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India Macro Weekly
Once more with feeling… BoP
risks overdone
In focus: Once more with feeling… BoP risks overdone
Incoming data support our standing call that India’s balance of payments risks are
overdone. In fact, we marginally cut our FY12 current account deficit forecast to
2.8% of GDP (at US$105/bbl BofA MLe) from 3.1% earlier. That said, we address
3 client questions. First, is the 'downside' surprise in the current account one-off?
Yes, but flows should still fund the gap. Note the increase in the trade deficit to
US$8.9bn in April from US$5.6bn is essentially seasonal. Second, will phasing out
QE II hurt? Not really, as a decline in oil prices shoud offset a slowdown in FII
flows. Finally, with INR sub-45/ USD, wont the RBI buy fx? Not till inflation abates.
Intervention is not feasible without impacting the INR till nostro balances cross,
say, US$20bn (US$13bn now). Our fx strategists see the INR around Rs45/USD.
Current account deficit drop one off, but risks overdone
Is the sudden 'improvement' in the current account one off? Yes, as it partly
comes from leads and lags in trade data. While we have cut the FY11 current
account deficit to 2.5% of GDP from 2.8%, the ‘contraction’ is partly explained by
statistical miscounting of unreconciled net import receipts to 'others' in the capital
account rather than the current account. “Other” capital has seen a drawal of
US$12.7bn (0.8% of GDP) in April-December from an accretion of US$10bn in
FY08. We assess that the current account deficit is being under-reported by 0.5%
of GDP. Even adjusting for this, capital inflows should still fund the gap.
Post QEII, lower FII flows = lower commodity prices
What if QEII docks in June as our US economists expect? We reckon this to be
'neutral'. Any shrinkage in portfolio flows (US$12bn BofA MLe vis a vis US$30bn
in FY11) will likely be offset by lower oil prices and a lower oil import bill. During
QEII, the larger portfolio inflows were drained out by rising oil imports. After all,
US$10/bbl swings US$8bn on the trade deficit. Our commodity strategists expect
oil prices to come off to US$94/bbl by December from US$122/bbl in June.
RBI intervention difficult till ‘imported’ inflation comes off
With INR sub-Rs45/USD, wont the RBI buy fx? Not now, although it must be keen
to recoup the US$35bn of fx sold during the 2008 crisis. In our view, fx
intervention does not seem feasible without impacting INR unless banks’ nostro
balances touches touch 50% of the current account deficit (say, US$20bn). Given
high 'imported' inflation, the RBI will surely want to keep the INR as strong as
possible, especially given the US Dollar volatility. Second, our BoP estimates do
not suggest much scope for fx intervention. After all, banks' nostro fx balances
amount to just US$13bn. Third, the RBI can likely afford to wait as fx reserves are
still a comfortable 2.5x of short-term debt of 1-year original maturity. Finally, our
index of exchange market pressure does not still show any stress at this point.
Next up in India: 8.4% April inflation
India: Wholesale price inflation (April), Monday, 16 May 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Weekly
Once more with feeling… BoP
risks overdone
In focus: Once more with feeling… BoP risks overdone
Incoming data support our standing call that India’s balance of payments risks are
overdone. In fact, we marginally cut our FY12 current account deficit forecast to
2.8% of GDP (at US$105/bbl BofA MLe) from 3.1% earlier. That said, we address
3 client questions. First, is the 'downside' surprise in the current account one-off?
Yes, but flows should still fund the gap. Note the increase in the trade deficit to
US$8.9bn in April from US$5.6bn is essentially seasonal. Second, will phasing out
QE II hurt? Not really, as a decline in oil prices shoud offset a slowdown in FII
flows. Finally, with INR sub-45/ USD, wont the RBI buy fx? Not till inflation abates.
Intervention is not feasible without impacting the INR till nostro balances cross,
say, US$20bn (US$13bn now). Our fx strategists see the INR around Rs45/USD.
Current account deficit drop one off, but risks overdone
Is the sudden 'improvement' in the current account one off? Yes, as it partly
comes from leads and lags in trade data. While we have cut the FY11 current
account deficit to 2.5% of GDP from 2.8%, the ‘contraction’ is partly explained by
statistical miscounting of unreconciled net import receipts to 'others' in the capital
account rather than the current account. “Other” capital has seen a drawal of
US$12.7bn (0.8% of GDP) in April-December from an accretion of US$10bn in
FY08. We assess that the current account deficit is being under-reported by 0.5%
of GDP. Even adjusting for this, capital inflows should still fund the gap.
Post QEII, lower FII flows = lower commodity prices
What if QEII docks in June as our US economists expect? We reckon this to be
'neutral'. Any shrinkage in portfolio flows (US$12bn BofA MLe vis a vis US$30bn
in FY11) will likely be offset by lower oil prices and a lower oil import bill. During
QEII, the larger portfolio inflows were drained out by rising oil imports. After all,
US$10/bbl swings US$8bn on the trade deficit. Our commodity strategists expect
oil prices to come off to US$94/bbl by December from US$122/bbl in June.
RBI intervention difficult till ‘imported’ inflation comes off
With INR sub-Rs45/USD, wont the RBI buy fx? Not now, although it must be keen
to recoup the US$35bn of fx sold during the 2008 crisis. In our view, fx
intervention does not seem feasible without impacting INR unless banks’ nostro
balances touches touch 50% of the current account deficit (say, US$20bn). Given
high 'imported' inflation, the RBI will surely want to keep the INR as strong as
possible, especially given the US Dollar volatility. Second, our BoP estimates do
not suggest much scope for fx intervention. After all, banks' nostro fx balances
amount to just US$13bn. Third, the RBI can likely afford to wait as fx reserves are
still a comfortable 2.5x of short-term debt of 1-year original maturity. Finally, our
index of exchange market pressure does not still show any stress at this point.
Next up in India: 8.4% April inflation
India: Wholesale price inflation (April), Monday, 16 May 2011.
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