We welcome the 100Bps cut in interest rates. Though it comes
in late and the potential weakening of the rupee not apparent as yet, we do expect
a further 4-6% depreciation of the rupee (trade weighted).
Q310 earnings are expected to benefit from this cut. Also,
we have reviewed upwards our 2010 growth forecast from 3.5% from 3.8%.
As we highlighted in the beginning of the year, the EUR/USD
has regained stability. We foresee a short term weakening of the USD (on the back
of QE2) and hence the Euro staying above 1.35 over the next quarter.
This should allow our export driven sectors (and mainly the
hotel sector) to improve their top-line earnings.
However, major risk to this outlook remains the sluggish aggregate
demand growth in our major export markets (fiscal austerity measures= lower disposable
income= weaker consumption=lower growth!!!).
Notwithstanding a top-line increase in tourists arrivals and
spending (consumer behavior has changed), we might experience a short term, excess
capacity (by April next year, average room capacity in the industry will have increased
by 14% since 2007 and 7% since 2008) which could keep pressuring prices and our
high end segment still remains one of the most expensive in the world (for a long
haul destination).
Locally, inflation has already hit 2% in September and is expected
to exceed 3.5% by Q210, threatening real interest rates and raising rates again
will be a rather slow process.
The Banks’ net interest income and net earnings are expected
to remain under pressure in the short term.
The forthcoming budget is expected to focus on maintaining
the economic growth momentum, new fiscal measures...