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8/7/2019 Impact of Oil-2011
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India Macro ScanIndia Macro Scan
Impact of OilImpact of Oil
&&Macroeconomic Outlook Amidst Global UncertaintiesMacroeconomic Outlook Amidst Global Uncertainties
MumbaiApril, 2011
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on o : mpac on n a
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Relatively low importance of troubledcountries
5
10
15
20
25
30Oil imports (mn tonnes)
OmanMauritania
Saudi ArabiaAlgeria JordanTunisia
MoroccoBahrainLebanon
UAEKuwait
Qatar
Arab League Index of Unrest
Oil imports from Egypt and Libya form a minor portion of Indias oil importbill
Risk of a contagion spreading to the Gulf countries remains as depicted byEconomists Arab League Index of Unrest
While Egypt was primarily a concern about transit, Libya's production
represents one third of the world's spare capacity and hence the possibility ofcomplete disruption in supply has spooked the oil market
0
S a u d i A r a b i a I r
a n I r a q
N i g e r i a
S o u t h A m e r i c a
K u w a i t
U A E
A n g o l a
O m a n
Q a t a r
A s i a
E u r a s i a
Y e m e n
E g y p t
N o r t h A m e r i c a
0 20 40 60 80 100
YemenLibyaEgyptSyria
raq
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OPECs reserve capacity adequate tocompensate Libyas production loss
1
2
3
4
5
6
UAE Saudi Arabia Qatar Libya Kuwait
Spare capacity of OPEC members(mbpd)
OPEC collectively pumped 29.4 mbpd in January 2011 and has about 5 mbpd ofspare capacity of which Saudi Arabia accounts for 3.1 mbpdSaudi Arabias reserve capacity is adequate to make up for the loss of
production in LibyaHowever, a simultaneous shutdown in production in multiple regions has the
potential of throwing the oil supply in a disarray, and push crude prices higheron a sustained basis
0
J a n - 1
0
F e b - 1 0
M a r - 1
0
A p r -
1 0
M a y - 1
0
J u n - 1
0
J u l - 1 0
A u g -
1 0
S e p -
1 0
O c t - 1
0
N o v - 1
0
D e c - 1
0
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Limited impact on economic growth
-20
-15
-10
-5
0
5
10
15
8
9
10
11
12 Non-Farm GDP (% YoY)
WPI Fuel Minerals (% YoY 6m lag, RHS, Inverted)
The impact of international crude oil prices gets diluted in case of India asprices of diesel, kerosene, LPG continue to be heavily administered
Only petrol prices have seen government deregulation although there is a
substantial lag with which prices are adjustedIf average oil price remains in the range USD 100-110 pb in FY12, then theimpact on non-farm GDP growth would be limited
20
25
305
6
J u n -
0 5
M a r - 0
6
D e c - 0
6
S e p -
0 7
J u n -
0 8
M a r - 0
9
D e c - 0
9
S e p -
1 0
J u n -
1 1
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High oil prices impact inflation with a lag
-40
-20
0
20
40
60
80
100
0
2
4
6
8
10
12
WPI (% YoY)
Brent (% YoY, RHS)
India Energy Consumption by Sub Sectors
Iron and Steel
ChemicalsCement
Food and Tobacco
Aluminium
Pulp, Paper and Printing
ATF and naptha prices continue to be dominated by international pressuresHowever the pass through of international prices is not instant as items likediesel, kerosene, and LPG continue to be administered (petrol prices werederegulated by the government earlier this year)
With a lag of 3-6 months, WPI inflation generally responds with an increase of
0.4% for every 1% increase in oil prices (this includes the second round impact)Pass through of crude prices to high energy consumption sectors such as Iron& Steel, Cement, Chemicals is likely to weigh on core inflation
-80
-
-2
A p r - 0
5
O c t - 0
5
A p r - 0
6
O c t - 0
6
A p r - 0
7
O c t - 0
7
A p r - 0
8
O c t - 0
8
A p r - 0
9
O c t - 0
9
A p r - 1
0
O c t - 1
0
ex e an ea er
Other
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Fisc appears vulnerable to oil shock
FY09 FY10 FY11* FY12*
Average oil price (USD pb) 83 70 85 110
Total underrecoveries (` bn) 1042 461 950 1300Financed by:Upstream companies (` bn) 329 144 426 540
The government gave a subsidy of over ` 700 bn in FY09 when underrecoveries exceeded ` 1 trillion
Total under recoveries are expected to touch ` 1300 bn in FY12 if oil pricesaverage around USD 110 pb
The government has budgeted only ` 230 bn as petroleum subsidy for FY12If average oil price rises by 25-30% in FY12, then petroleum subsidy could
overshoot the budgeted target by approximately ` 300 bn this could potentiallyadd 0.3% to the fiscal deficit
Government (` bn) 713 260 384 536
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Impact on INR to be limited
FY11USD 83 USD 105 USD 110 USD 115
Exports 242 290 290 290Non Oil 279 322 322 322Oil 96 121 126 131TB 133 153 158 163
FY12
300
400
500
600
700
800
900
By 2020To be added in 2011-12Current
Strategic Petroleum Reserves (mn barrels)
We expect concerns on current account deficit to be manageable as long as oilprice averages less than USD 110 pb
In the absence of significant strategic petroleum reserves, higher crude prices
on a sustained basis would translate into higher oil imports in value termsA positive BoP surplus in FY12 should help in containing the adverse impactof high oil price
Invisibles 87 100 100 100Curnt a/c -46 -53 -58 -63% of GDP -2.7 -2.7 -2.9 -3.2
0
100
200
US Japan China India
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as oil exports have picked up
2.0
2.5
3.0
3.5
4.0
4.5
8
10
12
14
16
18
20 Oil production (USD bn) Oi l exports (USD bn, RHS)
2.5
3.0
3.5
4.0
4.5
5.0
Ratio of oil imports to oil exports
Indias oil production and exports have seen a pick up over the last 6-monthsOil exports have increased vis--vis oil imports on a relative quantitative scale
exports have likely touched USD 4 bn level on a monthly basis
While high oil price will have a negative effect on oil imports, it would at thesame time have a positive impact on oil exports
1.0
1.5
46
A p r - 0
7
O c t - 0
7
A p r - 0
8
O c t - 0
8
A p r - 0
9
O c t - 0
9
A p r - 1
0
O c t - 1
01.5
2.0
A p r - 0
7
O c t - 0
7
A p r - 0
8
O c t - 0
8
A p r - 0
9
O c t - 0
9
A p r - 1
0
O c t - 1
0
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Remittances unlikely to be affected in a big way
Source of Remittance Inflows into India
North America
Gulf
Europe
South America
East Asia
Africa
Others
Average Utilisation Pattern of Remittances sent to India
Family Maintenance
Deposits in Banks
Investment in Property
Investment in EquitySharesOthers
India is the top remittance receiving country and has the 2nd largest emigrantpopulation in the world
While the Gulf region contributes close to 27% of the total remittance inflows,it is considerably lower than North Americas share of 38%
Chances of the ongoing geopolitical crisis in the MENA region adverselyaffecting remittance inflows is low
However, India could suffer from lumpiness in the inflows due to temporaryretrenchment of migrant workers and economic crisis in the Gulf countries
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Rates likely to carry an upside bias
80
100
120
140
160
7
8
9
10
1110Y bond yield (%)
5Y OIS (%)
Brent (USD pb, RHS)
High oil price impacts both inflation and fiscal deficit (in case of limited or nopass through)
High persisting inflation could imply tighter monetary policy while high fiscaldeficit could imply higher market borrowings
Under both the conditions, long term rates would carry an upward bias
20
40
60
4
5
6
A p r - 0
5
O c t - 0
5
A p r - 0
6
O c t - 0
6
A p r - 0
7
O c t - 0
7
A p r - 0
8
O c t - 0
8
A p r - 0
9
O c t - 0
9
A p r - 1
0
O c t - 1
0
A p r - 1
1
Correlation ofoil with 10Y yield = 72%Correlation of oil with 5Y OIS = 71%
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o a naps o
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Global themes
Private consumption continues to support the ongoing global economic recovery
Recovery remains unbalanced while in most economies output is still belowpotential, most of the emerging market economies are now facing the problem ofoverheating
Sovereign concerns in the euro area continue to persist; need for fiscal consolidationcan potentially soften the recovery process in some of the European countries
Emer in market economies facin u side risks to inflation in contrast inflationar
pressures in most of the developed economies continues to remain subdued
The increase in commodity prices due to a combination of the ongoing recovery inglobal growth and geopolitical unrest in the MENA region would add to headlineinflationary pressures in the near term
Monetary policy tightening by the Asian central banks to continue in 2011; developedcountry central banks to move slowly with caution
Intervention risks to remain in the FX markets with capital inflows amidst policytightening in Asia
The natural calamity in Japan to have limited impact on global growth and inflation
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US: Housing and labor market yet torecover
-15
-10
-5
0
5
10
15
20
-40
-30
-20
-10
0
10
20
30
New Home Sales (% YoY)
Construction Spending (% YoY, RHS)3
4
5
6
7
8
4
5
6
7
8
9
10
11Spread with U-6 (%, RHS)
Unemployment Rate (%)
Housing sector continues to remain weak despite reaching a likely bottomduring 2009-10
This has impaired consumers balance sheet through negative wealth effect With real activity remaining weak, labor market conditions have also remained
fragileAlthough the unemployment rate has fallen below 9%, the broader measure of
unemployment (U-6 rate) continues to remain at an elevated level
-20-50
F e b - 0 1
F e b - 0 2
F e b - 0 3
F e b - 0 4
F e b - 0 5
F e b - 0 6
F e b - 0 7
F e b - 0 8
F e b - 0 9
F e b - 1 0
F e b - 1 1
23
M a r - 0
1
M a r - 0
2
M a r - 0
3
M a r - 0
4
M a r - 0
5
M a r - 0
6
M a r - 0
7
M a r - 0
8
M a r - 0
9
M a r - 1
0
M a r - 1
1
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US: Inflation has picked up, but remainssubdued
0
1
2
3
4
5
6CPI (% YoY)
Core CPI (% YoY)
CPI inflation reached a 10-month high of 2.2% in Feb-11Core CPI inflation reached an 11-month high of 1.1% in Feb-11 With economic recovery still remaining soft, upward pressure on core inflation
is unlikely to sustain
-3
-2
-
F e b - 0 1
F e b - 0 2
F e b - 0 3
F e b - 0 4
F e b - 0 5
F e b - 0 6
F e b - 0 7
F e b - 0 8
F e b - 0 9
F e b - 1 0
F e b - 1 1
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Market expectations from Fed
30
40
50
60
70
80Probability of a Fed hike implied by Fed Fund Futures (%)
Any Fed hike is virtually ruled out in April 2011The probability of hike in the December 2011 FOMC meeting currently (as on
April 12 th ) stands below 50%
0
10
20
A p r
2 0 1 1
J u n
2 0 1 1
A u g
2 0 1 1
S e p
2 0 1 1
N o v
2 0 1 1
D e c
2 0 1 1
J a n
2 0 1 2
M a r
2 0 1 2
l b l b d
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Global recovery in 2011 to be sustained,moderation anticipated
IMF Forecasts (WEO, April 2011)
2009* 2010 2011 2012
GDP (% pa)
US -2.6 2.8 2.8 2.9Eurozone -4.1 1.7 1.6 1.8
UK -4.9 1.3 1.7 2.3
a an -6.3 3.9 1.4 2.1
Growth in advanced economies is expected to moderate to 2.4% in 2011from 3.0% in 2010
Inflation in advanced economies is expected to increase to 2.2% in 2011from 1.6% in 2010
China 9.2 10.3 9.6 9.5CPI Inflation (% pa)
Advanced Economies 0.1 1.6 2.2 1.7Emerging Economies 5.2 6.2 6.9 5.3
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Global commodity themes
Commodity prices have picked up with the ongoing recovery in the global economy Gold price has touched an all time high Silver prices have already jumped up by 22% in 2011
Aluminum prices are up by over 9% on a YTD basisRecent geopolitical unrest in parts of Africa and Middle East have increased the tail risk
Brent has increased by roughly 29% on a YTD basis
EM appetite for commodities should continue to put a floor to pricesThe commodity rally stoked in the last few months on the back of QE-2 and an ailing Dollar, should remain in flavor in H1-2011
A run up in commodity prices in 2011 could moderate the ongoing recovery process
Re-emergence of a risk event in European peripheral economies could mar the riskappetite for commodities
Chinas deliberate soft landing also runs a risk of weighing on demand and henceglobal commodity prices
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India themes
Economic growth set for a moderation in FY12 to 8.3% we expect the effect of growthmoderation to be amplified in H1 due to statistical base effect
Rising core and fuel inflation to provide downside risk to growth
While consumption is expected to be the key driver of GDP growth in FY12, headwindsfor investment has emerged due to ongoing monetary tightening
Average WPI inflation expected to remain in the range 7.5-8.0% in FY12 With global commodity prices remaining high, capacity constraints are helping
-
On the rate front, we expect RBI to continue tightening in FY12 and look for another 50bps hike in both repo and reverse repo rates
The government has budgeted for an improvement in the fiscal deficit to 4.6% in FY12from 5.3% in FY11. We expect subsidies to overshoot the budgeted target and increasethe fiscal deficit to 5.1% .
FII flows turned positive in Mar-11 (at USD 1.5 bn vis--vis USD -0.7 bn in Feb-11); Netflows in Apr-11 have already exceeded USD 1.3 bn
We expect Rupee to weaken to 45.00 by Jun-11 and 46.50 by Dec-11 on the back of rising oil prices, a stronger Dollar, and a mild moderation in domestic growth
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n a: row se or a m -cyc e mo era on
GDP gro th picks p b t signs of
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GDP growth picks up, but signs ofmoderation emerge
GDP by SectorFY10 FY11
(In % YoY) Q1 Q2 Q3 Q1 Q2 Q3 GDP (at Factor Cost) 6.3 8.6 7.3 8.9 8.9 8.2Agriculture 1.8 1.2 -1.6 2.5 4.4 8.9Industry 2.9 6.3 10.0 11.7 8.9 5.7Mining & Quarrying 6.9 6.6 5.2 8.4 7.9 6.0Manufacturing 2.0 6.1 11.4 13.0 9.8 5.6Electricit 6.2 7.5 4.5 6.2 3.4 6.4
After growing by 8.9% in H1 FY11, GDP growth moderated to 8.2% in Q3 FY11Agriculture records the strongest performance in Q3 FY11 post the drought in
the previous fiscal yearBoth industry and services growth moderated in Q3 FY11
Services 8.5 10.8 9.2 9.4 9.6 8.7Construction 5.4 5.1 8.3 10.3 8.7 8.0Trade, Hotels, Transport & Communication 5.5 8.2 10.8 11.0 12.1 9.4Financing, Insurance, Real estate etc 11.5 10.9 8.5 7.9 8.2 11.2Community, Social and Personal Services 13.0 19.4 7.6 7.8 7.4 4.8
Strong Agri growth reiterated by estimates
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Strong Agri growth reiterated by estimatesof crop production
Crop 2006-07 2007-08 2008-09 2009-10 2010-11**Rice 93.35 96.69 99.18 89.09 94.11Wheat 75.81 78.57 80.68 80.80 84.27*
Coarse Cereals 33.92 40.76 40.03 33.55 40.21Pulses 14.20 14.76 14.57 14.66 17.29*Foodgrains 217.28 230.78 234.47 218.11 235.88*Oilseeds 24.29 29.76 27.72 24.88 30.25*
Achievement of Production of Major Crops (mn tons)
The record level of production of wheat, pulses, oil seeds and sugarcane inFY11 reflects the likely possibility of agri GDP surprising us on the upside
Sugarcane 355.52 348.19 285.03 292.30 340.55Cotton # 22.63 25.88 22.28 24.22 33.92**Record high** 3rd Advance EstimatesSource: Directorate of Economics and Statistics, Department of Agriculture and Cooperation
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FY12 growth to stay within trend
4
6
8
10
12Agriculture Industry Services GDP(% pa)
After bottoming out at 6.8% in FY09, GDP growth is expected to rebound toaround 8.8% in FY11
We expect FY12 GDP growth to moderate to around 8.3% as impact of policytightening plays out completely
-2
0
2
FY08 FY09 FY10 FY11* FY12**
* CSOs advance estimate; ** Our estimates
Consumption will remain the key driver of
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Consumption will remain the key driver ofgrowth in FY12
4
5
6
7
8
9
10Private Consumption (% pa)
Private Consumption Trend (% pa)
3
6
9
12
15
18
21Investment (% pa)
Investment Trend (% pa)
Domestic consumption has picked up and is likely to be the key driver ofgrowth in FY12
However, inflation and tight monetary policy could possibly keep investmentgrowth below the medium term trend
2
3
F Y 9 7
F Y 9 8
F Y 9 9
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
-30
F Y 9 7
F Y 9 8
F Y 9 9
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
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Gradual moderation reflected in IIP
FY10 FY11IIP 15.1 3.6 10.0 7.8
Mining & Quarrying 10.5 11.0 0.6 9.6 6.5Manufacturing 79.4 16.1 3.5 10.4 8.1Electricity 10.2 7.3 6.7 5.8 5.4
Trends in Industrial Production (% YoY)
Sectoral
April-February Weight Feb-10 Feb-11
IIP growth has so far remained healthy with Apr-Feb FY11 growth lying inhigh single digits
Recent moderation is expected to continue for the next 4-5 months; IIP growthto start rebounding in H2 FY12
Full year growth in FY11 expected around 7.7%
Basic Goods 35.6 8.5 5.9 6.8 6.5Capital Goods 9.3 46.7 -18.4 19.0 8.7Intermediate Goods 26.5 15.9 8.4 13.6 9.1Consumer Goods 28.7 6.3 11.1 5.9 7.5
Durables 5.4 29.1 23.4 23.8 21.8
Non-Durables 23.3 -0.8 6.1 0.3 1.9
Capital goods to drag investments lower
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Capital goods to drag investments loweramid greater volatility
0
5
10
15
20
25
30
7 )
Y e a r l y V o l a t i l i t y
Capital Goods
IIP ex Capital Goods
0
10
20
30
40
50 GDP-InvestmentsIIP-Capital Goods (3mma)IIP-Capital Goods (12mma)
(% YoY)
Persistent weakness in capital goods poses downside risk to investment side ofthe GDP
High input costs and policy tightening is tempering with demand conditionsVolatility in capital goods has increased four times in the last two years
F Y 9
F Y 9
F Y 9
F Y 9
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 0
F Y 1
F Y 1 1 ( A p r - F e b
-20
-
Q 1 F Y 0 6
Q 3 F Y 0 6
Q 1 F Y 0 7
Q 3 F Y 0 7
Q 1 F Y 0 8
Q 3 F Y 0 8
Q 1 F Y 0 9
Q 3 F Y 0 9
Q 1 F Y 1 0
Q 3 F Y 1 0
Q 1 F Y 1 1
Q 3 F Y 1 1
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Inflation to precede growth in policy focus
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Food inflation has eased, but protein
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Food inflation has eased, but proteininflation remains a concern
20
40
60
80
100Vegetables Condiments & Spices(% YoY)
0
10
20
30
40
50Milk
Eggs, Meat & Fish
Fruits
(% YoY)
Primary food inflation continues to remain close to double digitsAlthough vegetable prices have corrected after the spike observed in Dec-Jan
FY11, fruit prices continue to remain elevated
High protein food items like milk, eggs, fish, meat, etc. have seen very highinflation over the last 1-2 years
-20
0
M a r - 0
7
S e p -
0 7
M a r - 0
8
S e p -
0 8
M a r - 0
9
S e p -
0 9
M a r - 1
0
S e p -
1 0
M a r - 1
1-20
-10
M a r - 0
7
S e p -
0 7
M a r - 0
8
S e p -
0 8
M a r - 0
9
S e p -
0 9
M a r - 1
0
S e p -
1 0
M a r - 1
1
Ri k f i fl i i li d?
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Risk of inflation getting generalized?
4
8
12
16
20
Core WPI
Non-Core WPI
(% YoY)
8
10
12
14
16
4
6
8
10
12
14 WPI (% YoY)3M Ahead Inflation Expectation (%, RHS)1Y Ahead Inflation Expectation (%, RHS)
High non-core inflation raises the risk of a pass through effect to core inflationCrude oil price has risen by more than 30% since end Dec-10 this raises the
risk of a hike in domestic retail pricesThere is lack of clarity on deregulation of diesel and LPG prices as of now
RBIs recent survey of households shows a worsening of inflation expectationsin Q4 FY11 over both a 3-month and 1-year horizon
-4
A u g - 0
5
F e b - 0 6
A u g - 0
6
F e b - 0 7
A u g - 0
7
F e b - 0 8
A u g - 0
8
F e b - 0 9
A u g - 0
9
F e b - 1 0
A u g - 1
0
F e b - 1 1
4
6
0
2
S e p - 0 6
M a r - 0
7
S e p - 0 7
M a r - 0
8
S e p - 0 8
M a r - 0
9
S e p - 0 9
M a r - 1
0
S e p - 1 0
Average inflation unlikely to come down
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g ysignificantly in FY12
4
6
8
10
12Estimated WPI trajectory
Average WPI inflation is expected around 9.3% in FY11Despite a slight moderation, inflation is once again expected to pick up in
FY12
We expect average WPI inflation to come around 7.5-8.0% in FY12 higherthan RBIs medium term target of 5.5%
-2
0
2
M a r - 0
9
J u n - 0
9
S e p - 0
9
D e c - 0
9
M a r - 1
0
J u n - 1
0
S e p - 1
0
D e c - 1
0
M a r - 1
1
J u n - 1
1
S e p - 1
1
D e c - 1
1
M a r - 1
2
F l i fl ti ith & / f l i hik
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Fuel inflation with & w/o fuel price hike
DateEffective
price afterhike (Rs)*
% gainEffective
price afterhike (Rs)
% gain
16/6/2004 35.71 5.9 22.74 4.61/8/2004 36.81 3.1 24.16 6.25/11/2004 39.00 5.9 26.28 8.8
21/6/2005 40.49 6.6 28.45 7.67/9/2005 43.49 7.4 30.45 7.06/6/2006 47.51 9.2 32.47 6.615/2/2008 45.52 4.6 31.76 4.25/6/2008 50.56 11.0 34.80 9.4
Time line of Price Hikes
8
9
10
11
WPI inflation
Forecast
High crude prices and soaring subsidy burden are likely to push thegovernment to hike fuel prices, probably post the ongoing state elections
We believe that the June Syndrome (out of the last 10 price hikes beforederegulation in petrol prices last year, 5 have been rolled out in the month of
June) may strike once again this yearIncorporating a ` 2 hike in both petrol and diesel prices in month of June, WPI
inflation is likely to top 10% in the month of August
. . . .27/2/2010 47.43 6.3 35.47 7.9
26/6/2010 51.43 7.3 40.10 5.216/12/2010 55.87 5.615/1/2011 58.37 4.5
Jun-11 60.37 3.4 42.1 5.0
Petrol Price Deregulation 6
M a r - 1
0
M a y - 1
0
J u l - 1 0
S e p -
1 0
N o v - 1
0
J a n -
1 1
M a r - 1
1
M a y - 1
1
J u l - 1 1
S e p -
1 1
N o v - 1
1
J a n -
1 2
M a r - 1
2
WPI inflation with fuel hike
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qu y e c o move owar s s com or level in Q1 FY12
Liquidity eases at the beginning of FY12
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Liquidity eases at the beginning of FY12
2
3
4
5
6-1 000
-500
0
500
1,000
1,500 Net LAF (Rs bn) Call Rate (%, RHS, Inverted)
+1%NDTL ( bn)
-1% NDTL ( bn)
Liquidity turned surplus for a brief period in AprilYear end government spending in FY11 and under maintenance of CRR
balances were primarily responsible for the temporary easing With the commencement of the auction season and a pick up in autonomous
outflows, liquidity is expected to turn negative and move towards -1% of NDTLby end May-11
7
8-2,000
-1,500
A p r - 1
0
J u n -
1 0
A u g - 1
0
O c t - 1
0
D e c - 1
0
F e b - 1 1
A p r - 1
1
Liquidity deficit to persist through
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H1 FY12
-500
0
500
1,000
1,500
2,000
2,500
CRR
Currency in Circulation
Non-Tax
Tax
Auction
Estimated month end l iquidity ( ` bn)
Liquidity deficit is likely to come below the 1% of NDTL level this monthHowever, the deficit is likely to increase towards the end of H1 FY12 and
expected to exceed the 1% of NDTL mark by end Sep-11
-2,500
-2,000
-1,500
-1,000
A p r - 1
1
M a y - 1
1
J u n - 1
1
J u l - 1 1
A u g - 1
1
S e p - 1
1
ov . xpen ure
Redemption
Coupons
Net Liquidity
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on y e s e y o carry an ups e r s
Jul-Aug likely to be the best time in
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H1 FY12
200
300
400
500
600
700Gross NetG-Sec Supply in Dated Securities in H1 FY12 (INR bn)
Tenors H1 FY11 H2 FY11 H1 FY12Less than 5Y 13.4 16.3 05-9 Y 24.6 19.6 34.0-42.410-14 Y 38.0 36.6 40.0-48.4
Share in gross borrowing (%): Dated securities
The government will borrow ` 2500 bn gross borrowing in H1 FY12 thiswould constitute 61% of the full year borrowing target
With redemption of ` 594 bn in H1 FY12, net borrowing will amount to ` 1908
bn this would result in an average net borrowing size of ` 355 bn in Q1 FY12and ` 280 bn in Q2 FY12
0
100
Apr May Jun Jul Aug Sep
- . . . - .
Above 20Y 13.0 12.4 9.6-14.4
Upside risk to yields likely in FY12
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Upside risk to yields likely in FY12
H1 FY12 H2 FY12* H2 FY12**Total Supply 2,350 2,030 2,430
Central Government 1,900 1,530 1,930State Government 450 500 500
MSS 0 0 0Special Bonds 0 0 0
Total Demand 1,993 2,302 2,313Banks 1,043 1,552 1,563
G-Sec Supply Pressure ( ` bn)
6
7
8
9
10
2.5
3.0
3.5
4.0
4.5
5.0
5.5US 10Y Yield
India 10Y Yield (RHS)
Last 5Y correlation = 42%Last 1Y correlation = 3
Excess supply situation to persist in FY12 can potentially increase by ` 500 bnon the back of a rise in subsidy payments
SLR @ 24% could pose a risk under these circumstances With another 50 bps expected policy hike from the RBI in FY12, the yield on
the 10Y g-sec likely to move towards 8.30% in the next 6-months
End of QE2 program by the Fed in Jun-11 could provide an upside risk
Insurance Cos. 500 450 450
Others 450 300 300RBI 0 0 0
Supply-Demand Gap 357 -272 117
41.5
2.0
A p r - 0
6
O c t - 0
6
A p r - 0
7
O c t - 0
7
A p r - 0
8
O c t - 0
8
A p r - 0
9
O c t - 0
9
A p r - 1
0
O c t - 1
0
A p r - 1
1
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upee e y o wea en n e near o me um erm
Fundamentals still in favor, but impact
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could diminish in FY12
0
2
4
6
8
10Average yearly change in USDINR (%)
Higher than average growth has been supportive of Rupee With an expectation of moderation in economic growth and inflation
remaining at elevated level, downside risks to Rupee likely to gain traction
Global risk sentiment and commodity prices to provide cues
-6
-4
-2
High Growth/High Inflation
High Growth/Low Inflation
Low Growth/High Inflation
Low Growth/Low Inflation
BoP to remain in surplus in FY12
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BoP to remain in surplus in FY12
FY07 FY08 FY09 FY10 FY11* FY12*Trade Balance -61.8 -91.5 -119.5 -118.4 -133.0 -158.0Invisibles 52.2 75.7 91.6 80.0 87.0 100.0Current Account -9.6 -15.7 -27.9 -38.4 -46.0 -58.0(as % of GDP) -1.0 -1.3 -2.3 -2.8 -2.7 -2.9
FDI 7.7 15.9 19.8 18.8 9.0 20.0Portfolio 7.1 27.4 -14.0 32.4 33.0 25.0
Highlights of India's Balance of Payments (USD bn)
BoP surplus to remain within USD 15-20 bn range in both FY11 and FY12 We expect USDINR around 45.00 by Jun-11 and 46.50 by Dec-11 high oil
price, stronger Dollar, and a moderation in domestic growth would keep Rupee
under pressure* Our estimates with GDP of USD 1725 bn and USD 1991 bn in FY11 and FY12 respectively; ** Includes errors & omissions
oans . . . . . .
Others 6.0 22.6 -7.3 -11.0 -7.0 0.0Capital Account 45.2 106.6 6.8 53.4 63.0 75.0(as % of GDP) 4.8 8.6 0.6 3.9 3.7 3.8
Overall BoP** 36.6 92.2 -20.1 13.4 16.0 17.0
(as % of GDP)** 3.9 7.4 -1.7 1.0 0.9 0.9
Summary
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Summary
US recovery to continue gradually; Fed to remain on holdthrough 2011 QE2 expected to end in Jun-11; Dollar to regain strength in H2
India growth to moderate to 8.3% in FY12 with inflationremaining a concern; expect RBI to hike another 50 bps Fiscal management would be challenging in FY12; tough for the government
to maintain 4.6% deficit with firm commodity prices FY12 net market borrowing of ` 3.4 trillion carries an upside risk to the tune
of ` 500 bn With SLR now reduced to 24%, bond yields likely to carry an upside risk;
expect 10Y g-sec yield to move towards 8.30% over the next 6-months Liquidity deficit likely to stabilize around ` 500-600 bn by end May-11 BoP surplus of approximately USD 17 bn to be supportive of Rupee in FY12 However, the combination of high inflation and an expected moderation in
growth would provide a downside risk to Rupee Global growth and commodity prices remain the key risk for both domestic
interest rates and currency
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an ou
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