today provided some support for the optimists. HSBC India’s purchasing manager index for manufacturing was 51.3 in November, compared with 49.6 in October. Any number greater than 50 indicates an expansion and less than 50 a contraction. The growth in manufacturing is the first since July, when the rupee swoon accelerated. In a promising sign for the Indian economy, the increase came at the same time manufacturers saw an easing in inflation, HSBC’s chief India economist Leif Eskesen said in a report published today. That could mean the central bank “is getting closer to the end of its tightening cycle, although it may still need to notch rates up a bit further.”

The manufacturing data come just a few days after India released numbers showing an uptick in economic growth. The Indian economy expanded 4.8 percent in the quarter ended in September, the government announced Friday. That’s still anemic for a developing country like India, but at least it’s better than the 4.4 percent recorded in the first quarter.

Indian consumers are starting to feel a little better, too. Consumer confidence hit a record low in September, just after the summer’s run on the rupee, according to MNI India, part of Deutsche Börse Group’s MNI Indicators, but confidence has risen for two months since and in November rose to its highest level since June, MNI announced on Friday.

Don’t get too excited, though: With the new central bank governor, Raghuram Rajan, raising interest rates to fight consumer price inflation of 10 percent, Goldman Sachs expects rates, currently at 7.75 percent, to hit 8.5 percent next year, the bank said on Nov. 21. Moreover, the improved consumer sentiment could be just a seasonal rebound connected to the Indian festival of Diwali in November, so it’s too soon to proclaim this consumer rebound has legs, according to Philip Uglow, MNI’s chief economist. “The continued high level of inflation and recent interest rate increases could weigh on sentiment ahead,” Uglow said in a statement released by MNI. “The weak economy, coupled with high interest rates, means consumer expectations for car and home buying remain at depressed levels.”

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