Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered
Transcript of Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered
India – Macro challenges and policy responsesresponses
November 2013
Macro challenges and policy
Not much respite from weak growthNot much respite from weak growthNot much respite from weak growthNot much respite from weak growth
2
Growth on a weak footing
Forecast8%
10%
12%
Back to square one%y/y
0%
2%
4%
6%
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
10%
12%
14%
Non government sector is under immense pressure%y/y
Source: Standard Chartered Research 3
0%
2%
4%
6%
8%
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
7%
8%
9%
10%
11%
12%RBI starts
hiking rates
by 25bps
GDP
% y/y
From high inflation/high growth to sticky inflation/low growth
0%
1%
2%
3%
4%
5%
6%
7%
Q4-FY7 Q2-FY8 Q4-FY8 Q2-FY9 Q4-FY9 Q3-FY10 Q1-FY11
WPI
RBI starts
hiking rates
by 25bps RBI hikes by
50bps
From high inflation/high growth to sticky inflation/low growth
RBI starts
easing
Forecasts:
another
25bps
increase in
repo rate
RBI
starts
hiking
Q3-FY11 Q1-FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 Q3-FY14
Sources: CEIC, Standard Chartered Research 4
repo rate
expected
before end
of 2013
Investment demand collapses
Slowing capex on new projects is worryingINR bn, %y/y
40
60
80
250
300
350
Capex on
existing projectsCapex growth
rate
-40
-20
0
20
0
50
100
150
200
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Capex on new
projects
Infrastructure dominates capex spending% share of corporate capex, FY11 & FY13
Power
Metals
Telecom
Hotels
Construction
FY11
FY13
0 10 20 30 40 50
Cement
Textiles
Petroleum
Ports and Airports
Transport services & equipments
Chemicals
Others
5Sources: RBI, Standard Chartered Research
INR bn
Projects getting stalled
15,000
20,000
25,000
-
5,000
10,000
FY03 FY04 FY05 FY06 FY07 FY08
Shelved projects New projects
100,000
120,000
140,000
160,000
Sources: CMIE, Standard Chartered Research 6
-
20,000
40,000
60,000
80,000
FY08 FY09 FY10 FY11 FY12 FY13
New projects Outstanding (RHS)
The vanishing “animal spirits”
48.8%
52.0%
50.0%
52.0%
54.0%
No improvement in project approvals% of total projects above INR150 cr delayed
46.4%
44.8%45.2%
40.0%
42.0%
44.0%
46.0%
48.0%
April 2010 April 2011 April 2012 December 2012
May-13
Negative sentiment impacting investment intentions% y/y
100%
150%
200%
Investment
intention
-100%
-50%
0%
50%
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
7Sources: RBI, CEIC, Standard Chartered Research
Rising debt equity ratio constraining
Debt-to-equity ratio of CNX 500 firms
130.0
140.0
150.0
160.0
80.0
90.0
100.0
110.0
120.0
Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec
Rising debt equity ratio constraining capex
Sources: CEIC, Standard Chartered Research 8
Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13
High lending rates also affecting investment demand
5
6
7
8
%
0
1
2
3
4
FY03 -08 FY09 FY10
Real lending rate
High lending rates also affecting investment demand
Nominal lending rate (RHS)
11
12
13
Sources: RBI, Standard Chartered Research
6
7
8
9
10
FY11 FY12 FY13
9
Worsening asset quality of banks another concern
Gross NPAs as % of gross advances
10.0
12.0
14.0
16.0
2.0
4.0
6.0
8.0
10.0
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Worsening asset quality of banks another concern
Sources: RBI, Standard Chartered Research
FY07 FY08 FY09 FY10 FY11 FY12 FY13 Jun'13
Restructured Std. Asset to
Gross Advances (%)
10
Investment slowdown is impacting household spend too
8%
10%
12%
Household consumption expenditure% y/y
0%
2%
4%
6%
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Investment slowdown is impacting household spend too
Source: Standard Chartered Research 11
Consumer confidence remains weak
Household economic conditions worsened
Q1 FY13
Q2 FY13
Q3 FY13
51.5
40
50
60
Q4 FY13
Q1 FY14
0
10
20
30
Have become better off Have become worse off
Consumer confidence remains weak
…but some improvement in expectations
109.8110
115
120
Q1 FY13Q2 FY13Q3 FY13
Q4 FY13
Q1 FY14
90
95
100
105
Current conditions Future expectations
12Source: CEIC, Standard Chartered Research
…particularly in urban areas
Same store sales growth of retailers %y/y
30
35
40
45
50
-5
0
5
10
15
20
25
Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12
Pantaloon lifestyle
Pantaloon Value
Jubilant
Sources: Company reports, Standard Chartered Research 13
FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14
12
14
16
18
…but consumption of staples relatively flat
%y/y
0
2
4
6
8
10
Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12
Dabur
Colgate
…but consumption of staples relatively flat
FY12 Q1-FY13 Q3-FY13 Q1-FY14
HUL
Sources: Company reports, Standard Chartered Research 14
….as wage increases in rural areas still quite strong
% y/y
15%
20%
25%
Nominal rural agri wages
-5%
0%
5%
10%
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
….as wage increases in rural areas still quite strong
Sources: CEIC, Standard Chartered Research 15
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Nominal rural non-agri wages
Some preliminary signs of growth bottoming out
FY13 growth slips to 5%...Real GDP growth (% y/y)
Decade average
8
9
10
4
5
6
7
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Some preliminary signs of growth bottoming out
Pace of decline has moderatedReal GDP growth (% y/y)
0.1
0.1
0.1
Sources: CEIC, Standard Chartered Research 16
0.0
0.0
0.0
0.1
Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13
….but not many growth green-shoots
-13
-3
7
17
27
Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13
Commercial vehicles
Passenger vehicles
Two wheelers
Vehicle sales % y/y, 3mma
Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13
-10%
0%
10%
20%
30%
40%
50%
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Mobile phone connections
Mobile phone connections% y/y, 3mma
shoots
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
International air travellers
Domestic air travelers
Air travel% y/y, 3mma
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
0%
5%
10%
15%
20%
25%
30%
35%
-10%
0%
10%
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Cargo TrafficRailway freight (RHS)
Cargo Traffic and railway freight% y/y, 3mma
Sources: CEIC, Standard Chartered Research 17
Credit deceleration has reversed in some sectors
10%
20%
30%
40%
50%
60%
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
Roads
PowerInfrastructure
Credit to infrastructure% y/y, 3mma
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
5%
15%
25%
35%
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
Vehicle loans
Retail credit
Housing loans
Retail credit% y/y, 3mma
Credit deceleration has reversed in some sectors
5%
15%
25%
35%
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
Credit to small scale industries
Industrial credit
Credit to industry% y/y, 3mma
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
5%
15%
25%
35%
May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13
Services
Retail and wholesale trade
Credit to service sector% y/y, 3mma
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
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
Some activity on projects which had recently received critical approvals
…..we expect FY14 GDP growth at 4.7%, with Q2-FY14 being the bottom
Growth: structural issuesGrowth: structural issuesGrowth: structural issuesGrowth: structural issues
20
Declining productivity is at the root of the growth problem
160
170
180
190
200
Total Factor Productivity (TFP)
100
110
120
130
140
150
160
1982 1984 1986 1988 1990 1992 1994 1996
Declining productivity is at the root of the growth problem
Sources: CEIC, Standard Chartered Research
1996 1998 2000 2002 2004 2006 2008 2010
21
Savings fall faster than investments, widening the gap
32
34
36
38
40
% of GDP
Investment to GDP ratio
20
22
24
26
28
30
32
FY90 FY92 FY94 FY96 FY98 FY00
Savings fall faster than investments, widening the gap
Sources: CEIC, Standard Chartered Research
Investment to GDP ratio
FY02 FY04 FY06 FY08 FY10 FY12
Savings to
GDP ratio
22
NREGA has changed the wage dynamics
% y/y
12%
14%
16%
18%
20%
Nominal urban wages
0%
2%
4%
6%
8%
10%
FY 01
FY02
FY 03
FY 04
FY 05
FY 06
NREGA has changed the wage dynamics
NREGA
Implementation
Sources: CEIC, Standard Chartered Research 23
FY 07
FY 08
FY 09
FY 10
FY 11
FY 12
FY 13
Nominal rural wages
Fiscal transfer mechanism adds to rural demand
INR cr 2007-08 2011-
MGNREGA 12,661 40,000
Indira Awas Yojana 3,886 10,000
National social assistance program 3,104 6,158
PMGSY 6,500 20,000
NRHM 10,509 18,115
ICDS 5,193 10,000
Mid-day meal 5,832 10,380
Sarva Sikhsha Abhiyan 11,477 21,000
JNNURM 5,508 13,700
AIBP 5,446 12,650
RGGVY 3,913 6,000
Drinking water mission 7,320 11,000
Rashtriya Krishi Vikas Yojana 1,200 7,811
Total 81,217 186,539
Fiscal transfer mechanism adds to rural demand
-12 (BE) 11th Plan total % growth Share
40,000 156,301 216% 22.6
10,000 41,486 157% 6.0
6,158 23,536 98% 3.4
20,000 65,002 208% 9.4
18,115 69,214 72% 10.0
24
10,000 38,980 93% 5.6
10,380 38,602 78% 5.6
21,000 77,576 83% 11.2
13,700 48,485 149% 7.0
12,650 46,622 132% 6.7
6,000 25,913 53% 3.7
11,000 46,722 50% 6.8
7,811 18,550 551% 2.7
186,539 691,976 130% 100.0
Sources: Planning Commission, Standard Chartered Research
The “chaotic” urbanisation process
Urbanisation rate increased from 27.2% in 2001 to 31.towns, 42.6% of the urban population stay in million plus towns
2011
Statutory Towns 4,041
Census Towns 3,894
Urban Agglomerations 475
Out Growths 981
Class I towns 468
Million plus towns 53
The “chaotic” urbanisation process
31.2% in 2011, 70% of urban population live in Class I towns, 42.6% of the urban population stay in million plus towns
2001 % growth
3,799 6%
1,362 186%
384 24%
962 2%
394 19%
35 51%
25Source: Standard Chartered Research
Gen “I” aspires a better life
1990s
# Television channels 1
# car models ~5
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)
# car models ~5
# Shopping malls 0
% of household with mobile phones 0
Internet penetration, % 0
1990s 2010
1 >500
~5 ~165
Sources: Boston Consulting group, Standard Chartered Research
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)
~5 ~165
0 >500
0 ~60
0 ~11
26
Inflation: Mixed signalsInflation: Mixed signals
27
Fear of inflation prevails
Mixed signals on inflation ...%y/y
CPI
Core CPI9
11
13
WPI
Core WPI
1
3
5
7
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
Pricing power reduces
� WPI which fell within the RBI’s 4-6% comfort zone has moved up
� Sustained fall in core WPI indicates lack of pricing power
� CPI higher on the back of surprising increase in food prices, particularly
Sources: CEIC, Standard Chartered Research 28
increase in food prices, particularly vegetables
� Second round effects of fuel price hike not being felt but risks from another round of fuel price increase remains
� INR effect not felt acutely, we estimate 70-100bps impact of 10% depreciation
Benign commodity prices and lack of pricing power positives
7
9
11
13
15
% y/y
-5
-3
-1
1
3
5
7
Sep-09 Mar-10 Sep-10 Mar-11 Sep
Benign commodity prices and lack of pricing power positives
Imported inflation
Sources: CEIC, Standard Chartered Research
Sep-11 Mar-12 Sep-12 Mar-13
Core inflation
29
Vegetable prices the culprit behind the recent rise
20%
30%
40%
50%
-30%
-20%
-10%
0%
10%
Apr-05 Apr-07 Apr-
Vegetable prices the culprit behind the recent rise
Vegetables
Food prices
Sources: CEIC, Standard Chartered Research
-09 Apr-11 Apr-13
30
Internal imbalance led to persistent inflation
Average
Alarm level8%
10%
12%
Rising average inflation rates and inflation stickiness make us worried
-2%
0%
2%
4%
6%
Feb-96 Feb-98 Feb-00 Feb-02 Feb-04
Internal imbalance led to persistent inflation
Rising average inflation rates and inflation stickiness make us worried
Sources: CEIC, Standard Chartered Research
WPI % YoY
Feb-06 Feb-08 Feb-10 Feb-12
31
CPI turns out to be stickier than WPI
10%
15%
20%
-5%
0%
5%
10%
Dec-96 Dec-98 Dec-00 Dec-02 Dec-
CPI turns out to be stickier than WPI
CPI% YoY
Sources: CEIC, Standard Chartered Research
-04 Dec-06 Dec-08 Dec-10 Dec-12
32
Inflation expectations are getting de
Current perception
10
11
12
13
14
% y/y
4
5
6
7
8
9
10
Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12
Inflation expectations are getting de-hinged
1 year ahead
8
10
12
Sources: CEIC, Standard Chartered Research
WPI quarterly average (RHS)
0
2
4
6
FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14
33
Rising fiscal risksRising fiscal risks
34
Noble intent and strong execution in FY13
An ambitious fiscal consolidation planGrowth (%y/y), % of GDP (RHS)
-4
-3
-2
20
25
30Receipts Expenditure Fiscal deficit (RHS)
-7
-6
-5
-4
0
5
10
15
FY04 FY06 FY08 FY10 FY12 FY14 F
Noble intent and strong execution in FY13
Petrol
65
70
75
80
Regular revision in fuel product prices INR/ litre
Sources: CEIC, Standard Chartered Research 35
Diesel
30
35
40
45
50
55
60
Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13
Fiscal deficit widened significantly in H1
H1 fiscal deficit as a proportion of annual fiscal deficit
50
60
70
80
0
10
20
30
40
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Fiscal deficit widened significantly in H1-FY14, %
H1 fiscal deficit as a proportion of annual fiscal deficit
Fiscal deficit as a % of GDP (RHS)
4
5
6
7
Source: Standard Chartered Research 36
0
1
2
3
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14*
H1-FY14 fiscal deficit performance
H1-
5-yr avg
H1-FY13
50
60
70
80
Slower taxes and high expenditure widen deficitAs a proportion of annual aggregates
H1-FY14
avgFY13
0
10
20
30
40
Tax revenue Total expenditure Fiscal deficit
FY14 fiscal deficit performance
500
600
700
800
Government likely to miss disinvestment target INR bn
Source: Standard Chartered Research 37
FY14
H1-FY14
0
100
200
300
400
Disinvestment Stake sale in two metal companies
Telecom spectrum auctions
Dividends & profits
Fiscal equation: Budgeted vs. our estimates
INR bn FY14 budgeted Our estimates
Tax revenue 8,840
Non-tax revenue incl. disinvestment target 2,387
Total revenue 11,227
Expenditure 16,652
Fiscal deficit -5,425
Fiscal deficit as a % of GDP~ -4.8%
Fiscal equation: Budgeted vs. our estimates
Our estimates Slippage H1 H2
8,290 -550 3,075 5,215
2,287 -100 893 1,394
Source: Standard Chartered Research 38
10,577 -650 3,968 6,609
16,152 -500 8,090 8,062
-5,575 -150 -4,122 -1,453
-5.0% ~0.2% - -
Swing factors for fiscal deficit
INR bn FY14 budgeted
Unknown unknowns
Metal-company-stake sales 156
Resolution of tax dispute with a telecom company
0
Private-company-stake sales by the government
0government
Known unknowns
Coal-block auction 0
Disinvestment 400
Telecom-related revenue 400
Dividends and profits 738
FY14 budgeted Our estimates Probability
156 Uncertain
0Uncertain but if resolved, can yield INR 100bn
0Uncertain, but if resolved, can yield INR
120bn
Source: Standard Chartered Research 39
120bn
50 Medium
200 Medium
400 High
738 High
External sector developmentsExternal sector developmentsExternal sector developmentsExternal sector developments
40
Increased openness is welcome but…
USD bn
400
500
600
0
100
200
300
FY01 FY02 FY03 FY04 FY05 FY06 FY07
Increased openness is welcome but…
Imports
Sources: CEIC, Standard Chartered Research 41
Exports
FY08 FY09 FY10 FY11 FY12 FY13 FY14(E)
…. need to worry about the trade deficit
-100
-50
0
Trade deficitUSD bn
-250
-200
-150
-100
FY01 FY02 FY03 FY04 FY05 FY06 FY07
…. need to worry about the trade deficit
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E
Sources: CEIC, Standard Chartered Research 42
Why is trade deficit worsening?
Commodities FY10 FY13 Change
Petro related products
28.2 60.3 32.1
Machinery/ electronics, Engg
34.6 59 24.4
Gems and jewelllery 28.9 43.4 14.5
Chemicals, pharmaand cosmetics
15.7 27 11.3
Exports, USD bn
and cosmetics 15.7 27 11.3
Textiles 19.8 27.3 7.5
Cereal 2.9 9.6 6.7
Rubber 2.7 5.1 2.4
Plastics 3.3 6.3 3
Iron and Steel 3.6 6.2 2.6
Ores and Minerals 8.6 5.5 -3.1
Total exports 178.7 300.5 121.7
Imports, USD bn
Commodities FY10 FY13 Change
Oil 87.1 169.3 82.2
Gold and Silver 29.6 55.6 26
Machinery 19.7 27.6 7.9
Electronics 20.9 31.5 10.6
Sources: CEIC, Standard Chartered Research 43
Electronics 20.9 31.5 10.6
PreciousStones 16.1 22.6 6.5
Chemicals 11.9 19.2 7.3
Coal 8.9 15.4 6.5
Ores 7.7 14.9 7.2
Transport 11.6 13.7 2.1
Edible Oil 5.6 11.3 5.7
Total Imports 288.4 490.8 202.5
Widening deficits raise alarm about macro stability
Fiscal deficit spills on to the current account% of GDP
-2%
-1%
0%
1%
CAD
-4.8(f)
-4.0(F)
-7%
-6%
-5%
-4%
-3%
Mar-04 Mar-07 Mar-10 Mar-13
Fiscal deficit
Widening deficits raise alarm about macro stability
Governance deficitNumber of cabinet decisions taken in a year
Jul 10 - Jun 11
Jul 11 - Jun 12
Jun 12- Jun 13 Chidambaram Effect
20 70 120 170 220 270
Jul 06 - Jun 07
Jul 07 - Jun 08
Jul 08 - Jun 09
Jul 09 - Jun 10
44Source: Standard Chartered Research
The outlook on C/A deficit appears
Gold Imports duty
Import duty (%) RHS
5%
6%
7%
8%
9%
250
300
350
400
Gold imports(tons)
0%
1%
2%
3%
4%
5%
0
50
100
150
200
`
Q4FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4FY13
Q1FY14
The outlook on C/A deficit appears favourable
-15
-10
-5
0
C/A deficit likely to narrow substantially USD bn
45Sources: CEIC, Standard Chartered Research
-35
-30
-25
-20
-15
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Forecast
FII outflows on tapering fear, but stabilising
100
200
300
Equities
Bond outflows have outpaced equitiesNet daily portfolio inflows, USD mn, 30-day moving average
-300
-200
-100
0
100
Jan-13 Mar-13 May-13 Jul-13 Sep-13
Bonds
Equities received USD 15bn between Jan – May, outflow USD 2.8bn since then
Bonds received USD 4.5bn, lost USD 9.4bn after that
stabilising recently
QE 1
QE 3
40
50
60
Indian equities have benefited most from QE3Foreign buying of AXJ equities, USD bn
Source: CEIC, Standard Chartered Research 46
QE2
OT
QE 3
-10
0
10
20
30
Sum INR IDR PHP KRW THB
May, outflow USD 2.8bn since then
The importance and volatility of FII flows
USD bn
Exports Imports Trade balance
May-12 24.8 41.7 -17.0
Jun-12 24.9 36.2 -11.2
Jul-12 23.1 40.2 -17.1
Aug-12 23.1 36.9 -13.8
Sep-12 24.9 41.8 -16.9
Oct-12 24.0 44.7 -20.6
Nov-12 23.3 41.3 -18.1Nov-12 23.3 41.3 -18.1
Dec-12 25.5 43.4 -17.8
Jan-13 25.7 45.7 -20.0
Feb-13 25.8 41.3 -15.5
Mar-13 30.7 40.5 -9.8
Apr-13 23.7 41.9 -18.3
May-13 24.5 44.6 -20.1
Jun-13 23.8 36.0 -12.2
Jul-13 25.8 38.1 -12.9
Aug- 13 26.1 37.0 -10.9
Sep -13 27.6 34.4 -6.7
Oct- 2013 27.2 37.3 -10.5
The importance and volatility of FII flows
FDI gross inward
FII total FII equity FII debt
2.3 0.6 -0.1 0.7
2.2 0.2 -0.1 0.3
2.8 2.5 1.9 0.6
3.5 2.0 1.9 0.1
5.4 3.7 3.6 0.1
3.2 3.6 2.2 1.5
2.4 1.8 1.7 0.1
Sources: CEIC, RBI, Standard Chartered Research
2.4 1.8 1.7 0.1
2.6 4.9 4.6 0.3
3.6 4.6 4.1 0.6
3.1 5.3 4.6 0.7
3.0 2.7 1.7 1.1
2.3 2.0 1.0 1.0
1.6 5.2 4.1 1.2
1.4 -7.5 -1.9 -5.7
1.65 -3.0 -0.9 -2.1
1.40 -2.3 -0.95 -1.4
0.73 1.9 -1.2
0.83 2.9 -2.0
47
BoP expected to surprise positivelyexpected to surprise positively
Sources: CEIC, RBI, Standard Chartered Research
48
Outstanding debt situation needs a close watch
External commercial debt is on the rise and short term debt tooUSD bn
100
120
140
0
20
40
60
80
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06
Outstanding debt situation needs a close watch
External commercial debt is on the rise and short term debt too
119
96.70
External commercial debt
06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Short-term debt
Sources: RBI, CEIC, Standard Chartered Research 49
Assessing the risk from short term debt
100
120
140
160
180
USD bn, outstanding as of June 2013
0
20
40
60
80
Short term debt Trade credit NRI Deposit FII in GoISec
* The hedged proportion is taken to be 50% as an approximation
Assessing the risk from short term debt
Source: Standard Chartered Research 50
FII in GoISec Hedged ECB* Unhedged ECB* Sovereign debt
Its different this time
FY97
FY91 FY13
4
6
8
10
12
There are similarities to 1991… % y/y
. .. but also important differences %
-6
-4
-2
0
2
4
GDP growth Inflation Fiscal deficit C/A deficit
FY91 FY97 FY13
Services as % GDP 50 51 66
Exports as % of GDP 5.7 8.5 16.7
. .. but also important differences %
Source: Standard Chartered Research 51
Currency vs. 5 year average 20 2.0 -10
Short-term debt/FX reserves 227 51 61.9
Stable inflows as % of trade deficit
54 132 85
Capital openness 2.2 3.0 4.9
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
120
140
160
180
200783 493
KR
THID
PH
0
20
40
60
80
100
120
1997
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
Source: Standard Chartered Research 52
PH
MY
IN
CNTW
2007 2013F
Early Fed tapering fears adds to external weakness
INR depreciates close to 16%
Early Fed tapering fears adds to external weakness
Sources: Bloomberg, Standard Chartered Research 53
INR depreciation feeds into macro risks
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
INR depreciation feeds into macro risks – negative feedback loop
FX exposure component of the USD 390bn external debt
Exports are relatively insensitive to exchange rate movements
Currency depreciation can push back investment decisions
Policy responses and INR outlookPolicy responses and INR outlookPolicy responses and INR outlookPolicy responses and INR outlook
55
RBI took strong steps to tighten liquidity and stem depreciation
Banks to borrow cash up to 1% of NDTLs at
7.25%
0.0
0.5
1.0
Our forecasts
New liquidity framework will push overnight rates higherINR trillion
Banking system's cash deficit
Banks to borrow cash in excess of 1% of NDTLs
at 10.25%
-2.5
-2.0
-1.5
-1.0
-0.5
Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
End August
End September
RBI took strong steps to tighten liquidity and stem depreciation
Our forecasts
� LAF limited to 1% of NDTL of the banking system from 17 July
� Marginal Standing Facility(MSF) rates have been increased b
200 bps to 10.25%, penalising borrowings under the MSF.
RBI announced the following steps on 15 July…..
……..And the markets reacted swiftly.
� LAF limited to 0.5% NDTL of each bank
� Banks will have to hold cash equivalent of at least 99% ofCRR on a daily basis, compared with 70% earlier(Eff. 27July).
Followed by additional measures on 23 July…..
56
September
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
……..And the markets reacted swiftly.
USD 11bn package announced by the FM
6
44
5
6
7
The USD 11bn mathUSD bn
0
1
2
3
4
Overseas borrowings o.w. oil companies
This inflow has not hit the market as of now
USD 11bn package announced by the FM
4
57
1
Quasi sovereign bond NRI deposit
Sources: Standard Chartered Research
This inflow has not hit the market as of now
Rules on outflows tightened
-10
-5
0
FDI outflows norms made tighterUSD bn
-25
-20
-15
FY02 FY04 FY06 FY08 FY10 FY12
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
0.8
1
1.2
1.4
Outward remittances have been smallUSD bn
Source: Standard Chartered Research 58
0
0.2
0.4
0.6
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
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 11.3%
Machinery 19.7 27.6 5.6%Machinery 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 3.9%
Demand for USDs for oil imports partially taken off the market
- RBI 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)~
Source: CEIC, Standard Chartered Research 59
- This should take away ~ USD 6-8 bn per
month demand away from the market
Tapping the NRI diaspora
50
60
70
80
USD bn, outstanding as of June 2013
0
10
20
30
40
NRI Deposits FCNR(B)
Source: RBI, Standard Chartered Research 60
NR(E)RA NRO
Measures announced to attract USD 10
Overseas borrowing by banks against tier 1capital made cheaper
Banks’ lower INR funding costs via the FCNR (B) scheme to attract more flows
%Old New
6M LIBOR0.39 0.39
Spread over LIBOR
1.25-1.5 1.25-1.5
1Y swap cost1Y swap cost
7.2 6.2
Landed cost of one year overseas funds under the loan route
8.84 - 9.1 7.84 - 8.1
India has attracted USD17
Measures announced to attract USD 10-15bn
Banks’ lower INR funding costs via the FCNR (B) scheme to attract more flows
%Old New
Interest rate on 3Y
FCNR(B) deposits after adjusting for
~4.0 ~4.0
Source: Standard Chartered Research 61
adjusting for
Swap cost 7 3.5 ~4.00-4.25
Landed cost of one year overseas
funds
11.0 8.00-8.25
India has attracted USD17 bn till Nov 8 2013.
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
� Speculation about INR depreciation was becoming a self-fulfilling prophecy (drawing a line on the sand)
� 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
� 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
� Weaker growth outlook can trigger equity outflows and put more pressure on INR
� Does not address the core macro issues – false sense of stability
How to think about the recent RBI measures?
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
fulfilling prophecy (drawing a line on the sand)
Clearly indicated that the policymakers do not want too much depreciation
s the structural challenges (CAD reduction and CAD financing)
RBI’s credibility increased as a central bank not wary of taking difficult decisions
CPI or WPI
Transmission mechanism not clear, interest rate could be a blunt instrument
50bps repo rate hike and 50 bps MSF rate cut, more liquidity easing
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
false sense of stability
Index inclusion could be a game-changer
Our estimates of FII inflows into GoISecs if India is included in GBI
AuM tracking GBI-EM-GD index (A)
Estimated GoISec weightage in the index (B)
Estimated inflows from funds tracking GBI-EM-GD
(C=A*B)
Estimated EM dedicated funds not tracking GBI-EM-GD Estimated EM dedicated funds not tracking GBI-EM-GD
index (D)
Assumed allocation to GoISecs (E)
Estimated inflows from EM dedicated funds not
tracking GBI-EM-GD index (F=D*E)
Total inflows (G=C+F)
Current foreign holding (H)
Incremental flows due to index inclusion (G-H)
changer
if India is included in GBI-EM-GD index
USD 200-250bn
10%
USD 20-25bn
USD 350-400bn
63
USD 350-400bn
3%-5%
USD 10.5 - 20
USD 30.5-45 bn
USD 8bn
USD 22.5-37bn
Source: Standard Chartered Research
The wildcard of politics The wildcard of politics The wildcard of politics The wildcard of politics
64
Political deadlock in parliament
Ruling CoalitionNumber of seats
in Lok Sabha
UPA with outside support 281
India National Congress 202
UPA allies 30
Parties providing outside support to UPA
A weaker NDA, a weaker UPA?
SP 22
BSP 21
JD(S) 3
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
OppositionNumber of seats
in Lok Sabha
NDA (BJP and allies) 132
Left 20
Others 106
Seats needed to be in majority 270
Source: Standard Chartered Research 65
UPA less support from SP 259
Seats needed to be in majority if DMK and left abstain
261
Seats needed to be in majority if DMK, left and TMC abstain
242
risks of an early election receding
The pivotal issue of the general election yet to be identified – choice between economy, religion and corruption
Everybody likes to be populist!
1.0%
1.2%
1.4%
Fiscal burden of the Food Security bill% of GDP
0.0%
0.2%
0.4%
0.6%
0.8%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Land bill proposes 4X increase in rural land price and 2X in urban
Marginal and small holdings< 2
hectares
3.0%
3.5%
4.0%
4.5%
80%
85%
90%
Land bill to increase the time for land acquisition% of total land holdings
Source: Standard Chartered Research 66
Largeholdings > 10 hectares
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
60%
65%
70%
75%
1970-71
1976-77
1980-81
1985- 1990-91
1995-96
2000-01
2005-06
2010-11
Land bill proposes 4X increase in rural land price and 2X in urban
Ahead of busy election cycle
400
500
600
5 states to hold elections in Q4-2013; general elections in 2014
0
100
200
300
Madhya Pradesh Mizoram Delhi
Loksabha seats*
2013; general elections in 2014
Source: Standard Chartered Research 67
Assembly seats
Delhi Rajasthan General election
The reform pipeline appears limited
Pipeline of reform bills requiring parliamentary approval is small
Increase in FDI limit for insurance
Goods and Services tax (GST)
Quite a few policy changes require a simple executive decision
Clearance of delayed projects by CCI
Decisions regarding coal pricing pool and renegotiations of PPAs
Liberalization of FII registration norms
National manufacturing investment zone
The reform pipeline appears limited
Pipeline of reform bills requiring parliamentary approval is small
Direct tax code
Real estate regulatory bill
Source: Standard Chartered Research 68
Quite a few policy changes require a simple executive decision
Urea price decontrol
Regulator for the road sector to quicken projects
Delhi Mumbai industrial corridor
Fragmented polity increases the risk of a hung parliament
280
330
380
430
% of votes in favour of parties other than BJP and INC
(RHS)
30
80
130
180
230
1984 1989 1991 1996 1998
Number of parties
contesting the general
elections
Fragmented polity increases the risk of a hung parliament
48
50
52
54
of parties other than BJP and INC
Source: Standard Chartered Research 69
40
42
44
46
1998 1999 2004 2009
Number of parties
contesting the general
elections
But weak coalitions are not new to India …
9
11
13
# of months/ years the government lasted
Number of coalition parties and stability of the government
13M 10 M 11 M
-1
1
3
5
7
May-96 Mar-97 Mar-98
But weak coalitions are not new to India …
# of parties in ruling coalition
# of months/ years the government lasted
Number of coalition parties and stability of the government
5 Y 5 Y
Oct-99 May-04 May-09
70Source: Election Commission, Standard Chartered Research
Rates outlookRates outlook
71
SCB India forecasts
FY09 FY10
GDP growth, % 6.7 8.6
WPI, % 8.0 3.9
Fiscal balance, % of GDP
-6.0 -6.3
CAD, % of GDP -2.4 -2.8
Repo rate, % 5.00 5.00
Reverse repo rate, % 3.50 3.50
USD-INR, end-March 50.70 44.90
FY11 FY12 FY13(F) FY14(F)
9.3 6.2 5.0 4.7
9.6 8.8 7.4 6.0
-5.1 -5.9 -4.9 -5.0
-2.6 -4.2 -4.8 -2.4
6.75 8.50 7.75 8.00
5.75 7.50 6.75 7.00
44.60 50.94 54.50 63.0
India’s Fiscal Year (FY) is from 1 Apr to 31 Mar
7Source: Standard Chartered Research
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