India in Focus: six event risks ahead
We see six event risks into the summer.
First, will April-May see lending rate cuts?
Second, will earnings bottom out in the March quarter?
Third, will the budget session of Parliament see a hike in FDI+FII limit in insurance to 49% of equity?
Fourth, will the RBI ease in the 3 May policy?
Fifth, will the RBI be able to hold Rs52-56/USD?
Sixth, how will the Karnataka and West Bengal polls vote?
GEMs Daily - Asia Edition
India: six event risks ahead
Preview
Markets advanced on Monday with US equities gaining 0.6% before Alcoa kicks
off first quarter earnings. The yen weakened another 1.8% in the wake of the
Bank of Japan’s aggressive easing announced last week, and the Nikkei rose
2.8%. Market focus today will be on corporate earning releases in the US with no
major macro releases scheduled.
India in Focus: six event risks ahead
We see six event risks into the summer. First, will April-May see lending rate
cuts? Second, will earnings bottom out in the March quarter? Third, will the
budget session of Parliament see a hike in FDI+FII limit in insurance to 49% of
equity? Fourth, will the RBI ease in the 3 May policy? Fifth, will the RBI be able to
hold Rs52-56/USD? Sixth, how will the Karnataka and West Bengal polls vote?
(I. Sen Gupta; page 2)
News and Views
Bank Indonesia will not hike the policy rate, as the inflation surge in March was
temporary and core inflation will remain stable at 4.2%, according to Perry Warjiyo,
executive director for BI’s monetary policy and economic research. Accommodation
and car costs will likely account for about three-fifths of Singapore inflation this
year, according to Second Minister of Trade & Industry S. Iswaran. (page 4)
Please join us for our “Great Debates” conference (agenda) on occasion of the IMF Spring
meetings, on Saturday, 20 April, in Washington D.C. Contact your salesperson for details.
LatAm and EEMEA in Focus
Now that Japan’s long-term bond yields look set to remain low, and the yen weak,
domestic savers may venture into foreign assets with renewed interest. Brazil and
Mexico should benefit due to the size of their domestic bond and currency
markets. Russia’s surprisingly weak CPI in March marks the start of a new
disinflation trend, in our view, which will push inflation to our out-of-consensus
outlook of 5% yoy in 2013 eop. (page 6, page 8)
Today’s Market Movers
Focus today will be on inflation data in China. CPI for March probably moderated
to 2.4% from 3.2% last month while PPI contracted 1.7% yoy.
In Focus
India: six event risks ahead
We see six event risks into the summer. First, will April-May see lending rate
cuts? Second, will earnings bottom out in the March quarter? Third, will the
Budget session of parliament see a hike in FDI+FII limit in insurance to 49% of
equity? Fourth, will the RBI ease in the 3 May policy? Fifth, will the RBI be able to
hold Rs52-56/USD? Sixth, how will the Karnataka and West Bengal polls vote?
#1. Lending rate cuts in April-May
Will lending rates really come down? We expect a 25bp lending rate cut in April-
May with the onset of the slack industrial season. The RBI OMO and/or CRR cuts
are pushing up deposit growth to 14% levels. At the same time, high lending rates
will likely continue to drag down loan demand. The resultant improved bank
liquidity should help pull down lending rates (Chart 1). Do read our latest liquidity
report here.
#2. Earnings to bottom out
Our equity strategists expect the coming results season to report March-quarter
BSE Sensex headline profit growth at a weak 1% atop 0% in the December
quarter (Chart 2). However, weak growth is largely on account of poor
performance of Tata Motors. Excluding it, Sensex profit growth is 13%. Note our
equity strategists think FY14 Sensex EPS growth will be under 10% vs current
expectations of 17%. Do read our equity strategists report here.
#3. FDI in insurance in Budget session ending 10 May
Will Delhi persevere with reforms? We expect it to try to pilot legislation to hike
FDI/FII limits in insurance to 49% from 26% (perhaps with 26% cap for FDI) in the
current Budget session reconvening 2 April-10 May. The government has also
called for a third all-party meeting on 9 April to discuss the Land Acquisition Bill.
#4. 25bp CRR cut on 3 May, 25bp rate cut in June, July
We expect the RBI to cut CRR by 25bp on 3 May, repo rates by 25bp in June and
July, CRR by 25bp in October and rates by 25bp in January (Chart 3). We have
shifted our next repo rate cut to June from 3 May after the RBI today indicated
that it would not want to cut thrice in a row.
#5. Karnataka, West Bengal polls to shape reform appetite
Won’t the coming election cycle slow reforms? We would monitor the West
Bengal panchayat (April-May) and the Karnataka state (May) polls as they will
determine the political appetite for reforms, especially with the DMK leaving the
Congress-led United Progressive alliance (Table 1-Table 2).
#6. RBI to hold Rs52-56/USD; US dollar at 1.30s-1.20s/€
Can the RBI really hold Rs52-56/USD after the seasonal support of March fades
away? Yes, if the US dollar trades in the current 1.30s-1.20s/€ range. We expect
the RBI to buy FX at Rs52/USD to arrest the falling import cover. Its US$291bn
reserves should be able to defend Rs56/USD levels
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