Global cues may make or mar markets on Monday

European stocks too declined on Friday as investors await the release of nonfarm payrolls figures amid signs the US economy is sputtering, while Asian shares edged lower on Friday on profit booking ahead of key US jobs data.

Economists expect US non-farm payrolls to rise by a paltry 46,000 after a less-than-impressive 117,000 rise in July 2011. The unemployment rate is forecast to remain unchanged at 9.1 per cent. The US market remains closed on Monday, 5 September 2011, for the Labour Day holiday.

Back home, there are concerns that India’s strong Q1 June 2011 GDP growth data could prompt the Reserve Bank of India (RBI) to continue raising interest rates when it undertakes mid-quarter policy review on September 16, 2011 to restrain inflation, which remains well above the RBI's perceived comfort level of 5 to 6 per cent. The latest data showed that the Indian economy expanded 7.7 per cent in Q1 June 2011 from a year earlier, helped by a robust 10 per cent growth in the services sector. The manufacturing sector grew an annual 7.2 per cent in Q1 June 2011, while farm output rose an annual 3.9 per cent, the data showed.

It may be noted that the apex bank has raised its main interest rate 11 times since March last year, but annual inflation has remained stubbornly high above RBI’s comfort levels.

RBI recently stated that there is a need to rebalance demand from consumption to investment by stepping up savings in the economy. In order to achieve a 9 per cent growth in Twelfth Five Year Plan (2012-17), the investment rate of 40.5 per cent would be required if incremental capital output ratio (ICOR) remains unchanged from 4.5 per cent during the Eleventh Plan. This requires augmenting saving as well as bringing about technological and institutional improvements to lower ICOR.

Annual report

In its annual report for 2010-2011 released on August 25, 2011, RBI said that there is a need to step up savings in the economy. The current account deficit (CAD) that finances the saving-investment gap has averaged less than 1% of GDP over past two decades.

Even assuming a higher a CAD/GDP ratio of 2 per cent, gross domestic saving (GDS) rate need to be raised by about 5 percentage points from 33.7 per cent in 2009-10, RBI said, which underscores the importance of augmenting saving as well as bringing about technological and institutional improvements to realise higher growth through higher investments and lower ICOR.

If global crude oil prices stay at current level, further increase in prices of administered oil products will become necessary to contain subsidies, RBI said. The near-term prospects for agricultural sector remain good. Farm secretary P. Basu on Tuesday last that improved rainfall in August 2011 will likely result in record farm out in the crop year from that began on 1 July 2011. Sufficient rainfall now will also leave enough soil moisture for winter-sown crop such as wheat, Basu said adding good rains could help boost rural income and may help bring down food inflation. Meanwhile, Indian firms relying on European and US markets are worried about a likely economic slowdown in the US and Europe. Bilateral trade between India and the US stood at $36.5 billion in 2010.