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Economy
India
FY2012E interest rates: Increasingly firm. Inflation continues to evade the comfort
zone, leading us to expect RBI to continue to tighten monetary policy in a graduated
manner. Oil could be the key determinant of the pace and extent to which G-sec yields
rise. The key risk lies in 2HFY12E in the form of likely additional government borrowings
if oil prices continue to stay on the higher side. We expect 10-year G-sec yield to rise to
around 8.30-8.40% in 1HFY12E and further in 2HFY12E with the announcement of
higher government borrowings. OMOs are likely to emerge as a key instrument for RBI
to maintain a lid on G-sec yields.
Risk of overstepping government borrowings: Negative for interest rates in 2HFY12E
We consider two scenarios for crude price at our base assumption of US$105/bbl (Scenario 1) and
at US$115/bbl (Scenario 2). A higher subsidy burden will force the government to exceed the
budgeted borrowing in 2HFY12E and push up yields. We estimate that the oil subsidy will rise to
`763 bn in Scenario 1 and `955 bn in Scenario 2. This is likely to lead to additional borrowings
being announced in 2HFY12E, estimated at `802 bn in Scenario 1 and `980 bn in Scenario 2 over
the budget estimates of `3,430 bn. This will likely push up the 10-year benchmark yield to around
8.6-8.7% in 2HFY12E, with any further rise prevented by OMOs by the RBI.
Liquidity negativity to moderate but unlikely to turn positive
The liquidity shortage in the economy is now more structural than frictional. High inflation in the
economy has led the currency in circulation to remain on high, thereby hampering deposit growth.
With the demand side story remaining strong, credit to manufacturing companies also remains
high. We model deposit growth to pick up to 17% while credit growth can slip to 19.5% in
FY2012E. The balance of payments is unlikely to produce any significant surpluses, thereby limiting
the scope for the RBI to intervene in the FX markets to infuse Rupee liquidity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
India
FY2012E interest rates: Increasingly firm. Inflation continues to evade the comfort
zone, leading us to expect RBI to continue to tighten monetary policy in a graduated
manner. Oil could be the key determinant of the pace and extent to which G-sec yields
rise. The key risk lies in 2HFY12E in the form of likely additional government borrowings
if oil prices continue to stay on the higher side. We expect 10-year G-sec yield to rise to
around 8.30-8.40% in 1HFY12E and further in 2HFY12E with the announcement of
higher government borrowings. OMOs are likely to emerge as a key instrument for RBI
to maintain a lid on G-sec yields.
Risk of overstepping government borrowings: Negative for interest rates in 2HFY12E
We consider two scenarios for crude price at our base assumption of US$105/bbl (Scenario 1) and
at US$115/bbl (Scenario 2). A higher subsidy burden will force the government to exceed the
budgeted borrowing in 2HFY12E and push up yields. We estimate that the oil subsidy will rise to
`763 bn in Scenario 1 and `955 bn in Scenario 2. This is likely to lead to additional borrowings
being announced in 2HFY12E, estimated at `802 bn in Scenario 1 and `980 bn in Scenario 2 over
the budget estimates of `3,430 bn. This will likely push up the 10-year benchmark yield to around
8.6-8.7% in 2HFY12E, with any further rise prevented by OMOs by the RBI.
Liquidity negativity to moderate but unlikely to turn positive
The liquidity shortage in the economy is now more structural than frictional. High inflation in the
economy has led the currency in circulation to remain on high, thereby hampering deposit growth.
With the demand side story remaining strong, credit to manufacturing companies also remains
high. We model deposit growth to pick up to 17% while credit growth can slip to 19.5% in
FY2012E. The balance of payments is unlikely to produce any significant surpluses, thereby limiting
the scope for the RBI to intervene in the FX markets to infuse Rupee liquidity.
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