Economic conditions are not as bad as they seem. The future, in fact, is looking brighter than before.Two things going for the economy at present are the peaking of interest rates and inflation. The Reserve Bank of India (RBI) can pause its rate hiking spree on the back of the topping out of inflation. Equity and debt markets can then give up their bearishness and look ahead into a period of stable inflation with interest rates coming off.
Inflation for June 2011 printed at 9.44 percent, against consensus estimates of 9.65 percent. Inflation was higher by 0.8 percent from the previous month, but the non-food manufacturing index rose by just 0.2 percent month-on-month (ie, June compared to May) and 7.23 percent year-on-year (June 2011 vs June 2010).
The weakness in the IIP (Index of Industrial Production) is seen as a precursor to non-food manufacturing inflation coming off down the line. The IIP growth numbers for May 2011 came in weaker than expected at 5.6 percent against consensus estimates of over 8 percent. The IIP contracted by 3.1 percent month-on-month. This is the second straight month-on-month contraction in IIP. In April, the IIP had contracted by 1.6 percent month-on-month.
Inflation for the month of July is also likely to print at over 9.5 percent levels as the fuel price hikes announced by the government in June will be reflected in the July numbers – especially the spread on effects of transporters and others raising prices. If commodity prices, especially crude oil, stay steady, inflation will start trending down from August onwards. In this scenario, the RBI can hold on to policy rates.

Commercial vehicle sales, seen as a barometer of economic growth, registered 17.7%growth for June 2011. Growing commercial vehicle sales in a period of high inflation and high interest rates is promising. Reuters

There are signs of interest rates coming off. Banking system liquidity has eased with bank borrowings from the RBI coming off by over Rs 50,000 crore. Government spending, bond maturities, rising deposit growth and drop in currency in circulation have all contributed to the rise in liquidity. The easing liquidity situation has brought down borrowing costs for banks and corporates with yields on one-year and five-year corporate debt paper falling by around 40 basis points (100 basis points make 1 percent) from peaks seen in May.
On the economy front, exports have shown good performance for June 2011. They have grown by 46.4 percent year-on-year for June 2011. Exports at $29.2 billion have grown by over 12 percent month-on-month. Export growth is promising despite signs of a weakening global economy.
Commercial vehicle sales, seen as a barometer of economic growth, registered 17.7 percent growth for June 2011. Growing commercial vehicle sales in a period of high inflation and high interest rates is promising.
Direct tax collections were higher by close to 24 percent year-on-year in the first quarter of 2011-12. The higher direct tax collection is an indication that corporate profitability is still not threatened. On the whole, the Indian economy, while showing signs of weakening, is looking resilient despite global economic issues of US unemployment, Chinese inflation and eurozone debt.