India Macroscope-- The Capital Question Citi

India Macroscope
The Capital Question
 Rising Need of Capital Flows — India's capital requirements across the
government and private sector have risen, with overall Debt-GDP ratios at 136%.
While public debt/GDP has moderated from 88% to 70%, private sector leverage
has risen faster from 33% of GDP to 66% currently, with growing recourse to
external sources of funding. The current sweet spot in equity/debt flows is positive
and has helped boost markets but given record high current account deficits,
fundamentally India's dependence on capital flows has gone up.
 Domestic Capital Is as Critical and as Much of a Challenge – While foreign
capital flows get the headlines, domestic flows are just as important as (1) Savings
rates have fallen, (2) There is a continued shift to physical savings and (3) Most
recent deposit growth numbers are at near historic lows of 11% YoY. Recent steps
on the debt market are positive, but more needs to be done given its impact on the
domestic and external front. The need for and pressure on capital will only rise,
which highlights (a) the dilemma of the RBI of responding to industry demands of
lowering rates to boost growth and (b) the need for reining in the fiscal deficit and
consequently inflationary expectations. Under these circumstances, monetary
easing in 2013 will likely be limited to 75bps.
 Incremental Reform Momentum Positive – The winter session was relatively
better than expected with the passage of banking/companies bill and the cabinet
approving the committee on investment. A key test is how it would manage the
current roads controversy. While the passenger rail-fare hike and the possibility of
further reform on fuel pricing is positive, key to note that crucial bills on GST, land
bill and FDI in insurance/pensions are still pending.
 Maintain Estimates on the Macro — (1) Maintain our 5.4% and 6.2% GDP
estimates for FY13 and FY14, (2) Deficits, both current account and fiscal, to
remain elevated in FY14, keeping the INR in a Rs54-56 range, (3) WPI Inflation to
average 6.5%-7%. Decontrol of diesel would increase WPI by 1%.

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