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Global markets Global markets
This document has been prepared for your information only and does not constitute any offer/commitment to transact. Such an offer would be subject tocontractual confirmations, satisfactory documentation and prevailing market conditions. Reasonable care has been taken to prepare this document.Neither HDFC Bank Ltd. (including its group companies) nor any employees of HDFC Bank Ltd. (including those of group companies) accept anyresponsibility for action taken on the basis of this document or liability arising from the use of this communication.
(1)
Global economy: Some improvement visible but nothing spectacular
Fiscal consolidation likely to weigh on growth in advanced economies
Global growth forecasts
(In Y‐o‐Y %) 2011 2012 2013F 2014F
Although fiscal consolidation could act as a drag to US growth, private demand likely to remain strong and ensure growth prospects improve
going into 2014.
Global growth 3.9 3.0 3.0 3.2
US 1.7 2.2 2.2 3.0Japan ‐0.7 2.2 2.0 2.2UK 0.7 ‐0.4 0.4 0.9 going into 2014.
The Euro‐zone to remain in an austerity driven recession that has spread to the core.
Euro‐zone 1.4 ‐0.4 ‐0.5 0.6‐‐Germany 3.1 0.8 0.7 1.4‐‐France 1.7 0.1 ‐0.2 0.4‐‐Italy 0.4 ‐2.3 ‐1.5 0.2
Recovery in Chinese economy to be modest‐‐large fiscal stimulus unlikely.
y‐‐Spain 0.7 ‐1.5 ‐1.6 ‐0.1China 9.2 7.8 7.5 7.5India 6.2 5.0 5.5 6.0
Note: Growth for India is for FYSource: IMF, Economist & HDFC Bank
(2)
US economy: private demand likely to show continued traction
Lagged effect of fiscal tightening measures undertaken in Q12013 could ensure that
growth softens in Q2
US economy: snapshot
But private consumption is picking up and could remain strong over 2013 on the back of a continued traction in the housing market and
improvement in the labour market.
(In YoY %) Q12013 Q22013F Q32013F Q42013FReal GDP 1.8 1.5 2.2 2.5Private consumption 2.6 1.6 2.1 2.3G t di 4 8 3 0 2 0 1 0
State & local government likely to boost spending offsetting drag from fiscal tightening
by the Federal government
Government spending ‐4.8 ‐3.0 ‐2.0 ‐1.0Fixed investment 3.0 5.0 5.7 6.2‐‐Residential investment 14.0 12.0 14.0 14.0Exports ‐1 1 4 0 4 5 4 5 by the Federal government.
Inflation pressures could subside over Q2‐Q3 d i b l l b l dit i b t
Exports 1.1 4.0 4.5 4.5Imports ‐0.4 3.0 2.2 3.0CPI inflation 1.7 1.3 1.3 1.5Unemployment rate (In %) 7.6 7.5 7.4 7.3
driven by lower global commodity prices but pickup thereafter in response to improving
private demand.
p ySource: Bureau of economic analysis, IIF & Capital economics
(3)
US economy: On the mend
Housing market recovers Labour Market improves
50000
60000
70000
80000
90000
Housing Starts
200
250
300
350Nonfarm payrolls
200k mark
0
10000
20000
30000
40000
50000
009
009
009
009
010
010
010
010
011
011
011
011
012
012
012
012
013
013 50
100
150
200
11 11 11 11 11 11 12 12 12 12 12 12 13 13 13
In ́000
s
Auto Sales Increase
01‐01‐2
01‐04‐2
01‐07‐2
01‐10‐2
01‐01‐2
01‐04‐2
01‐07‐2
01‐10‐2
01‐01‐2
01‐04‐2
01‐07‐2
01‐10‐2
01‐01‐2
01‐04‐2
01‐07‐2
01‐10‐2
01‐01‐2
01‐04‐2
01‐01‐2
01
01‐03‐2
01
01‐05‐2
01
01‐07‐2
01
01‐09‐2
01
01‐11‐2
01
01‐01‐2
01
01‐03‐2
01
01‐05‐2
01
01‐07‐2
01
01‐09‐2
01
01‐11‐2
01
01‐01‐2
01
01‐03‐2
01
01‐05‐2
01
ISM surveys signal expansionCar sales
50
55
60
65
70
ISM manufacturing ISM non‐manufacturing
550000600000650000700000750000800000
Car sales
30
35
40
45‐01‐2007
‐05‐2007
‐09‐2007
‐01‐2008
‐05‐2008
‐09‐2008
‐01‐2009
‐05‐2009
‐09‐2009
‐01‐2010
‐05‐2010
‐09‐2010
‐01‐2011
‐05‐2011
‐09‐2011
‐01‐2012
‐05‐2012
‐09‐2012
‐01‐2013
‐05‐2013
350000400000450000500000
1/01/2011
1/03/2011
1/05/2011
1/07/2011
1/09/2011
1/11/2011
1/01/2012
1/03/2012
1/05/2012
1/07/2012
1/09/2012
1/11/2012
1/01/2013
1/03/2013
1/05/2013
Source: Reuters, BLS & HDFC Bank
(4)
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01‐
01 01 01 01 01 01 01 01 01 01 01 01 01 01 01
But Fed targets are still some way off
Unemployment stuck at 7.6% Inflation unlikely to move up in a hurryU e p oy e u a %
9
10
3.0
3.5
Fedʹs Threshold level at 2%
CPI InflationAnnual
6
7
8
In %
1 5
2.0
2.5
In Y‐o‐Y %
4
5
01‐01‐2008
01‐04‐2008
01‐07‐2008
01‐10‐2008
01‐01‐2009
01‐04‐2009
01‐07‐2009
01‐10‐2009
01‐01‐2010
01‐04‐2010
01‐07‐2010
01‐10‐2010
01‐01‐2011
01‐04‐2011
01‐07‐2011
01‐10‐2011
01‐01‐2012
01‐04‐2012
01‐07‐2012
01‐10‐2012
01‐01‐2013
01‐04‐2013
Fedʹs Threshold level at 6.5%
1.0
1.5
1‐01‐2012
1‐02‐2012
1‐03‐2012
1‐04‐2012
1‐05‐2012
1‐06‐2012
1‐07‐2012
1‐08‐2012
1‐09‐2012
1‐10‐2012
1‐11‐2012
1‐12‐2012
1‐01‐2013
1‐02‐2013
1‐03‐2013
1‐04‐2013
1‐05‐2013
1‐06‐2013
Source: Reuters & HDFC Bank
A sustained increase in the participation rate could keep the unemployment rate higher for a longer period of time
Source: Reuters & HDFC Bank
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01
Subdued global growth and a stronger USD will increase downside risks to inflation
Hence, after initial reduction of QE 3 likely in September—Fed might be forced to re‐assess economic t d th t hi h it i ht t t i d d th QE 3prospects and the pace at which it might want to wind‐down the QE 3 program.
(5)
Federal Reserve’s forecasting record is poor
(6)
However, risks still remain that could delay the termination of QE 3 beyond mid‐2014
Mortgage rates spike on talks of QE3 taper Risks on the horizon:
Another round of protracted negotiations to raise the debt ceiling in October/November could dampen
confidence undermining growth prospects 4.00
4.20
4.40
4.60
30‐Year Mortgage rates
%
Fed Chief talks of tapering QE 3 before year end
i o e o i o
As US interest rates rise in response to the Fed curtailing QE 3– recovery in the housing sector could
t d l ff t d
3.00
3.20
3.40
3.60
3.80
1‐03
1‐17
1‐31
2‐14
2‐28
3‐14
3‐28
4‐11
4‐25
5‐09
5‐23
6‐06
6‐20
7‐04
In % before year end
get adversely affected.
Fed’s forecasts on growth/unemployment rate appear to be too optimistic and is well above consensus
2013
‐01
2013
‐01
2013
‐01
2013
‐02
2013
‐02
2013
‐03
2013
‐03
2013
‐04
2013
‐04
2013
‐05
2013
‐05
2013
‐06
2013
‐06
2013
‐07
GDP growth
Overall Growth remains subdued
be too optimistic and is well above consensus
2.5
3
3.5
4
4.5GDP growth
Y %
2Q2013 estimated between 1 and 1.5%
Bottom‐line: US economy likely to grow at a more moderate pace than the Fed expects
0
0.5
1
1.5
2
… … … … … … … … … … … … … …
In Y‐o‐Y moderate pace than the Fed expects
Hence, the winding‐down of QE 3 likely to take place at a much slower pace than the market is currently anticipating.
Source: BEA and St. Louis Fed(7)
Q1…
Q2…
Q3…
Q4…
Q1…
Q2…
Q3…
Q4…
Q1…
Q2…
Q3…
Q4…
Q1…
Q2…
Recent commentary from Fed officials suggests QE 3 taper will be gradual and dependent on data flow
Fed officials have emphasized that the withdrawal of QE 3 will be gradual so as to avoid a sharp l ti i t b i th f ll iescalation in rates by saying the following:
Fed officials have started to introduce some ambiguity in terms of the timing/pace of QE 3 withdrawal
Fed officials are making a clear distinction between a slow exit from ultra‐loose monetary
policy and monetary tightening.
Q32013: USD could gain marginally as markets prepare for an initial reduction in QE 3 but extreme
Implications for the FX markets:
appreciation pressures like that witnessed in Q22013 are unlikely.
Q42013: USD could lose some ground as the Fed slows the pace at which it exits from its ultra‐loosemonetary policy on the back of concerns about growth.y p y g
H12014: If growth picks up on the back of improving private demand, Fed could prepare market for thetermination of QE3 by end‐2014 —resulting in renewed strength of the greenback.
(8)
US yields appear to have flattened out after a sharp spike in Q22013
US yields soften in response to recent …resulting in a pull‐back in the greenback U yie o e i e po e o e estatements made by Fed officials…
e u i g i a pu a i e g ee aand a reduction in market volatility
3UST 2 year UST 5 year UST 10 year
Sovereign yields
2385
USD TWI index VIX (RHS)
2
2.5
3
% 13
15
17
19
21
82
83
84
0.5
1
1.5In %
5
7
9
11
13
78
79
80
81
S R t
0
01‐06‐2012
01‐07‐2012
01‐08‐2012
01‐09‐2012
01‐10‐2012
01‐11‐2012
01‐12‐2012
01‐01‐2013
01‐02‐2013
01‐03‐2013
01‐04‐2013
01‐05‐2013
01‐06‐2013
01‐07‐2013
Source: Reuters. Note: VIX is a measure of implied volatility of
02‐01‐2013
02‐02‐2013
02‐03‐2013
02‐04‐2013
02‐05‐2013
02‐06‐2013
02‐07‐2013
Source: Reuters The S&P 500 index
A re‐assessment of the Fed’s exit strategy could result in a further moderation in US treasury yields that could undermine the greenback and provide some relief to EM currencies like the INR.
(9)
USD: Strong long‐term supports in play
USD could rally over the long term driven by:US economy likely to outperform its peer USD could rally over the long‐term driven by:
Fed scaling back/terminating QE 3 program
US economy likely to outperform its peer group
Greater energy sufficiency—increase in shale gas extraction could reduce oil imports and the trade deficit creating a natural support for the
USD3
3.5
4Euro‐zone Germany Japan UK US
GDP growth rates (In %)
USD.
Improvement in US manufacturing1.5
2
2.5
3
Pickup in US private demand likely to ensure that the US economy grows at a faster pace than
its peer group– that could translate into i d f0 5
0
0.5
1
2012 2013F 2014F 2015F improved currency performance.
S IMF
‐1
‐0.5
Hence, we remain USD bulls in the long‐term. Source: IMF
(10)
But weak growth could result in continued fiscal li th t ld b i th f b k t E
Euro‐zone: Financial markets stable but fiscal concerns remain
ECB’s OMT program has pushed sovereign yields l d i th ibilit f f ll bl i i
GDP growth (In YoY %) 2011 2012F 2013F
slippage that could bring the focus back to Europe lower reducing the possibility of a full‐blown crisis
Italy 10 year Spain 10 year(In YoY %) 2011 2012F 2013FGreece ‐6.9 ‐6.0 ‐4.0Portugal ‐1.7 ‐3.0 ‐1.0Ireland 1.4 0.4 1.4Spain 0 4 1 5 1 6
Pre‐OMT Post‐OMT
7.00
8.00
Spain 0.4 ‐1.5 ‐1.6Italy 0.4 ‐2.3 ‐1.5Source: IMF
5.00
6.00
In %
Gross government debt as a % of GDP2007 2010 2011 2012 2013F
Greece 107.4 144.6 165.4 170.7 181.8Portugal 68.3 93.3 107.8 119.1 123.7Ireland 25 0 92 2 106 5 117 7 119 3
3.00
4.00
01‐2010
05‐2010
09‐2010
01‐2011
05‐2011
09‐2011
01‐2012
05‐2012
09‐2012
01‐2013
05‐2013
Ireland 25.0 92.2 106.5 117.7 119.3Italy 103.1 118.6 120.1 126.3 127.8Spain 36.3 61.3 69.1 90.7 96.9Source: IMF
We e e t the ECB to follo u ith the e e t oli y ate ut ith o e a o odati e o eta y
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
03‐0
Source: Reuters
We expect the ECB to follow up with the recent policy rate cuts with more accommodative monetary measures in response to bleak economic prospects.
(11)
Pockets of risks from the Euro‐zone that the market’s will have to grapple with
German elections due in September could bring focus back on to the issues in Europe
Possibility of fiscal slippage in the nations of the European periphery due to weakPossibility of fiscal slippage in the nations of the European periphery due to weak growth prospects.
Portugal and possibly Ireland could require additional funding beyond the 2014
Attention could turn to some of the overstretched banking systems in other smaller economies such as Slovenia, Malta and Luxembourg
Stress in the European banking sector due to a sharp increase in non‐performing loans.
(12)
Abenomimcs could mitigate some of the pressures from the Fed terminating QE 3
Recent market movements suggest that ‘Abenomics’Nikk i USD/JPY(RHS) Recent market movements suggest that Abenomics may finally be working—visible in rising Nikkei and
stability in bond yields
Abenomics consists of a three pronged approach in the 90
95
100
105
13000
14000
15000
16000
17000
Nikkei USD/JPY(RHS)
A e o i o i o a ee p o ge app oa i eform of monetary easing, fiscal expansion and
structural reform.
70
75
80
85
8000
9000
10000
11000
12000
012
012
012
012
012
013
013
013
013
013
013
013
013
013 Given the recent upper house election result, the LDP
01‐10‐20
22‐10‐20
12‐11‐20
03‐12‐20
24‐12‐20
14‐01‐20
04‐02‐20
25‐02‐20
18‐03‐20
08‐04‐20
29‐04‐20
20‐05‐20
10‐06‐20
01‐07‐20
0 14
0.160.91
10‐Yr JGB 2‐Yr JGB(RHS)
Given the recent upper house election result, the LDP led government will be able to push through structural
reforms.
S f i di ti th t Ab i i h i
Yields Stabilize0.06
0.08
0.1
0.12
0.14
0.30.40.50.60.70.8
In %
In %
So far, indications are that Abenomics is having a positive effect on Japan– visible in the rise in Q12013
GDP and latest Tankan survey.
0
0.02
0.04
00.10.20.3
4‐01‐2013
8‐01‐2013
1‐02‐2013
5‐02‐2013
1‐03‐2013
5‐03‐2013
9‐03‐2013
2‐04‐2013
6‐04‐2013
0‐05‐2013
4‐05‐2013
7‐06‐2013
1‐06‐2013
5‐07‐2013
Most importantly, the persistence of the BOJ’s stance likely to ensure increased Yen liquidity that could offset pressures from the Fed winding down QE 3.
Source: Reuters
(13)
0 1 0 1 0 1 2 1 2 1 2 0 2 0
China: Engineering a slowdown
Sh t t i di t i t t dManufacturing remains weak
Short term indicators point to a more pronounced slowdown than earlier expected
Export growth likely to remain subdued after crack d i i i51
52
53
54
China Manufacturing PMI
g
However, there is a major difference from earlier, as policies are being fashioned with a preference for
down on over invoicing
46
47
48
49
50
51
11 11 11 11 11 11 12 12 12 12 12 12 13 13 13 p g pslower growth
Aggressive pro‐cyclical response not guaranteed by the People’s Bank of China or the Government
01‐01‐201
01‐03‐201
01‐05‐201
01‐07‐201
01‐09‐201
01‐11‐201
01‐01‐201
01‐03‐201
01‐05‐201
01‐07‐201
01‐09‐201
01‐11‐201
01‐01‐201
01‐03‐201
01‐05‐201
Export Growth Import growth
Exports slump
People s Bank of China or the Government
10
20
30
40p p g
Y %
GDP growth in 2013 likely to print in between 7‐7.5%
‐20
‐10
0
10
Jan‐11
Mar‐11
May‐11
Jul‐1
1
Sep‐11
Nov‐11
Jan‐12
Mar‐12
Ma y‐12
Jul‐1
2
Sep‐12
Nov‐12
Jan‐13
Mar‐13
Ma y‐13
In Y‐o‐Y
Chinese Premier, Li Keqiang has emphasized that growth must remain above 7%
Source: Reuters
(14)
China: List of concerns
Estimates of China’s total credit to GDP ratio suggest
11
Chinese Economy set to slowEstimates of China s total credit‐ to GDP ratio suggest
that it is currently around 200% of GDP
Local government financing has contributed to a surge in NPLs of the banking system. Moody’s estimates that China GDP growth
9
9.5
10
10.5
g y y14% of total bank loans were from Local government
financing vehicles at the end of 2012
NPLs as of March,2013 stood at CNY 524.3 billion, up
China GDP growth
7
7.5
8
8.5
7.5%
7%
In Y
oY%
Base Case scenario for Chinese Growth
by 20.7% YoY. This number itself is likely to be understated
Between 2010 and 2012 shadow banks doubled their loans to CNY 36 trillion, about 69% of Chinese GDP
6.5
01‐01‐2008
01‐01‐2009
01‐01‐2010
01‐01‐2011
01‐01‐2012
01‐01‐2013
,according to JP Morgan
Structural problems of low consumption and high investment rates still persist.
Source: Reuters and HDFC Bank
p
Commodity prices likely to remain subdued on Chinese growth prospects.
(15)
European currencies: further weakness in store
EUR: Moderate depreciation in store GBP: to weaken further?EUR: Moderate depreciation in store GBP: to weaken further?
EUR/USD pair likely to remain a victim of the divergence in monetary stance between the
ECB and the Fed
The GBP is likely to trade like the EUR’s twinECB and the Fed.
The ECB is likely to keep monetary policy accommodative so as to boost growth
t
Like the EUR, monetary easing by the BOE is likely to undermine the GBP especially as the Fed looks to wind down QE 3 gradually.
prospects
The EUR is likely to receive mild respite in Q42013 as the Fed re‐assess its exit strategy but
h i lik l
The GBP is likely to remain particularly vulnerable to an elevated current account deficit and anemic growth prospects.
Adverse news flow on growth and on the periphery could weigh on the EUR as well.
that is likely to prove temporary.
However, verbal intervention by UK policymakers to curb excessive depreciation might help to limit the magnitude of declines
i th GBP
However, improvement in the current account position likely to act as a support restricting extreme depreciation and downtrend in the
EUR/USD i
in the GBP.
EUR/USD pair.
(16)
Our G‐3 forecasts
Our forecasts
Q32013 Q42013 H12014H12014
EUR/USD 1.29‐1.32 1.31‐1.33 1.28‐1.29
GBP/USD 1.52‐1.54 1.51‐1.53 1.48‐1.50
USD/JPY 97.00‐100.00 100.00‐102.00 102.00‐104.00
(17)
Indian economyIndian economyIndian economyIndian economy
(18)
Growth outlook: The road to recovery could be long and painful
Growth drivers How they have panned out so far o i e o ey a e pa e ou o a
Easier monetary conditions as RBI reciprocates
Some pick up in government capex driven by quicker project awards
Some traction here although issues with land acquisition & environmental clearances remain
Rupee depreciation has compromised RBI’s ability to easeEasier monetary conditions as RBI reciprocates government policy initiatives
Prospect of normal monsoons could support rural demand
Rupee depreciation has compromised RBI s ability to ease policy and effective lending rates
Monsoon on track with initial sowing report pointing to strong summer crop output
Some improvement in external demand Export growth has disappointed so far despite exchange rate depreciation and signs of revival in private demand in
US
P i t k b t i k i
GDP growth projections ( in % Y‐o‐Y)
Prospect of improvement in macro imbalances ( fiscal and current account deficit)
Progressing on track but risks remain• Potential pressure likely on subsidy bill from higher oil
prices and food security bill • CAD could ease but debt repayment new source of stress
GDP growth projections ( in % Y o Y)Sector FY12 FY13 FY14f
Agriculture and allied activities 3.6 1.9 3.5
Industry 3.5 2.1 2.8
Se i e 8 2 7 1 7 2
Source: CSO & HDFC Bank
(19)
Services 8.2 7.1 7.2
GDP at factor cost 6.2 5.0 5.5
Investment : Some increase in infra awards but private capex still lagging
Can fiscal consolidation and monetary easing really help when regulatory impediments to capex still
remain ?
Issue Status
Land acquisition • Cabinet approval secured for land acquisition bill and broad consensus amongst political parties •Could be introduced in monsoon sessionCould be introduced in monsoon session
Environmental clearances/project
• Some improvement in environmental clearances especially for roads and highways projects • Cabinet Committee on Investments has cleared projects worth Rs 70 000 cr over the last three70
8090
New project starts
clearances/project clearances
projects worth Rs 70,000 cr over the last three months but this could have a lagged impact on investment • Government has also set target of Rs 1.15 tn of infra project awards
2030405060
in USD bn
Raw material shortages/Financialposition of power
• Further traction with fuel‐supply agreements with large producers such as NTPC agreeing to sign pact with CIL• Coal linkage reforms yet to be addressed• While key states have agreed to the “State debt
010
Aug‐06
Apr‐07
Dec‐07
Aug‐08
Apr‐09
Dec‐09
Aug‐10
Apr‐11
Dec‐11
Aug‐12
Mar‐13
position of power producers
While key states have agreed to the State debt restructuring package” few have accessed the facilities under the package • Some headway on imported coal price pass‐though
O h L l GST b DTC b ll ld b
Source: CMIE & HDFC Bank
Private Government
Other measures • Little progress on GST but DTC bill could be introduced in monsoon session
(20)
Government on track to meet FY14 fiscal target but medium‐term consolidation at risk
Offsets to fiscal drag could curtail …...but could vanish in the medium‐O e o i a ag ou u aislippage in FY14…...
u ou a i i e e iuterm
Excess expenditure on account of food security ordinance could be limited given
Rise in fuel subsidy could be managed by deferral of payout/further deregulation of
delay in implementation ( at least six months)
Expenditure on food security ordinance could overshoot initial projections given
likely outlay on infrastructure and distribution
p y gdiesel
Shortfall from disinvestment/tax revenue could be offset but cut‐back in plan
spending, efficiency gains from streamlining
Limit beyond which delayed fuel subsidy payouts can be sustained
Delay in tax reform measures such as GST could compromise structural consolidation spending, efficiency gains from streamlining
such spending, more effective tax administration ,sale of surplus land held by
government
cou d co p o ise st uctu a co so idatioefforts
Government unlikely to breach 4.8% of GDP target
Medium‐term fiscal consolidation at risk
g
(21)
Food security ordinance: Cost and implications
Near‐term
Medium ‐term
Fisc
• Impact to extend beyond food subsidy –to include investment in storage warehousing enhancement
• Could push up FY14 food subsidy bill to Rs 1,24,000 cr against Rs 90,000 cr budgeted
•Slippage of 0.3% of GDP
• Howe er delay in implementation means
Fisc storage, warehousing, enhancement in agricultural productivity most
likely to borne by states •Annual cost could be close to Rs
2,25,000 cr or 1.9% of GDP
• However delay in implementation means impact on fisc this year could be modest •4.8% of GDP target to be maintained
• Impact on food inflation could be negligible in FY14 even though need for procurement
Inflation
• Direct impact :Could entail increased procurement and limit
stock of food‐grains in open market •Indirect impact : To increase purchasing power of relativelyin FY14 even though need for procurement
over medium‐term increases•Lower MSP increase ( 6.5% for summer crops
in FY14 against 26.0% in FY13) to help
purchasing power of relatively poor and push up demand for non‐food grains/ health and education
services
Current account deficit
•Possibility of shortfall especially in the event of a drought/natural
calamity •Could put pressure on already elevated current account deficit
(22)
The growth‐inflation balance could prove more challenging for the RBI….
Despite measures by the government to speed up project clearances
industrial growth remains lackluster
Exchange rate depreciation to spur imported inflation even as its second round effects could remain curtailed
14 0IIP growth
7.508.00
WPI inflation forecast
6.0
8.0
10.0
12.0
14.0
n % Y‐o‐Y
5.005.506.006.507.007.50
in %
IIP growth plummets to ‐1.6% in May from 1.9%
in April
Inflation forecast: July,2013
‐2.0
0.0
2.0
4.0
6.0
r‐10
g‐10
c‐10
r‐11
g‐11
c‐11
r‐12
g‐12
c‐12
r‐13
i n
3.003.504.004.50
n‐13
r‐13
y‐13 l‐13
p‐13
v‐13
n‐14
r‐14
Inflation forecast: March,2013
Source: Office of Economic Advisor & HDFC Bank ‐6.0
‐4.0 Apr
Aug
Dec
Apr
Aug
Dec
Apr
Aug
Dec
Apr
Jan
Mar
May Ju Sep
Nov Jan
Mar
Source: CSO & HDFC Bank
(23)
….as could external stability
The INR has come under intense depreciation pressure in recent months
Depreciation driven by: (a) Spike (partly seasonal) in
62 00
USD/INR
Phase 1:First half of May
gold imports resulting in a deterioration in the trade
balance (b) RBI purchases USDs at higher than expected
USD/INR levels that pushes56 00
58.00
60.00
62.00
USD/INR levels that pushes USD/INR pair higher
50 00
52.00
54.00
56.00
Phase 2: Second half of M t t
Depreciation pressures intensifies because of:(a) Pro‐USD trade
(b) Reduction in portfolio inflows into equity
k t
50.00
18/04/2013
26/04/2013
3/5/2013
9/5/2013
15/05/2013
21/05/2013
27/05/2013
31/05/2013
6/6/2013
12/6/2013
18/06/2013
24/06/2013
28/06/2013
4/7/2013
10/7/2013
16/07/2013
Source: RBI & HDFC Bank May to present markets(c) Portfolio outflows from
the debt markets(d) Overseas positioning
(24)
Shrinking trade gap to provide some support to the INR….
Export growth fell in June but Trade balancep g Jblow was offset by lower
imports
‐5000
0
Sep‐12
Oct‐12
Nov‐12
Dec‐12
Jan‐13
Feb‐13
Mar‐13
pril‐20
13
May‐13
Jun‐13
n
Trade balance
8.0
10.0
12.0
‐15000
‐10000
Ap
in USD m
n
0.0
2.0
4.0
6.0
2 2 2 3 3 3 3 3 3
in % Y‐o‐Y
Source: Department of Commerce‐25000
‐20000
‐6.0
‐4.0
‐2.0
Oct‐12
Nov‐12
Dec‐12
Jan‐13
Feb‐13
Mar‐13
April‐20
13
May‐13
Jun‐13
Import Export Source: Department of Commerce
100.0
150.0
200.0
o‐Y
Fall in gold imports underpins softer import
growth in June • Trade deficit in June fell to USD 12 bnagainst over USD 20 bn month ago•Decline sharper than explained by
‐50 0
0.0
50.0
100.0
ct‐12
ov‐12
ec‐12
an‐13
eb‐13
ar‐13
2013
ay‐13
un‐13
in % Y‐o
p p yseasonality; underpinned fall in gold imports
• Further restrictions on gold imports to take CAD lower to 3.8% of GDP in FY14
from 4.8% in FY13
(25)
‐50.0 Oc
No De Ja Fe Ma
April‐ Ma Ju
Gold
Source: Department of Commerce
….even as the structural strain on the current account could sustain
I di ’ i bi dCurbing the non‐oil ex gold trade
600.0
2 0
Trade deficit movement
India’s import binge extends beyond oil and gold
g ggap could provide a buffer to price
inelastic imports such as oil
300.0
400.0
500.0
‐4.0
‐2.0
0.0
2.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
GDP
SD bn
100.0
200.0
‐10.0
‐8.0
‐6.0
as % of
in U
0.0FY07 FY08 FY09 FY10 FY11 FY12 FY13
Oil Gold Coal Iron & Steel Others
‐12.0
Trade deficit Trade deficit ex goldTrade deficit ex oil ex gold
Source: Commerce Ministry & HDFC Bank Source: Commerce Ministry, RBI & HDFC Bank Source: Commerce Ministry & HDFC Bank y
• Non‐oil imports including iron, coal, chemicals, edible oils ,metals and ores bigger strain on the import bill than oil and gold •Curbing current account deficit not just about controlling oil and gold•Curbing current account deficit not just about controlling oil and gold• Focused trade policy needed to check non‐oil ex gold trade deficit
(26)
Besides funding concerns could pose a risk to external stability despite recent damage control
Semblance of stability visible across RBI’s money market measures have e a e o a i i y i i e a oemerging market currencies
I o ey a e ea u e a ereinforced support from reduced global
market volatility
Net foreign inflows in debt 112.0
USD/AXJ USD/EM CAD USD/INR
200
400
600
D m
illion
104.0
106.0
108.0
110.0
112.0
Bernanke indicates possible taper by year‐
end
600
‐400
‐200
0
2‐May‐13
9‐Ma y‐13
16‐M
ay‐13
23‐M
ay‐13
30‐M
ay‐13
6‐Jun‐13
13‐Jun‐13
20‐Jun‐13
27‐Jun‐13
4‐Jul‐1
3
11‐Jul‐13
18‐Jul‐13
In US
96.0
98.0
100.0
102.0
Source: Reuters & HDFC Bank Source: SEBI
‐800
‐600
3/1/2013
3/15
/2013
3/29
/2013
4/12
/2013
4/26
/2013
5/10
/2013
5/24
/2013
6/7/2013
6/21
/2013
7/5/2013
7/19
/2013
RBI introduces measures
•Fed talk has been focused on alleviating fears about the pace of the QE‐3 taper
•Mixed economic data pointing to a still tentative revival in growth has buttressed the Fed’s
•Foreign investors are still pulling out money from the domestic debt market but the degree of
hemorrhaging has reduced•Funding the current account deficit could still be challenging but some stability is visible in
(27)
damage control rhetoric e a e gi g u o e a i i y i i i e i
capital inflows
Key reasons why the INR has stabilized in the last fortnight after the sharp depreciation in Q22013
Rise in domestic money market rates has increased the cost of holding overnight long USD positions. Hence, domestic entities have cut some of their excess long‐USD
positions.
RBI measures have pushed forward premia higher– resulting in a favourable arbitrage between onshore market and the off‐shore market making investors sell USD/INR
spot.
A re‐assessment of the pace at which the Fed could wind‐down QE 3– has resulted in i d f i EM i i l di th INRan improved performance in EM currencies—including the INR.
(28)
Our balance of payments forecasts: Strain on capital account to offset current account comfort
Gold: $1646/oz
Gold: $1654/oz
Gold: $ 1300/oz$1646/oz $1654/oz $ 1300/oz
Oil: $ 115 p.b Oil: $ 110 p.b Oil: $ 105 p.b
(In USD billion) FY12 FY13 YoY % FY14F YoY %
Exports 309.8 306.6 ‐1.0 321.9 5.0
Imports: (a) + (b) 499.5 502.3 0.6 497.4 ‐1.0
(a) Oil 154 172.9 12.3 179.8 4.0
(b) Non‐oil:‐‐ 345.6 329.4 ‐4.7 317.6 ‐3.6
‐‐ Gold imports 63.2 53.1 ‐16.1 37.1 ‐30.0
‐‐ Non‐oil ex gold 282.4 276.3 ‐2.1 280.5 1.5
M h di b l 189 7 195 7 3 2 175 5 10 3Merchandise balance ‐189.7 ‐195.7 3.2 ‐175.5 ‐10.3
Software exports 61 63.5 4.1 67.3 6.0
Private transfers 63.5 64.4 1.4 65.7 2.0
Other invisible categories ‐12.7 ‐20.3 ‐30.0
Net Invisibles 111.6 107.6 ‐3.6 103.0 ‐4.3
Current account (CA) ‐78.2 ‐88.1 ‐72.5
CA % of GDP ‐4.2 ‐4.8 ‐3.8
FDI 22.2 19.8 16.0
Portfolio flows 17.1 26.9 10.0
External loans 19.3 31.3 22.0
Banking capital 16.2 16.6 20.0
‐‐NR Deposits 12.0 14.9
Total capital account 67.7 89.3 65.0
Errors & ommissions ‐2.4 2.6 3.0
(29)
Source: RBI & HDFC Bank
Errors & ommissions 2.4 2.6 3.0
Overall BOP ‐12.9 3.8 ‐4.5
INR: Our forecasts and assumptions
Q32013: INR could come under some pressure as global marketsbrace for a possible reduction in QE 3 in September.
However, recent RBI measures to push domestic rates higherlikely to act as a major reason that could reduce the prospect ofexcessive currency depreciation
Our USD/INR forecasts
Q32013 58.50‐60.50
excessive currency depreciation.
Q42013: As market’s re‐asses the Fed’s exit strategy, the USDcould trade weaker across the board
Q42013 57.00‐59.00
H12014 60.00‐62.00
could trade weaker across the board.
This could result in an increase in fund flows into EMassets, including domestic assets—that might provide somerelief to the INR.
H12014: INR likely to get weighed down by the followingfactors:
(a) Concerns about domestic political environment(a) Concerns about domestic political environment
(b) Resurgence of the pro‐USD trade in the global markets asFed prepares the market for another round of QE 3reduction.
(30)
What has happened?
Monetary policy: External stability the focus for now
The impact• MSF rate increased by 200 bps to 10.25%• LAF borrowing to be capped at 0.5% of NDTL or Rs 37,500 cr
•Allocation under LAF to individual banks to be made in proportion to bids subject to overall LAF ceiling
•Minimum daily limit for CRR balances increased to 99 0% ofMoney market rate movement
The motivation
•Minimum daily limit for CRR balances increased to 99.0% of requirement from 70.0%
7 00
8.00
9.00
10.00
11.00
n %
• A large reason behind recent rupee depreciation is FII outflows from debt market
• Move aims to increase domestic interest rates, close the gap with DM interest rates and attract foreign inflows
•Move also aims to curb speculation by increasing cost of carry4.00
5.00
6.00
7.00
‐13
‐13
‐13
‐13
‐13
‐13
‐13
‐13
‐13
‐13
‐13
‐13
i n
The mechanism
• Mechanism rests on increase in marginal cost of funds• Liquidity will have to be tighter (LAF much higher) than
2‐Jul‐
4‐Jul‐
6‐Jul‐
8‐Jul‐
10‐Jul‐
12‐Jul‐
14‐Jul‐
16‐Jul‐
18‐Jul‐
20‐Jul‐
22‐Jul‐
24‐Jul‐
Overnight MIBOR Reverse repo rateRepo rate MSF rate
Source: Reuters, RBI & HDFC Bank • Liquidity will have to be tighter (LAF much higher) than
previous weeks for measures to work • Seasonal factors may help ( i.e. lower government spending) but RBI may have to adopt liquidity impounding measures ( greater FX intervention, OMO sales , CRR hike in the extreme
case) )• By controlling liquidity in the system, the RBI can influence
short‐term rates.
(31)
Interest rate trajectory has reversed in response to RBI’s measures
9.50
10.00
10.50
11.00
11.00
12.00
Sovereign yeild curve
7.50
8.00
8.50
9.00
in %
9.00
10.00
in %
Month Ago
17th July
7.00
4/2/2013
4/16
/2013
4/30
/2013
5/14
/2013
5/28
/2013
6/11
/2013
6/25
/2013
7/9/2013
7/23
/2013
3‐month CD3 monthCP
6.00
7.00
8.00
3 th 1 5 10
24th July
Source: Reuters, RBI & HDFC Bank
• 10‐yr bond yield up by 100 bps but more strain on short‐end. T‐bill up by 150‐200 bps leading to
3‐month CP10‐yr AAA corporate bond
3 mth 1 yr 5 yr 10 yr
y y p y p p y p gcurve inversion •Credit market for corporate funding has also tightened •See inverted curve in place till RBI measures phased out. Possibility of long‐end of the yield curve edging lower as market prices in the fact that these measures are temporary.•Expect 10 yr benchmark to move in the range of 8 00 8 30% in the near term but move closer to•Expect 10‐yr benchmark to move in the range of 8.00‐8.30% in the near‐term but move closer to
7.60‐7.70% by 2013‐end
(32)
The way forward
•Given strain on growth see current measures as temporary ( upto three months) till•Given strain on growth see current measures as temporary ( upto three months) till semblance of stability returns to INR.Repo rate cuts still a possibility in H2FY14
When can the measures be unwound ?
Alternative measures to stabilize currency
Stability in global financial marketsstabilize currency financial markets
• Fresh supply of foreign inflows through sovereign USD bond(
pref)/dollar NRI bond ( currently not being considered)
• Focus on pace of taper and its conditionality could bring some
stability to markets•US revival still somewhat tentative –
• Encouraging public sector companies to raise debt abroad ( already in the
pipeline)•Further restrictions on gold imports/speculative trading
Fed may continue to distinguish between monetary “ tightening” ( i.e. hike in Fed funds rate) and balance
sheet tapering•This could lead to some stabilization
i DM b d i ld
How will the measures be reversed?
• Increase in system liquidity through enhanced government spending /OMO buy‐backs
in DM bond yields
• Cut in MSF rate backs to 8.25%•Removal of cap on LAF
(33)
Appendix pp
(34)
Food security ordinance: Details
Food security ordinance to provide legal right to poorest 67% of population ( 75% for rural areas and 50% for urban areas) to demand 5 kg of rice ,wheat and coarse cereals per person per month
at subsidized rates of Rs 3/kg,2/kg,1/kg respectively
To subsume schemes such as mid‐day meal, support for pregnant and lactating mothers and Antyodya Anna Yojna ( i.e 35 kg of food grains per households for poorest of the poor at
subsidized prices)
Move to increase coverage under public distribution system to 67% of population to little over 29.0% at present ( i.e. move from below BPL to BPL +)
Under current PDS eligible households get 35 kg of food‐grains per month per household at subsidized rates which are roughly half the economic cost of their procurement
Ordinance to be valid for 6 months after which it must either be introduced in parliament to be converted to a legislative bill or be re‐promulgated as an ordinance co e e o a egis a i e bi o be e p o u ga e as a o i a ce
Implementation of bill to be state responsibility and likely to take six months ( the estimated time taken for release of socio‐economic census )
(35)
HDFC Bank Treasury economics research team
AbheekAbheek BaruaBaruaChief economist, Phone:+91 (0) 124‐4664327Email ID: [email protected]
JyotinderJyotinder KaurKaurSenior economistPhone: + 91 (0) 124‐4664338( )Email ID: [email protected]
ShivomShivom ChakravartiChakravartiEconomistEconomistPhone: +91 (0) 124‐4664354Email ID: [email protected]
Rishi ShahRishi ShahJunior economistPhone: +91 (0) 124‐4664336Email ID: [email protected]
40
