Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered
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Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

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Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered Presentation Transcript

  • India – Macro challenges and policy responses November 2013
  • Not much respite from weak growth 2
  • Growth on a weak footing Back to square one %y/y Non government sector is under immense pressure %y/y 12% 14% 12% 10% 10% 8% Forecast 8% 6% 6% 4% 4% 2% 2% 0% 0% Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar09 09 10 10 11 11 12 12 13 13 14 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Source: Standard Chartered Research 3 View slide
  • From high inflation/high growth to sticky inflation/low growth % y/y 12% RBI starts hiking rates by 25bps 11% 10% GDP 9% 8% 7% 6% RBI hikes by 50bps RBI starts easing RBI starts Forecasts: hiking another 25bps increase in repo rate expected before end of 2013 5% 4% 3% WPI 2% 1% 0% Q4-FY7 Q2-FY8 Q4-FY8 Q2-FY9 Q4-FY9 Q3-FY10 Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 Q3-FY14 Sources: CEIC, Standard Chartered Research 4 View slide
  • Investment demand collapses Slowing capex on new projects is worrying INR bn, %y/y 350 Infrastructure dominates capex spending % share of corporate capex, FY11 & FY13 80 300 Capex growth rate Capex on existing projects Power FY11 Metals 60 FY13 Telecom Hotels 250 40 200 Construction Cement 20 Textiles 150 Petroleum 0 100 Ports and Airports Capex on new projects -20 50 Transport services & equipments Chemicals Others 0 -40 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 0 10 20 30 40 Sources: RBI, Standard Chartered Research 50 5
  • Projects getting stalled INR bn 25,000 160,000 140,000 20,000 120,000 100,000 15,000 80,000 10,000 60,000 40,000 5,000 20,000 - FY03 FY04 FY05 FY06 Shelved projects FY07 FY08 FY09 New projects FY10 FY11 FY12 FY13 Outstanding (RHS) Sources: CMIE, Standard Chartered Research 6
  • The vanishing “animal spirits” No improvement in project approvals % of total projects above INR150 cr delayed Negative sentiment impacting investment intention % y/y 200% 54.0% Investment intention 52.0% 52.0% 150% 50.0% 100% 48.8% 48.0% 46.4% 50% 46.0% 44.8% 45.2% 0% 44.0% 42.0% -50% 40.0% April 2010 April 2011 April 2012 December 2012 May-13 -100% Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Sources: RBI, CEIC, Standard Chartered Research 7
  • Rising debt equity ratio constraining capex Debt-to-equity ratio of CNX 500 firms 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Dec Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Sources: CEIC, Standard Chartered Research 8
  • High lending rates also affecting investment demand % 8 13 Nominal lending rate (RHS) 7 12 6 11 5 10 4 Real lending rate 9 3 8 2 1 7 0 6 FY03 -08 FY09 FY10 FY11 FY12 FY13 Sources: RBI, Standard Chartered Research 9
  • Worsening asset quality of banks another concern 16.0 14.0 12.0 Gross NPAs as % of gross advances 10.0 8.0 Restructured Std. Asset to Gross Advances (%) 6.0 4.0 2.0 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Jun'13 Sources: RBI, Standard Chartered Research 10
  • Investment slowdown is impacting household spend too Household consumption expenditure % y/y 12% 10% 8% 6% 4% 2% 0% Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Source: Standard Chartered Research 11
  • Consumer confidence remains weak Household economic conditions worsened …but some improvement in expectations 60 50 120 51.5 Q1 FY13 115 Q3 FY13 40 Q2 FY13 Q4 FY13 30 109.8 110 Q1 FY13Q2 FY13 Q3 FY13 Q1 FY14 105 Q1 FY14 20 100 10 95 0 Q4 FY13 90 Have become better off Have become worse off Current conditions Future expectations Source: CEIC, Standard Chartered Research 12
  • …particularly in urban areas Same store sales growth of retailers %y/y 50 45 40 35 Jubilant 30 25 20 Pantaloon lifestyle 15 10 Pantaloon Value 5 0 -5 Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12 FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 Sources: Company reports, Standard Chartered Research 13
  • …but consumption of staples relatively flat %y/y 18 16 Colgate 14 12 10 8 HUL Dabur 6 4 2 0 Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12 FY12 Q1-FY13 Q3-FY13 Q1-FY14 Sources: Company reports, Standard Chartered Research 14
  • ….as wage increases in rural areas still quite strong % y/y 25% 20% Nominal rural agri wages 15% 10% Nominal rural non-agri wages 5% May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 Sep-07 May-07 Jan-07 Sep-06 May-06 Jan-06 Sep-05 May-05 -5% Jan-05 0% Sources: CEIC, Standard Chartered Research 15
  • Some preliminary signs of growth bottoming out FY13 growth slips to 5%... Real GDP growth (% y/y) Pace of decline has moderated Real GDP growth (% y/y) 10 0.1 9 0.1 8 Decade average 0.1 7 0.1 6 0.0 5 0.0 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 0.0 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Sources: CEIC, Standard Chartered Research 16
  • ….but not many growth green-shoots shoots Vehicle sales % y/y, 3mma Air travel % y/y, 3mma 27 25% Commercial vehicles Domestic air travelers 20% 17 15% 10% Two wheelers 7 5% International air travellers 0% -3 -5% -10% Passenger vehicles -13 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 -15% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Mobile phone connections % y/y, 3mma Cargo Traffic and railway freight % y/y, 3mma 10% 50% 35% Cargo Traffic Mobile phone connections 40% Railway freight (RHS) 30% 25% 30% 20% 0% 15% 20% 10% 10% 5% 0% Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 May-11 0% Feb-11 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 May-11 Feb-11 -10% -10% Sources: CEIC, Standard Chartered Research 17
  • Credit deceleration has reversed in some sectors Credit to infrastructure % y/y, 3mma Credit to industry % y/y, 3mma 60% 35% 50% 25% 40% Infrastructure Industrial credit Power 30% 15% Roads Credit to small scale industries 20% 10% Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 5% Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Retail credit % y/y, 3mma Credit to service sector % y/y, 3mma 35% 35% Retail and wholesale trade 25% 25% Vehicle loans Retail credit 15% 15% Services Housing loans 5% Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 5% May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Sources: CEIC, Standard Chartered Research 18
  • Hopes on short term recovery stems from.... Impact of good monsoon on agriculture and rural consumption Continued export growth momentum on the back of global recovery Election related spending Some activity on projects which had recently received critical approvals …..we expect FY14 GDP growth at 4.7%, with Q2 Q2-FY14 being the bottom
  • Growth: structural issues 20
  • Declining productivity is at the root of the growth problem Total Factor Productivity (TFP) 200 190 180 170 160 150 140 130 120 110 100 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sources: CEIC, Standard Chartered Research 21
  • Savings fall faster than investments, widening the gap % of GDP 40 38 36 34 32 Savings to GDP ratio 30 28 Investment to GDP ratio 26 24 22 20 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 Sources: CEIC, Standard Chartered Research 22
  • NREGA has changed the wage dynamics % y/y 20% NREGA Implementation 18% Nominal urban wages 16% 14% 12% 10% 8% 6% Nominal rural wages 4% FY 13 FY 12 FY 11 FY 10 FY 09 FY 08 FY 07 FY 06 FY 05 FY 04 FY 03 FY02 0% FY 01 2% Sources: CEIC, Standard Chartered Research 23
  • Fiscal transfer mechanism adds to rural demand INR cr 2007-08 2011- (BE) -12 11th Plan total % growth Share MGNREGA 12,661 40,000 156,301 216% 22.6 Indira Awas Yojana 3,886 10,000 41,486 157% 6.0 National social assistance program 3,104 6,158 23,536 98% 3.4 PMGSY 6,500 20,000 65,002 208% 9.4 NRHM 10,509 18,115 69,214 72% 10.0 ICDS 5,193 10,000 38,980 93% 5.6 Mid-day meal 5,832 10,380 38,602 78% 5.6 Sarva Sikhsha Abhiyan 11,477 21,000 77,576 83% 11.2 JNNURM 5,508 13,700 48,485 149% 7.0 AIBP 5,446 12,650 46,622 132% 6.7 RGGVY 3,913 6,000 25,913 53% 3.7 Drinking water mission 7,320 11,000 46,722 50% 6.8 Rashtriya Krishi Vikas Yojana 1,200 7,811 18,550 551% 2.7 Total 81,217 186,539 691,976 130% 100.0 Sources: Planning Commission, Standard Chartered Research 24
  • The “chaotic” urbanisation process Urbanisation rate increased from 27.2% in 2001 to 31. 31.2% in 2011, 70% of urban population live in Class I towns, 42.6% of the urban population stay in million plus towns 2011 2001 % growth Statutory Towns 4,041 3,799 6% Census Towns 3,894 1,362 186% Urban Agglomerations 475 384 24% Out Growths 981 962 2% Class I towns 468 394 19% Million plus towns 53 35 51% Source: Standard Chartered Research 25
  • Gen “I” aspires a better life 1990s 2010 # Television channels 1 >500 # car models ~5 ~165 # Shopping malls 0 >500 % of household with mobile phones 0 ~60 Internet penetration, % 0 ~11 75% of population in 2020 will be from Gen “I” i.e. grew up in a liberalized economy (<14 years of age when economy started opening) Sources: Boston Consulting group, Standard Chartered Research 26
  • Inflation: Mixed signals 27
  • Fear of inflation prevails Mixed signals on inflation ... %y/y Pricing power reduces WPI which fell within the RBI’s 4-6% comfort zone has moved up 13 Sustained fall in core WPI indicates lack of pricing power CPI 11 9 CPI higher on the back of surprising increase in food prices, particularly vegetables Core CPI WPI 7 Second round effects of fuel price hike not being felt but risks from another round of fuel price increase remains Core WPI 5 INR effect not felt acutely, we estimate 70-100bps impact of 10% depreciation 3 1 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Sources: CEIC, Standard Chartered Research 28
  • Benign commodity prices and lack of pricing power positives % y/y 15 13 Imported inflation 11 9 7 5 Core inflation 3 1 -1 -3 -5 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Sep Mar-12 Sep-12 Mar-13 Sources: CEIC, Standard Chartered Research 29
  • Vegetable prices the culprit behind the recent rise 50% 40% Vegetables 30% Food prices 20% 10% 0% -10% -20% -30% Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Sources: CEIC, Standard Chartered Research 30
  • Internal imbalance led to persistent inflation Rising average inflation rates and inflation stickiness make us worried 12% 10% Alarm level 8% Average 6% WPI % YoY 4% 2% 0% -2% Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Sources: CEIC, Standard Chartered Research 31
  • CPI turns out to be stickier than WPI 20% CPI% YoY 15% 10% 5% 0% -5% Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Sources: CEIC, Standard Chartered Research 32
  • Inflation expectations are getting de de-hinged % y/y 14 12 13 1 year ahead 10 12 11 8 Current perception 10 WPI quarterly average (RHS) 9 6 8 4 7 6 2 5 4 0 Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12 FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 Sources: CEIC, Standard Chartered Research 33
  • Rising fiscal risks 34
  • Noble intent and strong execution in FY13 An ambitious fiscal consolidation plan Growth (%y/y), % of GDP (RHS) 30 Receipts Expenditure Regular revision in fuel product prices INR/ litre Fiscal deficit (RHS) -2 80 75 25 -3 Petrol 70 65 20 -4 60 15 55 -5 50 10 45 Diesel -6 40 5 35 0 -7 FY04 FY06 FY08 FY10 FY12 FY14 F 30 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Sources: CEIC, Standard Chartered Research 35
  • Fiscal deficit widened significantly in H1 H1-FY14, % Fiscal deficit as a % of GDP (RHS) 80 7 70 6 H1 fiscal deficit as a proportion of annual fiscal deficit 60 5 50 4 40 3 30 2 20 1 10 0 FY98 0 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14* Source: Standard Chartered Research 36
  • H1-FY14 fiscal deficit performance FY14 Slower taxes and high expenditure widen deficit As a proportion of annual aggregates Government likely to miss disinvestment target INR bn 80 800 70 700 60 600 50 40 H1FY14 5-yr avg 500 H1FY13 400 30 300 20 200 10 100 FY14 H1FY14 0 0 Tax revenue Total expenditure Fiscal deficit Disinvestment Stake sale in two metal companies Telecom spectrum auctions Dividends & profits Source: Standard Chartered Research 37
  • Fiscal equation: Budgeted vs. our estimates INR bn FY14 budgeted Our estimates Slippage H1 H2 Tax revenue 8,840 8,290 -550 3,075 5,215 Non-tax revenue incl. disinvestment target 2,387 2,287 -100 893 1,394 Total revenue 11,227 10,577 -650 3,968 6,609 Expenditure 16,652 16,152 -500 8,090 8,062 Fiscal deficit -5,425 -5,575 -150 -4,122 -1,453 Fiscal deficit as a % of GDP~ -4.8% -5.0% ~0.2% - - Source: Standard Chartered Research 38
  • Swing factors for fiscal deficit FY14 budgeted Our estimates 156 156 0 0 0 0 Coal-block auction 0 50 Medium Disinvestment 400 200 Medium Telecom-related revenue 400 400 High Dividends and profits 738 738 High INR bn Probability Unknown unknowns Metal-company-stake sales Resolution of tax dispute with a telecom company Private-company-stake sales by the government Uncertain Uncertain but if resolved, can yield INR 100bn Uncertain, but if resolved, can yield INR 120bn Known unknowns Source: Standard Chartered Research 39
  • External sector developments 40
  • Increased openness is welcome but… USD bn 600 Imports 500 400 Exports 300 200 100 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14(E) Sources: CEIC, Standard Chartered Research 41
  • …. need to worry about the trade deficit Trade deficit USD bn 0 -50 -100 -150 -200 -250 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E Sources: CEIC, Standard Chartered Research 42
  • Why is trade deficit worsening? Imports, USD bn Exports, USD bn FY10 FY13 Change Oil 87.1 169.3 82.2 24.4 Gold and Silver 29.6 55.6 26 43.4 14.5 Machinery 19.7 27.6 7.9 15.7 27 11.3 Electronics 20.9 31.5 10.6 Textiles 19.8 27.3 7.5 PreciousStones 16.1 22.6 6.5 Cereal 2.9 9.6 6.7 Chemicals 11.9 19.2 7.3 Rubber 2.7 5.1 2.4 Coal 8.9 15.4 6.5 Plastics 3.3 6.3 3 Ores 7.7 14.9 7.2 Iron and Steel 3.6 6.2 2.6 Transport 11.6 13.7 2.1 Ores and Minerals 8.6 5.5 -3.1 Edible Oil 5.6 11.3 5.7 178.7 300.5 121.7 288.4 490.8 202.5 Commodities FY10 FY13 Change Petro related products 28.2 60.3 32.1 Machinery/ electronics, Engg 34.6 59 Gems and jewelllery 28.9 Chemicals, pharma and cosmetics Total exports Commodities Total Imports Sources: CEIC, Standard Chartered Research 43
  • Widening deficits raise alarm about macro stability Fiscal deficit spills on to the current account % of GDP Governance deficit Number of cabinet decisions taken in a year 1% Jun 12- Jun 13 Chidambaram Effect 0% Jul 11 - Jun 12 -1% CAD Jul 10 - Jun 11 -2% -3% Jul 09 - Jun 10 Fiscal deficit -4.0(F) -4% Jul 08 - Jun 09 -5% -4.8(f) Jul 07 - Jun 08 -6% Jul 06 - Jun 07 -7% Mar-04 Mar-07 Mar-10 Mar-13 20 70 120 170 220 Source: Standard Chartered Research 270 44
  • The outlook on C/A deficit appears favourable Gold Imports duty C/A deficit likely to narrow substantially USD bn 400 9% 350 8% 0 -5 7% Import duty (%) RHS 300 6% -10 250 5% -15 200 4% Forecast -20 150 3% -25 100 2% Gold imports (tons) 50 -30 1% Q1FY14 Q4FY13 Q3 FY13 Q2 FY13 Q1 FY13 0% ` Q4FY12 0 -35 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Sources: CEIC, Standard Chartered Research 45
  • FII outflows on tapering fear, but stabilising recently Bond outflows have outpaced equities Indian equities have benefited most from QE3 Net daily portfolio inflows, USD mn, 30-day moving average Foreign buying of AXJ equities, USD bn 60 300 50 QE 1 Equities 200 40 100 30 0 20 -100 10 QE 3 OT QE2 Bonds -200 -300 Jan-13 0 -10 Mar-13 May-13 Jul-13 Sep-13 Sum INR IDR PHP KRW THB Equities received USD 15bn between Jan – May, outflow USD 2.8bn since then Bonds received USD 4.5bn, lost USD 9.4bn after that Source: CEIC, Standard Chartered Research 46
  • The importance and volatility of FII flows USD bn Exports Imports Trade balance FDI gross inward FII total FII equity FII debt May-12 24.8 41.7 -17.0 2.3 0.6 -0.1 0.7 Jun-12 24.9 36.2 -11.2 2.2 0.2 -0.1 0.3 Jul-12 23.1 40.2 -17.1 2.8 2.5 1.9 0.6 Aug-12 23.1 36.9 -13.8 3.5 2.0 1.9 0.1 Sep-12 24.9 41.8 -16.9 5.4 3.7 3.6 0.1 Oct-12 24.0 44.7 -20.6 3.2 3.6 2.2 1.5 Nov-12 23.3 41.3 -18.1 2.4 1.8 1.7 0.1 Dec-12 25.5 43.4 -17.8 2.6 4.9 4.6 0.3 Jan-13 25.7 45.7 -20.0 3.6 4.6 4.1 0.6 Feb-13 25.8 41.3 -15.5 3.1 5.3 4.6 0.7 Mar-13 30.7 40.5 -9.8 3.0 2.7 1.7 1.1 Apr-13 23.7 41.9 -18.3 2.3 2.0 1.0 1.0 May-13 24.5 44.6 -20.1 5.2 4.1 1.2 Jun-13 23.8 36.0 -12.2 1.6 1.4 -7.5 -1.9 -5.7 Jul-13 25.8 38.1 -12.9 1.65 -3.0 -0.9 -2.1 Aug- 13 26.1 37.0 -10.9 1.40 -2.3 -0.95 -1.4 Sep -13 27.6 34.4 -6.7 0.73 1.9 -1.2 Oct- 2013 27.2 37.3 -10.5 0.83 2.9 -2.0 Sources: CEIC, RBI, Standard Chartered Research 47
  • BoP expected to surprise positively 48 Sources: CEIC, RBI, Standard Chartered Research
  • Outstanding debt situation needs a close watch External commercial debt is on the rise and short term debt too USD bn 140 119 120 External commercial debt 100 96.70 80 60 Short-term debt 40 20 0 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sources: RBI, CEIC, Standard Chartered Research 49
  • Assessing the risk from short term debt USD bn, outstanding as of June 2013 180 160 140 120 100 80 60 40 20 0 Short term debt Trade credit NRI Deposit FII in GoISec Hedged ECB* Unhedged ECB* Sovereign debt * The hedged proportion is taken to be 50% as an approximation Source: Standard Chartered Research 50
  • Its different this time There are similarities to 1991… % y/y . .. but also important differences % 12 10 FY13 50 51 66 Exports as % of GDP 5.7 8.5 16.7 Currency vs. 5 year average 20 2.0 -10 Short-term debt/FX reserves 6 FY97 Services as % GDP 8 FY91 227 51 61.9 Stable inflows as % of trade deficit 54 132 85 Capital openness 2.2 3.0 4.9 FY97 FY91 FY13 4 2 0 -2 -4 -6 GDP growth Inflation Fiscal deficit C/A deficit Source: Standard Chartered Research 51
  • External Vulnerability Index (ST external debt to reserves ratio) India’s vulnerability has increased between 2007 and 2013 beating the trend in rest of Asia 200 783 493 180 160 140 120 100 80 TH KR 60 ID PH IN 40 MY 20 TW CN 0 1997 2007 2013F Source: Standard Chartered Research 52
  • Early Fed tapering fears adds to external weakness INR depreciates close to 16% Sources: Bloomberg, Standard Chartered Research 53
  • INR depreciation feeds into macro risks – negative feedback loop Higher inflation 70-80bps impact on inflation of a 10% depreciation Higher fiscal deficit Fuel and fertiliser subsidies likely to go up External debt refinancing risks Unhedged FX exposure component of the USD 390bn external debt Little impact on CAD Exports are relatively insensitive to exchange rate movements Confidence Currency depreciation can push back investment decisions
  • Policy responses and INR outlook 55
  • RBI took strong steps to tighten liquidity and stem depreciation ew liquidity framework will push overnight rates higher R trillion RBI announced the following steps on 15 July….. LAF limited to 1% of NDTL of the banking system from 17 Jul Marginal Standing Facility(MSF) rates have been increased b 200 bps to 10.25%, penalising borrowings under the MSF. 1.0 Banks to borrow cash up to 1% of NDTLs at 7.25% 0.5 Followed by additional measures on 23 July….. Our forecasts LAF limited to 0.5% NDTL of each bank Banks will have to hold cash equivalent of at least 99% of CRR on a daily basis, compared with 70% earlier(Eff. 27 July). 0.0 ……..And the markets reacted swiftly. -0.5 15 July close level 16 July open level 24 July Level Change 15-24 July Overnight call money rate (%) 7.15% 9.25% 10% +285bps USD-INR 59.89 59.14 59.15 -0.74 6M USD-INR forward premia (annualised, %) 6.40% 7.60% 9.50% 3.10% 1Y OIS rate (%) 7.62% 8.75% 9.45% +183bps 5Y OIS rate (%) 7.60% 8.32% 8.40% +80bps 10Y GoISec yield (%) 7.55% 8.05% 8.42% +87bps -1.0 End August End September -1.5 Banks to borrow cash in excess of 1% of NDTLs at 10.25% -2.0 Banking system's cash deficit -2.5 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 56
  • USD 11bn package announced by the FM The USD 11bn math USD bn 7 6 6 5 4 4 4 3 2 1 1 0 Overseas borrowings o.w. oil companies Quasi sovereign bond NRI deposit This inflow has not hit the market as of now Sources: Standard Chartered Research 57
  • Rules on outflows tightened FDI outflows norms made tighter USD bn Outward remittances have been small USD bn 0 1.4 1.2 -5 1 -10 0.8 0.6 -15 0.4 -20 0.2 -25 0 FY02 FY04 FY06 FY08 FY10 FY12 FY07 FY09 FY11 FY13 In our view, not many corporate were investing more than 100% of their net worth on outward FDI We do not interpret these measures as capital controls but weak sentiments has left the market with such a perception Source: Standard Chartered Research 58
  • Demand for USDs for oil imports partially taken off the market Commodities FY10 FY13 % of total imports Oil 87.1 169.3 34% Gold and Silver 29.6 55.6 19.7 27.6 5.6% Electronics 20.9 31.5 6.4% PreciousStones 16.1 22.6 4.6% Chemicals 11.9 19.2 decided to open a forex swap window to meet the entire daily dollar requirements of three public sector oil marketing companies (IOC, HPCL and BPCL)~ 11.3% Machinery - RBI 3.9% - This should take away ~ USD 6-8 bn per month demand away from the market Source: CEIC, Standard Chartered Research 59
  • Tapping the NRI diaspora USD bn, outstanding as of June 2013 80 70 60 50 40 30 20 10 0 NRI Deposits FCNR(B) NR(E)RA NRO Source: RBI, Standard Chartered Research 60
  • Measures announced to attract USD 10 10-15bn Overseas borrowing by banks against tier 1capital made cheaper % New Interest rate on 3Y FCNR(B) deposits after adjusting for ~4.0 ~4.0 6.2 Swap cost 7 3.5 ~4.00-4.25 7.84 - 8.1 Landed cost of one year overseas funds 11.0 8.00-8.25 New 0.39 0.39 1.25-1.5 7.2 Spread over LIBOR 1Y swap cost Landed cost of one year overseas funds under the loan route 8.84 - 9.1 % Old Old 1.25-1.5 6M LIBOR Banks’ lower INR funding costs via the FCNR (B) scheme to attract more flows India has attracted USD17 bn till Nov 8 2013. Source: Standard Chartered Research 61
  • How to think about the recent RBI measures? Policy priorities No easy choice in a slowing economy with high CAD, buffeted by global shocks Inflation is emerging as a concern again after a brief respite and dominating mindspace Speculation about INR depreciation was becoming a self-fulfilling prophecy (drawing a line on the sand) fulfilling RBI’s “hands-off” approach was interpreted as “weakness” Success of the measures Clearly indicated that the policymakers do not want too much depreciation Gave them space to take more corrective steps to address the structural challenges (CAD reduction and CAD financing) s RBI’s credibility increased as a central bank not wary of taking difficult decisions Difficulty of implementation No clarity on which inflation metric is going to be used – CPI or WPI Transmission mechanism not clear, interest rate could be a blunt instrument What more to expect? 50bps repo rate hike and 50 bps MSF rate cut, more liquidity easing More measures to create buffer on the external sector Intervention on the other side? Risks of the measures If measures sustain a little longer then growth may be impacted – monetary policy stance has changed Weaker growth outlook can trigger equity outflows and put more pressure on INR Does not address the core macro issues – false sense of stability
  • Index inclusion could be a game-changer changer Our estimates of FII inflows into GoISecs if India is included in GBI GBI-EM-GD index AuM tracking GBI-EM-GD index (A) USD 200-250bn Estimated GoISec weightage in the index (B) 10% Estimated inflows from funds tracking GBI-EM-GD (C=A*B) USD 20-25bn Estimated EM dedicated funds not tracking GBI-EM-GD index (D) USD 350-400bn Assumed allocation to GoISecs (E) 3%-5% Estimated inflows from EM dedicated funds not tracking GBI-EM-GD index (F=D*E) USD 10.5 - 20 Total inflows (G=C+F) USD 30.5-45 bn Current foreign holding (H) USD 8bn Incremental flows due to index inclusion (G-H) USD 22.5-37bn Source: Standard Chartered Research 63
  • The wildcard of politics 64
  • Political deadlock in parliament A weaker NDA, a weaker UPA? Ruling Coalition Number of seats in Lok Sabha Number of seats in Lok Sabha Opposition UPA with outside support 281 NDA (BJP and allies) 132 India National Congress 202 Left 20 UPA allies 30 Others 106 Seats needed to be in majority 270 Parties providing outside support to UPA SP 22 UPA less support from SP 259 BSP 21 Seats needed to be in majority if DMK and left abstain 261 JD(S) 3 Seats needed to be in majority if DMK, left and TMC abstain 242 RJD • • 3 When is the next general election likely? – risks of an early election receding The pivotal issue of the general election yet to be identified – choice between economy, religion and corruption Source: Standard Chartered Research 65
  • Everybody likes to be populist! Fiscal burden of the Food Security bill % of GDP Land bill to increase the time for land acquisition % of total land holdings 4.5% 90% 1.4% Marginal and small holdings< 2 hectares 85% 4.0% 3.5% 1.2% 80% 3.0% 1.0% 2.5% 75% 0.8% 2.0% 0.6% 70% 1.5% Large holdings > 10 hectares 0.4% 1.0% 65% 0.5% 0.2% 60% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 0.0% 1970- 1976- 1980- 1985- 1990- 1995- 2000- 2005- 201071 77 81 91 96 01 06 11 Land bill proposes 4X increase in rural land price and 2X in urban Source: Standard Chartered Research 66
  • Ahead of busy election cycle 5 states to hold elections in Q4-2013; general elections in 2014 2013; 600 Loksabha seats* 500 400 300 Assembly seats 200 100 0 Madhya Pradesh Mizoram Delhi Rajasthan General election Source: Standard Chartered Research 67
  • The reform pipeline appears limited Pipeline of reform bills requiring parliamentary approval is small Increase in FDI limit for insurance Real estate regulatory bill Goods and Services tax (GST) Direct tax code Quite a few policy changes require a simple executive decision Clearance of delayed projects by CCI Urea price decontrol Decisions regarding coal pricing pool and renegotiations of PPAs Regulator for the road sector to quicken projects Liberalization of FII registration norms Delhi Mumbai industrial corridor National manufacturing investment zone Source: Standard Chartered Research 68
  • Fragmented polity increases the risk of a hung parliament 430 54 % of votes in favour of parties other than BJP and INC (RHS) 380 52 330 50 280 48 Number of parties contesting the general elections 230 180 46 44 130 80 42 30 40 1984 1989 1991 1996 1998 1999 2004 2009 Source: Standard Chartered Research 69
  • But weak coalitions are not new to India … Number of coalition parties and stability of the government 13 # of months/ years the government lasted # of parties in ruling coalition 11 9 7 5 13M 10 M 11 M May-96 Mar-97 Mar-98 5Y 5Y 3 1 -1 Oct-99 May-04 May-09 Source: Election Commission, Standard Chartered Research 70
  • Rates outlook 71
  • SCB India forecasts FY09 FY10 FY11 FY12 FY13(F) FY14(F) GDP growth, % 6.7 8.6 9.3 6.2 5.0 4.7 WPI, % 8.0 3.9 9.6 8.8 7.4 6.0 Fiscal balance, % of GDP -6.0 -6.3 -5.1 -5.9 -4.9 -5.0 CAD, % of GDP -2.4 -2.8 -2.6 -4.2 -4.8 -2.4 Repo rate, % 5.00 5.00 6.75 8.50 7.75 8.00 Reverse repo rate, % 3.50 3.50 5.75 7.50 6.75 7.00 USD-INR, end-March 50.70 44.90 44.60 50.94 54.50 63.0 India’s Fiscal Year (FY) is from 1 Apr to 31 Mar Source: Standard Chartered Research 7
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