Indian economic growth hits 18-year high

Indian equities made strong gains in May, with the MSCI India Index returning 7% in US dollar terms, amid healthy data on domestic consumption and still-ample liquidity, alongside a moderation in inflationary pressures.

The economy grew at its fastest pace in almost two decades during the fiscal year ending March 2007, boosted by robust expansion in manufacturing, services and exports.

Corporate results provided further support, with full-year earnings from a majority of our holdings coming in broadly in line with, or exceeding, expectations.

Economic growth hits 18-year high

Economic growth accelerated to an 18-year high of 9.4% in the 2006-07 fiscal year, as factories ramped up production to meet surging consumer demand, and strength in the services sector cushioned weak farm output. The robust expansion was even more impressive as it was achieved against the headwinds of rising inflationary pressures, a tighter monetary environment and a continued appreciation of the rupee against the US dollar. Going forward, however, growth is expected to moderate as monetary tightening measures start to bite. Industrial production may also slow as a stronger rupee impacts export orders.

Fund raising activity gains pace

May proved a busy month for equity issuers: HDFC privately placed US$768m worth of shares, or about 7% of its enlarged capital; HDFC Bank announced plans to raise US$1bn via both the domestic and ADR markets; ICICI Bank intends to raise US$500m through a sale of a 5% stake in the company; whilst Tata Power unveiled plans to raise US$600m to fund its acquisition of coal mines in Indonesia.

Corporate earnings upbeat

Full-year earnings from our holdings were broadly positive: HDFC benefited from healthy loan growth and strong asset quality; ING Vysya Bank released results that were in line with its expansionary plans; Asian Paints benefited from strong residential demand; GAIL was aided by steady growth in its transmission and petrochemicals business; whilst Hero Honda posted steady figures on robust sales. Other companies that posted strong results were MphasiS, Gujarat Gas and Jammu & Kashmir Bank.

Corporate activity

Sun Pharmaceutical Industries agreed to buy Israeli generic drug maker Taro Pharmaceutical Industries for US$454m. The acquisition will provide Sun with a basket of new products for the US market. Elsewhere, IT services companies continued to expand their overseas presence, with Infosys Technologies announcing the expansion of its Czech facility, and Satyam Computer Services opening a development centre in Sydney, Australia. Finally, the Reserve Bank of India has allowed HDFC Bank to start a non-banking finance company which will undertake retail operations such as auto and personal loans.

Aberdeen Asset Management Asia Ltd