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India Macro Outlook
Business Economics Banking
April 12, 2018
2
Growth
The normalization before the pickup
3
Consumption to be the key driver
Private consumption to remain buoyed:
Government payouts under the 7th Pay Commission to support urban consumption
Low interest rate environment
Moderate inflation and recovery in growth to support real incomes
FY19 Budget support to rural and agriculture sector
… supported by low interest rates
Recovery led by urban and rural consumption…
58.8
11.7
27.1
2.4
Pvt. Consumption Govt. ConsumptionGross Fixed Capital Formation Others
Pvt. Consumption majority share in GDP
-25
-15
-5
5
15
25
35
45
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Sales (% YoY) Personal Vehicle Two-wheelers
9.0
9.5
10.0
10.5
11.0
11.5
12.0
Feb
-15
May
-15
Au
g-1
5
No
v-1
5
Feb
-16
May
-16
Au
g-1
6
No
v-1
6
Feb
-17
May
-17
Au
g-1
7
No
v-1
7
Feb
-18
Outstanding Loans
Fresh LoansWeighted Average Lending Rate (%)
Last 12-month change = -0.71%Last 12-month change = -0.25%
4
Gradual recovery in capex cycle
• Improvement in capacity utilization
• Robust FDI inflows Demand recovery
• Unlocking credit channels as majority infrastructure lending is from PSB
INR2.1tn PSB recapitalization
• Instituting time-bound resolution of insolvency
Insolvency resolution
• Central govt. infra expenditure to grow by 21% in FY19
Public sector capex
1.04
1.09
1.13
1.18
1.05 1.04
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
FY12 FY13 FY14 FY15 FY16 FY17
Debt/Equity (x) …Private capex supported by lower corporate leverage…
0
50
100
150
200
250
2013 2014 2015 2016 2017 (Jan- 15 Dec)
Rs 000 cr. M&A of domestic assets
Power Power
Industrial Metals
Communication Others
…aided by industry consolidation
20%
25%
10%
16%
29% Roads
Railways
Urban Infra
Petro
Others
FY19 Union Budget infrastructure expenditure share
Public sector led capex cycle revival…
5
Exports recovery to be supported by global demand recovery
Continued pick-up in global growth … …to support India’s export growth in 2018
GST-transition has impacted export’s performance… ..but recent govt efforts would provide cushion
IMF WEO November 2017 forecasts 2016 2017 2018 2019
World 3.2 3.6 3.7 3.7
Advanced economies 1.7 2.2 2.0 1.8
Euro area 1.8 2.1 1.9 1.7
Major advanced economies (G7) 1.4 2.0 1.9 1.6
European Union 2.0 2.3 2.1 1.8
Emerging market and developing economies 4.3 4.6 4.9 5.0
Emerging and developing Asia 6.4 6.5 6.5 6.5
Emerging and developing Europe 3.1 4.5 3.5 3.3
ASEAN-5 4.9 5.2 5.2 5.3
Latin America and the Caribbean -0.9 1.2 1.9 2.4
Middle East and North Africa 5.1 2.2 3.2 3.2
Sub-Saharan Africa 1.4 2.6 3.4 3.4
50
51
52
53
54
-30
-20
-10
0
10
20
30
Feb
-14
Ma
y-1
4
Au
g-1
4
No
v-1
4
Feb
-15
Ma
y-1
5
Au
g-1
5
No
v-1
5
Feb
-16
Ma
y-1
6
Au
g-1
6
No
v-1
6
Feb
-17
Ma
y-1
7
Au
g-1
7
India exports (%YoY, 3mma)
Global manufacturing PMI (lhs)
0
5
10
15
20
25
30
35
40
Ru
ssia
Ko
rea
Ind
on
esia
UK
Au
stra
lia
So
uth
Afr
ica
Ma
lay
sia
Ph
ilip
pin
es
Bra
zil
Ta
iwa
n
Vie
tna
m
Ch
ina
Th
ail
an
d
Sin
ga
po
re
Tu
rkey
Ind
ia
New
Zea
lan
d
US
Eu
ro A
rea
Ger
ma
ny
Jap
an
HK
Improvement in FY18 exports (rhs)
Apr-Sep FY18 export growth Expediting refund of IGST paid on exports Extending Advance Authorization, Export
Promotion Capital Goods schemes GST on sale-purchase of duty credit scrips
reduced to 0% 24x7 customs clearance at the 18 sea ports and
at 17 airports Reduction in mandatory documents for
exports and imports reduced to 3 each from 10 Expansion of MEIS (Merchandise Exports
from India Scheme (Foreign Trade Policy)
Delta in growth rate: FYTD18 growth –FYTD17 growth
6
Corporate results encouraging; recovery getting embedded
Manufacturing sector:
Sales growth rises in double digits for the 2nd consecutive quarter, though aided by
favorable base due to demonetization in the same quarter last year
Raw material cost (% of sales) were at 50.0% in Q3FY18 (50.7% in Q2) as robust
volume growth more than offset the higher commodity prices
Higher other operating costs led to operating margin contracting to 14.1%, lower than
its recent high of 14.5% recorded in the previous quarter.
Services sector:
Sales growth recovered to a modest 2% from a de-growth of -1.6% in the last quarter.
Operating margin lowered to 20.3% (21.8% in Q2), driven by higher overhead
expenses
…with services sales growth showing recovery Manufacturing sales growth robust…
18%
19%
20%
21%
22%
23%
-2%
0%
2%
4%
6%
8%
10%
12%
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Services
Sales growth OPM [RHS]
9%
10%
11%
12%
13%
14%
15%
-2%
3%
8%
13%
18%
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Manufacturing(ex petro)
Sales growth OPM [RHS]
7
Most sectors get additional boost from favorable base
Sector No. of Cos.
Net Sales (% YoY) Operating Margin (%)
Dec-17 Sep-17 Dec-16 Dec-17 Sep-17 Dec-16
Auto 17 24.5% 19.7% 4.1% 13.0% 14.1% 11.2%
Auto Ancillaries 92 19.4% 13.6% 6.7% 13.6% 13.8% 13.3%
Cement 36 23.1% 11.3% 1.0% 15.0% 17.0% 15.8%
Chemicals 292 16.5% 6.6% -3.7% 13.3% 14.1% 13.0%
Pharma 113 2.1% 2.0% 5.1% 19.9% 20.6% 21.2%
Cap Goods 172 12.5% -0.9% 9.0% 11.5% 7.6% 11.3%
Steel 88 26.0% 25.8% 32.2% 16.3% 14.5% 15.5%
Other Metals 26 22.7% 28.3% 24.2% 19.9% 23.0% 24.9%
FMCG 144 9.1% 8.2% 1.0% 19.9% 20.7% 19.5%
Textiles 231 13.0% 1.5% -0.2% 8.8% 11.2% 11.8%
Power 22 7.5% 4.4% 3.3% 27.8% 40.1% 36.5%
Construction 73 5.9% -2.9% -2.2% 10.9% 8.0% 11.4%
IT 148 5.6% 4.6% 9.3% 24.3% 24.3% 24.7%
Telecom 23 -17.8% -18.2% -5.6% 26.7% 37.4% 23.7%
Aggregate 2,032 11.0% 6.6% 5.4% 17.1% 19.2% 18.3%
Manufacturing 1,479 15.3% 10.2% 6.8% 14.1% 14.5% 14.1%
Services 531 2.0% -1.6% 3.0% 20.3% 21.8% 20.6%
Services (Ex-IT, telecom) 360 6.0% -0.9% 0.5% 14.0% 12.8% 15.0%
Higher RM costs
Healthy volume + realizations
Global challenges continue
Weak global demand
CV sales the outperformer
Drivers for current quarter
Improved execution
Trade channels normalizing
GST concerns not yet over
8
Heat map indicates recovery getting more visible
YoY% ( PMIs in levels) Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18
Consumption
Domestic passenger vehicle sales 14.4 9.1 10.0 14.7 8.6 -11.2 15.1 13.8 11.3 -0.3 14.3 5.2 7.6 7.8 6.4
2 wheeler sales -7.4 0.0 0.3 7.3 11.9 4.0 13.7 14.7 9.1 -2.8 23.5 41.5 33.4 23.8 18.3
Tractor sales 5.5 7.5 24.5 19.3 11.7 -1.7 14.4 34.5 50.3 -2.7 17.3 27.7 38.1 38.6
Domestic aviation passenger traffic 26.3 16.8 14.7 15.4 18.0 20.8 11.9 16.0 17.5 20.9 16.4 17.5 17.9 23.2
Railway passenger traffic 1.4 -0.7 2.2 2.1 2.7 1.4 1.8 -2.5 -1.4 4.6 -4.6 1.4 1.0 1.0 2.1
Personal loan 12.9 12.0 16.4 14.4 13.7 14.1 15.0 15.7 16.8 16.0 17.3 18.9 20.0 20.4
Petrol + Diesel consumption -6.1 -2.4 0.9 3.3 9.8 7.7 9.3 -2.8 16.9 -0.2 7.1 8.9 14.8 6.8
Cellular subscribers 19.0 19.7 18.1 21.2 22.2 22.7 22.6 21.4 20.9 22.2 22.4 22.2 9.1 8.6
Rural wages 6.6 6.5 6.4 6.9 6.8 6.3 6.8 6.3 6.0 4.9 4.2 4.2
Investment
Central govt capex 7.2 25.8 115.7 37.7 92.4 0.2 20.2 -27.6 -15.7 264.6 -22.6 -36.2 -22.3 -189.8
State govt capex -11.7 13.5 23.1 -6.5 11.8 -15.3 -24.2 -16.7 -16.8 -13.0 14.4 16.7 17.0 3.8
Capital goods production -0.6 -2.4 9.4 -4.8 -1.6 -6.1 -1.1 7.3 8.7 3.5 10.0 14.4 14.6
Industry
Industrial production 3.5 1.2 4.4 3.2 2.9 -0.3 1.0 4.8 4.1 1.8 8.8 7.1 7.5
Manufacturing PMI 50.4 50.7 52.5 52.5 51.6 50.9 47.9 51.2 51.2 50.3 52.6 54.7 52.4 52.1 51
Industry credit -5.1 -5.2 -1.9 -1.4 -2.1 -1.1 -0.3 -0.3 -0.4 -0.2 1.0 2.1 1.1 1.0
Construction
Steel consumption 1.3 3.2 -4.0 8.2 1.1 5.4 3.7 6.0 2.1 6.1 9.1 6.2 7.2 28.3
Cement production -13.3 -15.8 -6.8 -5.2 -1.4 -3.3 1.1 0.7 0.1 -1.3 16.9 18.9 19.6 22.9
Services
Services PMI 48.7 50.3 51.5 50.2 52.2 53.1 45.9 47.5 50.7 51.7 48.5 50.9 51.7 49.8 50.3
Services: Transport
Commercial vehicle sales -0.6 7.3 9.3 -22.9 -6.4 1.4 13.8 23.2 25.3 6.4 50.4 52.6 39.7 31.1 24.6
Railway freight traffic -3.4 -0.7 3.4 3.1 4.5 2.5 4.0 6.1 4.9 6.8 6.6 12.3 8.7 5.9 7.5
Domestic aviation cargo traffic 0.5 -1.3 13.6 9.1 10.6 11.4 10.0 11.7 14.7 -0.4 15.5 11.7 6.0 8.0
Shipping cargo 4.4 0.5 8.9 6.3 4.9 4.5 1.0 -0.3 3.1 3.4 4.8 5.0 12.9 9.1 2.9
Services: Financial, Real Estate and Professional Services
Schedule bank credit growth 4.3 4.1 8.2 4.9 4.8 8.1 5.6 6.3 6.6 6.8 9.3 10.5 10.6 10.6
Stamp duty collection -19.6 -22.8 0.3 -3.7 1.5 9.5 4.4 -8.5 16.9 -6.3 61.9 78.8 71.2 -3.9
Services: Public Administration, Defence and Other Services
Central govt revenue exp (ex. interest) 33.0 22.0 -49.3 54.9 69.1 -22.5 13.8 1.1 -7.7 -20.6 43.7 21.0 -11.3 1.4
Proportion of indicators higher 44 80 40 60 40 60 60 52 44 76 72 58 41 38
9
FY19 GDP: Set for acceleration as disruption woes waning
FY19 GDP growth estimated at 7.5%, ↑ from 6.7% in FY18
1. Pickup in rural economy driven by Govt support
2. Urban consumption supported from centre + state pay commission
3. Gradual recovery in investment climate amidst bank recapitalization and resolution of stressed assets
3. Recovery in global demand
4. FDI support
1. Lower incremental support from public sector enterprises capital expenditure
2. Higher imports as growth rises
3. Residual GST transition
4. Higher than USD 65 pb oil prices
5.5
6.4
7.4
8.2
7.5
6.7
7.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
FY13 FY14 FY15 FY16 FY17 FY18 FY19
(%YoY)
10
Economy
Moving from Disruption to Recovery
11
Growth recovery on strong foundations
Broad-based growth
recovery
Structural reforms
Macro stability
Building a firm foundation for boosting potential economic growth
12
Institutional
•Goods & Services Tax
•Insolvency & Bankruptcy Code
•Monetary Policy Committee
•NITI Aayog
Macro
•Flexible Inflation Targeting Regime
•Revised FRBM Framework
•FDI liberalization
•Fuel price deregulation
•Make in India, Startup India, Skill India
Micro
•UDAY Scheme
•PSU Bank Recapitalization
•Jan Dhan Yojana, Suraksha Bima Yojana
•MUDRA Bank
•Smart Cities
Administrative
•Direct Benefits Transfer
•E-Biz Portals
•E-Auction of coal blocks
•Keeping food inflation under check
140
131 130
100
60
70
80
90
100
110
120
130
140
150
Jul-13 to Jun-14 Jul-14 to Jun-15 Jul-15 to Jun-16 Jul-16 to Jun-17
India's rank in World Bank's Ease of Doing Business Assessment
Improvementin Rank
Source: World Bank
Post Demonetization, Cash/GDP ratio has moderated from ~12% to 10.8%
In Nov-17, Moody’s upgraded India’s long term foreign currency rating to Baa2 from Baa3
In sign of increased financialization, cashless means of transaction is rising at a healthy pace
Progress lacking in the area of land & labor reforms along with adequate job creation
Structural enablers to support in medium term
13
Structural enablers: Early signs of impact already visible
Formalization of the economy led by GST and demonetization
0.5
1.5
2.5
3.5
4.5
5.5
6.5
F1
97
1
F1
97
3
F1
97
5
F1
97
7
F1
97
9
F1
98
1
F1
98
3
F1
98
5
F1
98
7
F1
98
9
F1
99
1
F1
99
3
F1
99
5
F1
99
7
F1
99
9
F2
00
1
F2
00
3
F2
00
5
F2
00
7
F2
00
9
F2
01
1
F2
01
3
F2
01
5
F2
01
7
F2
01
9B
E
Central Govt. direct tax as % of GDP
1997 VDIS scheme
1985 scheme
IDS1 and IDS2
39
10
30
0
5
10
15
20
25
30
35
40
45
Appeal / Review Approval of resolution plan
Commencement of liquidation
Corporate Insolvency Resolution Process under IBC (till date), no. of cases
Progress under IBC
Household Inflation Expectations (%)
Current 3M Ahead 1Y Ahead
FY13 10.1 11.3 13.2
FY14 12.0 13.2 15.0
FY15 11.2 11.4 12.3
FY16 9.3 9.6 10.2
FY17 7.5 8.4 9.5
FY18 6.7 7.5 8.4
Inflation expectations reined-in under Inflation Targeting Regime
6.4
0
10.0
3.6
0
2
4
6
8
10
12
Pre-GST New Total
Indirect Tax Registrant (mn)
14
Inflation
Separating the wheat from the chaff
15
Jan-Feb CPI has surprised on the downside
Downward surprise in CPI Inflation
2018 has begun on a positive note, as CPI inflation has surprised on the downside in the months of January and February
After unusual pick in food prices over Oct-Nov due to unseasonal rains, Dec-Jan-Feb have witnessed winter seasonal correction in prices at a faster clip
Within food, price of veggies corrected by a cumulative 21% over Dec-Jan-Feb to lead the downside, supported also by softer prices of pulses, sugar and eggs
Incoming mandi prices for Mar-18 indicate continued contraction in prices of veggies, which could add to further downside to Mar CPI reading
Q4FY18 CPI inflation prints are likely to undershoot RBI’s estimate of 5.1% for the quarter
…led by continued correction in food prices
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
1
2
3
4
5
6
7
Dec-
15
Jan
-16
Fe
b-1
6
Ma
r-1
6
Ap
r-16
Ma
y-1
6
Jun
-16
Jul-
16
Au
g-1
6
Se
p-1
6
Oct
-16
No
v-1
6
Dec-
16
Jan
-17
Fe
b-1
7
Ma
r-17
Ap
r-17
Ma
y-1
7
Jun
-17
Jul-
17
Au
g-1
7
Se
p-1
7
Oct
-17
No
v-1
7
Dec-
17
Jan
-18
Fe
b-1
8
Surprise vis-à-vis Market Expectation (bps, RHS)
Actual CPI
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Food & Beverages (%MoM, historical average)
FY18
16
Lagged adjustments in retail prices in Jan-18
FY19 Outlook: Crude trajectory ‘on watch’
Since Jun-17, India Crude Basket (ICB) has firmed up by ~41%, driven by both supply and demand side factors
After muted increases over Sep-Dec, Jan-18 saw lagged pass through of increase in ICB to retail fuel prices of petrol ad diesel
While crude prices had eased from a 3-year high in Feb/early Mar-18, but future trajectory will be a factor of OPEC & Russia’s production outcomes along with US shale.
We expect an average crude price of USD 60-65 pb in 2018 vs. USD 53 pb in 2017
A 10% rise in crude price tends to increase headline CPI by 15bps (with 2nd round impact)
Crude to depend on OPEC production
0
200
400
600
800
1000
1200
1400
1600
Sa
ud
i Ara
bia
UA
E
Ku
wa
it
Ira
q
Qa
tar
Ira
n
Nig
eria
Alg
eria
An
go
la
Ecu
ad
or
Lib
ya
Ga
bo
n
Eq
. Gu
inea
Spare Capcity: OPEC members ('000 bbl/day)
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
Jan
-17
Feb
-17
Ma
r-1
7
Ap
r-1
7
Ma
y-1
7
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
No
v-1
7
Dec
-17
Jan
-18
Feb
-18
Ma
r-1
8
India Crude Basket (USD/bbl, %MoM)Petrol price (Rs, %MoM)Diesel price (Rs, %MoM)
17
Outlook FY19: Upside risks owing to
imminent MSP hikes
CACP offers various concepts for measuring agriculture production costs - o A2 = Actual paid out cost, A2+FL = A2+ plus imputed value of family labour o C2 = Comprehensive cost incl imputed rent, interest on owned land & capital
Price for Rabi MSPs is already above 1.5x A2+FL costs
Alignment of Kharif MSPs to 1.5xA2+FL, will mean MSPs hike of ~15%YoY in FY19 vs. past 5 year average increase of 4%
Assuming a less than perfect correlation between MSP and market price, we can expect direct impact on CPI inflation to be ~50 bps (spread over H2 FY19-H1FY20)
Price of Rabi crops already at 1.5x of A2+FL cost But Kharif prices much lower
MSP Price hike if benchmarked to A2+FL cost could add ~50 bps to CPI inflation
0
50
100
150
200
250
300
350
400
1.5x A2+FL 1.5x C2
WPI Inflation (in bps)
CPI Inflation (in bps)
Kharif crops A2+FL C2 Rabi crops A2+FL C2
Paddy common 39 4 Wheat 112 38
Jowar hybrid 9 -19 Barley 67 18
Bajra 50 12 Gram 73 21
Maize 36 2 Lentil (Masur) 75 11
Ragi 2 -19 Rapeseed/mustard 84 26
Arhar (Tur) 58 14 Safflower 28 1
Moong 25 -6
Urad 59 15
Cotton medium staple 23 -8
Groundnut in shell 35 4
Sunflower seed 15 -12
Soyabean yellow 34 -2
Sesamum 28 -9
Nigerseed 1 -23
Gross Margin of MSP over Cost
18
Base effect to remain less supportive until mid 2018
Outlook FY19: Base Case
A year of 2 halves
An unfavorable base until Jun-18 is likely to weigh on H1 FY19 inflation readings
We expect CPI inflation to average ~5.3% in H1FY19 and thereafter correct close to 4.5% in H2, assuming a normal monsoon and crude prices in USD 60-65/bbl range
Impact of HRA from 7th CPC is showing nascent signs of tapering off – earlier than anticipated, but individual States pay commissions could undo some of it
Upside risks to remain limited amidst excess capacity and normalisation of supply side under GST, as reflected in still benign core-core ex housing inflation
To reiterate, risks on anvil – (i) Trajectory of crude & global commodity prices amidst pick up in global growth (ii) revision in MSPs (iii) monsoon outcome
Core-Core ex housing Inflation almost 90 bps below Core-Core CPI inflation
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Base effect less supportive until mid-2018
5.32
4.44
3.6
4.1
4.6
5.1
5.6
6.1
Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
YoY (%) Core-Core CPI Core-Core ex. housing
7CPC allowances effective from Jul'17
19
Monetary Policy
FY19 to be the year of flux
20
MPC’s journey so far
First three consecutive MPC decisions were ‘surprising’ for markets
Over the last 17-months, the MPC’s bias has seen a subtle shift: From accommodative to various shades of neutrality
• Inflation has exceeded the 4% target for three consecutive months now
• Likelihood of persistence of this trend through 2018
This could continue to keep MPC cautious in the coming months
MPC Decision
Consensus Expectation
Voting Outturn
Policy Stance Deviation of CPI Inflation from Target (bps, 3mma)
Oct-16 25 bps cut No change 6-0 Accommodative +63
Dec-16 No change 25 bps cut 6-0 Accommodative -45
Feb-17 No change 25 bps cut 6-0 Strong Neutral -125
Apr-17 No change No change 6-0 Strong Neutral* -159
Jun-17 No change No change 5-1** Weak Neutral -116
Aug-17 25 bps cut 25 bps cut 5-1** Weak Neutral -179
Oct-17 No change No change 5-1** Weak Neutral -163
Dec-17 No change No change 5-1** Weak Neutral -62
Feb-18 No change No change 5-1*** Weak Neutral +56
Apr-18 No change No change 5-1*** Weak Neutral +91
* Width of LAF corridor reduced to 50 bps from 100 bps; ** One vote in favor of cut; *** One vote in favor of hike
21
Prolonged pause likely for RBI, but with a rate hike bias
With real rates still in the comfortable range, monetary policy is in for a prolonged pause through FY19
• However, there could be a chance of a 25 bps rate hike in H2 FY19
• Risks on anvil- 1) Inflation (crude, monsoon & MSPs) 2) Fiscal
Pause Hike
1.3
-2.0
-8.0
-4.0
-0.3
-1.9
-0.9
2.5
2.5
2.0
2.8
-10 -8 -6 -4 -2 0 2 4
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY181Y Real T-Bill Yield (%)
Last 4Y average = 2.5%
22
…amidst firming up of interest rate expectations
OIS market is currently pricing in ~40 bps rate hike from the RBI by Mar-19
Expectation of a rising interest rate trajectory amid fast dwindling surplus on money market liquidity has already resulted in banks increasing their benchmark lending rates by 10 bps in Mar-18
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar-
17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar-
18
Median 1Y MCLR of SCBs (%)
-40
-30
-20
-10
0
10
20
30
40
50
Ap
r-17
May
-17
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
No
v-1
7
Dec-
17
Jan
-18
Feb
-18
Mar-
18
Ap
r-18
Market pricing of change in repo rate over the next 1Y (bps, 30dma)
23
Market Outlook
Stability in Volatility or Volatility in Stability
24
INR and rates manifesting difference in volatility
While volatility in INR has declined considerably, it has moved up in case of rates
For both FY17 & FY18, rates volatility can be attributed to regime change in monetary policymaking, one off episodes like demonetization, and the recent fiscal slippage
USDINR 10Y G-Sec Yield
Min Max Range Min Max Range
FY14 53.81 68.85 15.04 7.11 9.24 2.13
FY15 58.46 63.68 5.22 7.65 9.10 1.45
FY16 62.19 68.71 6.52 7.47 8.00 0.53
FY17 64.85 68.78 3.93 6.19 7.52 1.33
FY18 63.37 65.71 2.34 6.41 7.77 1.36
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
FY14 FY15 FY16 FY17 FY18
Annual Realized Volatility in USDINR
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
FY14 FY15 FY16 FY17 FY18
Annual Realized Volatility in 10Y G-Sec Yield
25
Global monetary tightening getting synchronized…
With global economic recovery getting synchronized, key central banks across the globe are considering tapering their QE programs, with some looking at further increase in their monetary policy rates
Over the course of next 12-months, the market is currently pricing in
• 59 bps of rate hike from the US Fed
• 35-128 bps of rate hike in key EM economies (cut expected in South Africa)
Sharp/ Unanticipated monetary actions could increase financial market volatility
-20
0
20
40
60
80
100
120
140
Can
ada
US
UK
No
rway
Swed
en
Au
stra
lia
Swit
zerl
and
Jap
an
Eu
rozo
ne
Tu
rkey
Ch
ina
Mal
aysi
a
Ph
ilip
pin
es
Ko
rea
Ind
ia
Th
aila
nd
Sou
th A
fric
a
Developed Economies EM Economies
Market pricing of change in monetary policy rate in next 1Y (bps)
26
…but dollar could trade with a bias for softness
The market is expecting a moderately bearish trajectory for the dollar in the next 1Y
• Tax cut likely to have a transitory impact on US wages
• US fiscal deficit likely to deteriorate towards on the back of the USD 1.5tn tax overhaul. Higher fiscal deficit is associated with dollar softness.
• The dollar index overvaluation persists by 7-10% basis different metrics
• Uncertainty persists on the future Fed policy direction under the new Fed Chief Powell and changing composition of the Fed board of governors. We expect a gradual pace of Fed rate hikes, penciling-in two more hikes in 2018.
• Reduction in safe haven demand for the dollar with recovery in trading partners such as Euro Zone still in its nascent stages
-10
-8
-6
-4
-2
0
2
4
70
80
90
100
110
120
130
Jan
-95
Jan
-97
Jan
-99
Jan
-01
Jan
-03
Jan
-05
Jan
-07
Jan
-09
Jan
-11
Jan
-13
Jan
-15
Jan
-17
DXY Index
US Fiscal Balance (% of GDP, RHS)
75
80
85
90
95
100
105
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Mar
-17
Sep
-17
Mar
-18
Sep
-18
Mar
-19
DXY Index
Bloomberg Consensus
27
Assessing demand-supply situation
Bonds
• Net supply of SLR securities is likely to be lower by INR 578 bn
• Market clearing would require significant absorption from Insurance & PF cos.
Rupee
• Demand for dollars is likely to increase by USD 16 bn
• While supply of dollars could prove just about enough, resultant BoP surplus could shrink
FY18 FY19
Current Account -57 -73
Merchandise Trade -164 -186
Invisibles 107 113
Capital Account 77 81
FDI 35 37
Portfolio 21 18
Loans 8 10
Banking Capital 13 16
BoP 20 8
BoP Outline (USD bn)
FY18 FY19
Total Supply 8,249 7,671
Central Government 4,024 3,651
State Government 3,450 3,850
T-Bills 775 170
Total Demand 8,249 7,671
Banks 2,500 2,500
Insurance Cos. & PFs 3,700 4,000
Others (MFs, PDs, FIIs, etc.) 2,949 1,171
RBI -900 0
Supply-Demand Gap 0 0
SLR Supply Pressure (INR bn)
28
How much can RBI intervene in FY19?
FX
• Basis our BoP projections, requirement for dollar purchases is likely to decline to USD 8bn in FY19 from USD 20bn in FY18
• Likelihood of drawdown of fwd reserves from current levels of USD 26bn
Bonds
• RBI is likely to turn into a net buyer of g-secs in FY19 depending upon BoP and reserve dynamics
• There is net liquidity requirement of ~INR 1500 bn in FY19, which needs to be filled with drawdown of fwd reserves and OMO purchases
o 50% drawdown of fwd reserves will imply room for INR 700 bn OMO purchase
-10
0
10
20
30
40
50
60
70
FY14 FY15 FY16 FY17 FY18 FY19
Net BoP RBI's Net Fwd Position
(USD bn)
Note: RBI’s fwd position for FY18 is as of Jan-18
Reserve money (assuming 12% Nominal GDP growth) 2823
LAF borrowing 0
BoP surplus 528
FX income 792
Requirement of liquidity provision from RBI 1503
met by
Projection of reserve money liquidity in FY19 (INR bn)
29
What do valuations suggest for INR and rates?
Despite ubiquity of deviations from fair value, the notion of fair value does tend to provide a medium term anchor
On the basis of relative inflation, INR is currently 6-7% overvalued
• Overvaluation decreases to 2-3% if one accounts for productivity differentials
On the basis of domestic and global policy signals, fair value of 10Y g-sec comes around 7.0% for Mar-18 and 7.5% for Mar-19
• The lower than anticipated Government borrowing for H1 FY19 has pushed bonds somewhat closer to fair value, but oil price remains a risk
y = 1.3481x + 0.0159R² = 0.6015
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5 -1.0 -0.5 0.0 0.5 1.0
An
nu
al
Ch
an
ge
in
10
Y G
-Se
c Y
ield
(%
)
Cumulative Policy Index
Note: REER index does not take into account productivity differentials
Note: Cumulative Policy Index captures annual changes in Repo Rate, Fiscal Deficit Ratio, and 10Y UST Yield
-15
-10
-5
0
5
10
15
Ap
r-12
Oct
-12
Ap
r-13
Oct
-13
Ap
r-14
Oct
-14
Ap
r-15
Oct
-15
Ap
r-16
Oct
-16
Ap
r-17
Oct
-17
From long term average
From fair valueINR's REER based overvaluation (%)
Based on rebased REER Index to 2011-12 base
30
Favourable domestic macros to limit upside risk
Notwithstanding global uncertainties, India is on a relatively sound footing on key economic and vulnerability parameters
• Institutional reforms like inflation targeting and setting up of MPC has boosted inflation fighting credibility
• Active reserve accumulation has helped build comfortable level of insurance against unwarranted volatility
• De facto policy preference for real interest rates has imparted macro-financial stability
FY19 Last 5Y Average Last 10Y Average
GDP Growth (%) 7.5 7.1 7.1
CPI Inflation (%) 4.7 5.7 7.9
Government Debt (% of GDP) 67.1 69.0 69.8
Current Account Balance (% of GDP) -2.5 -1.4 -2.4
FX Reserves (USD bn) 445-450* 359 322
Import Cover (No. of months) 10.3 9.6 9.4
Real 10Y G-Sec Yield (%, Annual Avg.) 3.2 1.7 -0.2
* Including forward reserves
31
FY19 Outlook: YBL View
Expect trading range of 7.00-7.50%* for FY19
Concerns
Oil, US monetary tightening, MSP, Liquidity neutrality
Support
Attractive real yield, Low FX vol
Rates Expect 12m trading range at 64.5-67.0
Concerns
Oil, more than anticipated US monetary tightening, relatively high domestic equity valuations
Support
Attractive carry, comfortable reserves, BoP surplus, US policy preference for weak dollar
INR
* Currently, 10Y g-sec yield is trading close to ~7.5% on oil price risk
32
Joker in the Pack: Upcoming elections
Political stability will be crucial for policy stability in the coming years
Upcoming State elections
Karnataka Date:12th May-18
Results: 15th May-18
2018 end Chhattisgarh
Rajasthan Madhya Pradesh
33
Key YBL Forecasts
FY14 FY15 FY16 FY17 FY18 FY19 (YBL)
Annual Forecasts
Real GDP (%) 6.4 7.5 8.0 7.1 6.7 7.5
CPI (%, Average) 9.4 6.0 4.9 4.5 3.7 4.7
WPI (%, Average) 5.2 1.3 -3.6 1.8 3.0 3.7
Fiscal Balance (% of GDP) -4.4 -4.0 -3.9 -3.5 -3.5 -3.3
Current Account (% of GDP) -1.7 -1.3 -1.1 -0.7 -2.2 -2.5
BoP (USD bn) 16 61 18 22 20 8
Repo Rate (%, EoP) 8.00 7.50 6.75 6.25 6.00 6.00-6.25
10Y G-Sec Yield (%, EoP) 8.80 7.74 7.47 6.68 7.40 7.50
USDINR (EoP) 59.89 62.50 66.25 64.85 65.15 65.00
34
Thank You!
35
Appendix 1: BoP Trajectory and projections
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
(1) Trade Balance= (i)- (ii) -190 -196 -148 -145 -130 -112 -164 -186
Merchandise Exports (i) 310 307 319 317 266 280 302 334
%YoY 20.9 -1.0 3.9 -0.6 -15.9 5.2
Merchandise Imports (ii) 500 502 466 461 396 393 466 520
%YoY 30.3 0.5 -7.2 -1.0 -14.1 -1.0
(2) Invisibles= (iii) + (iv) + (v) 112 107 115 118 108 97 107 113
Services (iii) 64 65 73 77 70 67 73 77
Transfers (iv) 63 64 65 66 63 56 62 66
Income (v) -16 -21 -23 -24 -24 -26 -28 -30
(3) Current Account = (1) + (2) -78 -88 -32 -27 -22 -15 -57 -73
(as % of GDP) -4.2 -4.7 -1.7 -1.3 -1.1 -0.7 -2.2 -2.5
(4) FDI 22 20 22 31 36 36 35 37
(5) Portfolio 17 27 5 42 -4 8 21 18
(6) Loans 19 31 8 3 -5 2 8 10
(7) Banking Capital 16 17 25 12 11 -17 13 16
(8) Others -7 -5 -11 1 3 7 0 0
(9) Capital Account= (4)+(5)...(8) 68 89 49 89 41 36 77 81
(as % of GDP) 3.6 4.8 2.6 4.4 2.0 1.6 3.0 2.8
Overall BoP** = (3) + (9) -13 4 16 61 18 22 20 8
(as % of GDP)** -0.7 0.2 0.8 3.0 0.9 1.0 0.8 0.3
Basic BoP = (3) + (4) -56 -68 -11 4 14 20 -22 -36
Highlights of India's Balance of Payments (USD bn)
36
Appendix 2: Policy stability favoring India currently
0
50
100
150
200
250
2004
20
05
2006
20
07
2008
20
09
2010
20
11
20
12
2013
20
14
2015
20
16
2017
20
18
Global IndiaEconomic Policy Uncertainty Index (12mma)
Rising Uncertainty
Election Populism
Steep MSP Hike
Delay in GST Normalization
Lack of fast resolution under IBC
Few domestic policy risks to keep an eye on
37
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Note: Data in this report has been sourced from CEIC, Bloomberg, GoI Budget Documents & Economic Survey, CGA, PPAC, IMD, RBI, IMF, and YES BANK Limited
38
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