India: Will the Tortoise Pass the Hare ?

India's Finance Ministry raised its economic forecast for the year ending March 31, 2011. Back in Feb it had forecast 8.25%-8.75% growth and today increased that forecast to as much as 9.1%. Ironically, the increase in the growth pace is not expected to be accompanied by higher inflation. The revisions to growth appear to be at least in part driven by the heaviest monsoon rains in three years, helping the agriculture sector recovery from last year's drought.

For the current year, China is still positioned to outstrip India's growth, but next year it may be closer. China is shifting monetary policy in light of the higher inflation and robust lending and money growth. We anticipate China's economy slowing into the 8-9% range next year. India is likely to grow around 9%. There may be some quarters that India's growth exceeds China's.

India's stock market has easily outperformed China's this year. The S&P Nifty Index is up almost 15% this year vs a 12.25% loss for the Shanghai Composite.

Indian officials report that foreign investors have bought a record of INR1.34 trillion (~$29 bln) of Indian shares this year. Foreign investors have bought a net INR443.5 bln of Indian bonds this year. Figures from the Securities & Exchange Board indicate that since 1993 when foreigners were allowed to purchase Indian stocks and bonds, they have bought INR4.48 trillion of Indian shares and INR766 bln of foreign bonds.

Here in December, the rupee is the strongest Asian currency, appreciating 2.8% against the dollar. There is scope for additional dollar losses near term. The INR44.50 level offers initial support, but the two year low set in mid-Oct near INR43.9750 beckons.