07 July 2011

Fears of a fiscal blowout exaggerated:: JP Morgan

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Economics
Fears of a fiscal blowout exaggerated (Sajjid Z Chinoy)
Fears of significant fiscal slippage in FY12 have risen after the government cut oil
duties and explicitly fiscalized a portion of the losses of oil companies
While the FY12 deficit is likely to be higher than the budgeted 4.6% of GDP, we
do not expect the slippage to exceed 0.4% of GDP because
estimates of foregone revenues from the duty cuts appear overstated
central government will only bear a part of the revenue lost from the duty cuts
the upstream oil companies will take on a significant share of remaining oil-losses
better targeting of subsidies could lower government burden
tax revenues will likely exceed budget targets on higher nominal GDP growth
budgeted non-subsidy expenditure likely to be under spent


Economics
PMI falls sharply but trade flows remain strong (Sajjid Z Chinoy)
June PMI falls sharply to its lowest level in 9 months
The decline is across the board with the output index falling substantially and new
orders slowing for a third consecutive month
However, trade flows remain strong in May; non-oil imports unexpectedly surge
while exports continue to sizzle
The FY11 CAD expectedly narrows to 2.6% of GDP from 2.8 % the year before
The moderation in the CAD is led by a sharp narrowing of the trade deficit driven
by surging exports in the latter half of last fiscal

FDI plunges during FY11 but is offset by rising offshore commercial borrowings on
account of a rising interest rate differential
Authorities announce the operating framework for allowing foreign retail
participation into Indian mutual funds; flows through this route will be capped at
$10 billion
Authorities deny rumors that capital gains taxes are likely to be imposed on capital
inflows through Mauritius


India Monthly Wrap
June 2011: Rate hike; Petro-product prices raised (Bharat Iyer)
MSCI India (US$) gained 1.4% over the month and outperformed the MSCI
Emerging markets index (down 1.9%). Telecom, Consumer Staples and Utilities
companies were relative outperformers, while Energy, Materials and Health Care
underperformed.
RBI returns to calibrated tightening mode. The Central bank hiked benchmark
Repo and Reverse Repo rate by 25 bps each, in-line with market expectations.
The Central bank maintained its hawkish stance and expects inflation to remain
elevated in the near-term. Growth outlook does not yet appear to be a concern for
the RBI.

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