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India Macro Weekly
Sorry to go on and on… but
BoP risks overdone
Focus: Sorry to go on and on… but BoP risks overdone
We believe that balance of payments risks will prove overdone in FY12 as in
FY11. The December current account deficit today expectedly slipped to
US$9.7bn from US$16.8bn in September. Better-than-expected exports has led
us to cut our current account deficit forecast by 40bp to 2.7% of GDP in FY11 and
3.1% in FY12. Capital inflows should still be sufficient to fund the current account
deficit although it is at a historic peak. Our FX strategists see the INR in a Rs45-
46/USD range (with Rs47.50 in June with US Dollar strengthening to 1.20/Euro).
Fundable 3.1% of GDP current account deficit in FY12
We expect the current account deficit to peak at a fundable 3.1% of GDP in FY12.
This assumes our oil strategists' US$105/bbl forecast. After all, the pick up in
exports should sustain if US growth settles at 3% levels. Second, the oil import bill
should peak off if prices subside to US$94/bbl by December as we expect. Third,
the gold import bill should also stabilize given our house 2011 US$1425/oz view.
Fourth, our IT analyst, Mitali Ghosh, expects software export growth to pick up to
23% in FY12 from 16.6% in 9MFY11. Fifth, business process outsourcing should
also recover after net outflows of US$9.6bn. Finally, the RBI’s fx income should
pick up as US Treasury yields begin to go up.
↓ Equity flows = ↑FDI + ↑ debt flows + ↑ECBs + ↑NRI deposits
We expect capital inflows to be sufficient to fund the current account deficit.
Revival of FDI, the US$25bn increase in the FII corporate bond investment limit
and higher corporate external commercial borrowings should make up for the
slowdown in FII equity inflows we factor in. We also expect the RBI to widen the
100-175bp premia limit over Libor that banks can offer on NRI deposits.
Because growth always funds itself
What does conventional wisdom get wrong? The power of the India story to
attract its own financing! After all, it is really the import demand from high growth
that is generating the high current account deficit. In fact, the share of consumer
goods is limited to 15% of imports. And not surprisingly, the very growth that is
widening the current account deficit also raises the money to fund it.
Fx intervention unlikely: nostro 19% of current account
This begs the question, will the RBI buy fx? Not now, though it obviously wants to
recoup the US$35bn sold during the 2008 crisis. Given high oil prices, the RBI is
unlikely to take chances with the INR. Besides, bank nostro fx balances, that
measure potential fx intervention, have dipped to 19 % of the current account
deficit from 99.4% in FY06. We continue to expect the RBI to OMO Rs1600bn to
generate liquidity. This, in turn, should encase the 10y about a mid-cycle 8%.
Next up in India: Persistent loan demand
India: Banking data (December), Wednesday, 6 April 2011.
Sorry to go on and on… but BoP risks
overdone
We believe that balance of payments risks will prove overdone in FY12 as in
FY11. The December current account deficit today expectedly slipped to
US$9.7bn from US$16.8bn in September. Better-than-expected exports has led
us to cut our current account deficit forecast by 40bp to 2.7% of GDP in FY11 and
3.1% in FY12. Capital inflows should still be sufficient to fund the current account
deficit although it is at a historic peak. Our FX strategists see the INR in a Rs45-
46/USD range (with Rs47.50 in June with US Dollar strengthening to 1.20/Euro).
Do read our 2011 views here.
Bottom line: BoP risks overdone, range-bound INR
We believe that BoP risks will prove overdone in FY12, like in FY11. Yes, we are
projecting the current account deficit at a historically high 3.1% of GDP. Yet, in
our view, capital inflows should be sufficient to fund this admittedly large gap.
After all, growth brings its own financing (Chart 1). Our FX strategists see the INR
in an Rs45-46/USD range (with a spike to Rs47.50 in June with the US Dollar
strengthening to 1.20/Euro) (Chart 2).
We do expect FY12, like all recent years, to go through the usual annual bout of
lamentation – perhaps in 2Q11 – about BoP risks. As the dust settles, capital
flows, it will be discovered to have – as in the past few years - been sufficient – as
has been the case every year – to fund the current account deficit.
Fundable 3.1% of GDP current account deficit in FY12
We have cut our current account deficit forecasts by 40bp each to 2.7% of GDP
in FY11 and 3.1% in FY12 on better-than-expected export demand (Chart 3 and
Table 2). Global recovery has led to a jump in engineering exports (81% during
April-February 2011). Besides, higher oil prices have driven up petroleum exports
by 34% during April-February 2011. Incidentally, the commerce ministry has
expectedly revised the December quarter imports by a whopping US$17bn.
In our view, the worst is over:
The pick up in export demand should sustain if US growth settles at 3%
levels (Chart 3). However, exports will seasonally weaken relative to
imports in the June quarter. FX liquidity, therefore, will depend on the
timing of the inflows under the US$7bn BP-RIL mega FDI deal.
The oil import bill will likely peak in 1H11. Our oil strategists expect
Dated Brent prices to subside to US$94/bbl by end-2011 from
US$122/bbl in the June quarter. Note US$10/bbl swings US$8bn on the
current account deficit.
When will oil prices burn? Sustained US$120+/bbl, in our view. Rising oil
prices are usually funded by FII inflows as both reflect ‘risk on’ investor
sentiment (Chart 4). It is really after a certain flashpoint – that we
estimate at an annual average of US$120/bbl – that investors turn away
from India – as during 1H08 – as an oil importer.
The gold import bill should also stabilize after a 40% increase in the past
two years (Chart 5). Our commodity strategists expect 2011 gold prices
to settle at close-to-current US$1425/oz levels. Besides, higher gold
prices will also likely slow gold demand.
Our IT analyst, Mitali Ghosh, expects software export growth to pick up
to 23% in FY12 from 14% in 1HFY11 here.
Business process outsourcing should also recover from the 2008 crisis
after seeing net outflows of US$9.6bn since April 09.
The RBI’s income from fx assets will likely pick up as US Treasury yields
begin to go up (Chart 6). Our US rate strategists see the US 10y
climbing to 4% by December 2011.
↓ Equity flows = ↑FDI + ↑ debt flows + ↑ECBs + ↑NRI deposits
We expect capital inflows to be sufficient to fund the current account deficit. This
conservatively assumes that portfolio flows contract to US$12bn from FY11’s
US$30bn estimate. In particular, we expect FII equity flows to slow with India
strategist, Jyoti Jaipuria, expecting range-bound markets – with a 21750
December 2011 BSE Sensex target - on rising interest rates, higher commodity
costs and earnings downgrades. At the same time, the drop in FII equity flows
should be compensated by:
pick up in FII debt flows, following the US$25bn hike in foreign
institutional investment limit in corporate bonds;
higher FDI, with Delhi expediting project clearances. Besides, the
recently announced US$7bn BP-Reliance mega FDI deal will be a
support; and
corporates raising external commercial borrowings (ECBs) abroad with
domestic borrowing costs going up. In particular, telcos will likely raise
long tenor fx loans (of US$8bn) to partly fund their US$22bn of 3G
payments to the fisc.
We think there is a strong possibility that the RBI may finally hike the premia
over Libor – currently 100-175bp – on non-resident deposit rates
in order to attract more capital inflows.
Because growth always funds itself
What does conventional wisdom get so wrong about India’s BoP? The power of
the India story to attract its own financing! (Chart 7) After all, it is really the import
demand from high growth that is generating the current account deficit. In fact,
the share of consumer goods is limited to 15% of imports (Table 3). And so, the
very growth that widens the current account deficit also raises the money for it.
We had never shared concerns – that were ever so fashionable last July – that
the Indian economy was “over consuming” itself into an unsustainably large
current account deficit. Table 3 shows that the share of consumption goods in
imports has not really changed over the past 20 years. It is true that “official” gold
imports have climbed after the liberalization of the mid-1990s. At the same time,
former RBI Governor Reddy estimated that “smuggled” gold imports worked out
to about 8% of imports in pre-reform years.
Fx intervention unlikely: nostro 19% of current account
This begs the question, will the RBI buy fx? Not now, in our view. True, Governor
Subbarao would obviously want to buy back the US$35bn of fx reserves sold
during the 2008 credit shock. At the same time, given US$100+/bbl oil prices, the
RBI will likely not want to take chances with the INR. The scope for RBI fx
intervention is also circumscribed by a large current account deficit. Banks' fx
(nostro) balances, that measure potential fx intervention, have actually slid to a
bare 19% of the current account deficit from 99.4% in FY06 (Charts 8-9).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Weekly
Sorry to go on and on… but
BoP risks overdone
Focus: Sorry to go on and on… but BoP risks overdone
We believe that balance of payments risks will prove overdone in FY12 as in
FY11. The December current account deficit today expectedly slipped to
US$9.7bn from US$16.8bn in September. Better-than-expected exports has led
us to cut our current account deficit forecast by 40bp to 2.7% of GDP in FY11 and
3.1% in FY12. Capital inflows should still be sufficient to fund the current account
deficit although it is at a historic peak. Our FX strategists see the INR in a Rs45-
46/USD range (with Rs47.50 in June with US Dollar strengthening to 1.20/Euro).
Fundable 3.1% of GDP current account deficit in FY12
We expect the current account deficit to peak at a fundable 3.1% of GDP in FY12.
This assumes our oil strategists' US$105/bbl forecast. After all, the pick up in
exports should sustain if US growth settles at 3% levels. Second, the oil import bill
should peak off if prices subside to US$94/bbl by December as we expect. Third,
the gold import bill should also stabilize given our house 2011 US$1425/oz view.
Fourth, our IT analyst, Mitali Ghosh, expects software export growth to pick up to
23% in FY12 from 16.6% in 9MFY11. Fifth, business process outsourcing should
also recover after net outflows of US$9.6bn. Finally, the RBI’s fx income should
pick up as US Treasury yields begin to go up.
↓ Equity flows = ↑FDI + ↑ debt flows + ↑ECBs + ↑NRI deposits
We expect capital inflows to be sufficient to fund the current account deficit.
Revival of FDI, the US$25bn increase in the FII corporate bond investment limit
and higher corporate external commercial borrowings should make up for the
slowdown in FII equity inflows we factor in. We also expect the RBI to widen the
100-175bp premia limit over Libor that banks can offer on NRI deposits.
Because growth always funds itself
What does conventional wisdom get wrong? The power of the India story to
attract its own financing! After all, it is really the import demand from high growth
that is generating the high current account deficit. In fact, the share of consumer
goods is limited to 15% of imports. And not surprisingly, the very growth that is
widening the current account deficit also raises the money to fund it.
Fx intervention unlikely: nostro 19% of current account
This begs the question, will the RBI buy fx? Not now, though it obviously wants to
recoup the US$35bn sold during the 2008 crisis. Given high oil prices, the RBI is
unlikely to take chances with the INR. Besides, bank nostro fx balances, that
measure potential fx intervention, have dipped to 19 % of the current account
deficit from 99.4% in FY06. We continue to expect the RBI to OMO Rs1600bn to
generate liquidity. This, in turn, should encase the 10y about a mid-cycle 8%.
Next up in India: Persistent loan demand
India: Banking data (December), Wednesday, 6 April 2011.
Sorry to go on and on… but BoP risks
overdone
We believe that balance of payments risks will prove overdone in FY12 as in
FY11. The December current account deficit today expectedly slipped to
US$9.7bn from US$16.8bn in September. Better-than-expected exports has led
us to cut our current account deficit forecast by 40bp to 2.7% of GDP in FY11 and
3.1% in FY12. Capital inflows should still be sufficient to fund the current account
deficit although it is at a historic peak. Our FX strategists see the INR in a Rs45-
46/USD range (with Rs47.50 in June with US Dollar strengthening to 1.20/Euro).
Do read our 2011 views here.
Bottom line: BoP risks overdone, range-bound INR
We believe that BoP risks will prove overdone in FY12, like in FY11. Yes, we are
projecting the current account deficit at a historically high 3.1% of GDP. Yet, in
our view, capital inflows should be sufficient to fund this admittedly large gap.
After all, growth brings its own financing (Chart 1). Our FX strategists see the INR
in an Rs45-46/USD range (with a spike to Rs47.50 in June with the US Dollar
strengthening to 1.20/Euro) (Chart 2).
We do expect FY12, like all recent years, to go through the usual annual bout of
lamentation – perhaps in 2Q11 – about BoP risks. As the dust settles, capital
flows, it will be discovered to have – as in the past few years - been sufficient – as
has been the case every year – to fund the current account deficit.
Fundable 3.1% of GDP current account deficit in FY12
We have cut our current account deficit forecasts by 40bp each to 2.7% of GDP
in FY11 and 3.1% in FY12 on better-than-expected export demand (Chart 3 and
Table 2). Global recovery has led to a jump in engineering exports (81% during
April-February 2011). Besides, higher oil prices have driven up petroleum exports
by 34% during April-February 2011. Incidentally, the commerce ministry has
expectedly revised the December quarter imports by a whopping US$17bn.
In our view, the worst is over:
The pick up in export demand should sustain if US growth settles at 3%
levels (Chart 3). However, exports will seasonally weaken relative to
imports in the June quarter. FX liquidity, therefore, will depend on the
timing of the inflows under the US$7bn BP-RIL mega FDI deal.
The oil import bill will likely peak in 1H11. Our oil strategists expect
Dated Brent prices to subside to US$94/bbl by end-2011 from
US$122/bbl in the June quarter. Note US$10/bbl swings US$8bn on the
current account deficit.
When will oil prices burn? Sustained US$120+/bbl, in our view. Rising oil
prices are usually funded by FII inflows as both reflect ‘risk on’ investor
sentiment (Chart 4). It is really after a certain flashpoint – that we
estimate at an annual average of US$120/bbl – that investors turn away
from India – as during 1H08 – as an oil importer.
The gold import bill should also stabilize after a 40% increase in the past
two years (Chart 5). Our commodity strategists expect 2011 gold prices
to settle at close-to-current US$1425/oz levels. Besides, higher gold
prices will also likely slow gold demand.
Our IT analyst, Mitali Ghosh, expects software export growth to pick up
to 23% in FY12 from 14% in 1HFY11 here.
Business process outsourcing should also recover from the 2008 crisis
after seeing net outflows of US$9.6bn since April 09.
The RBI’s income from fx assets will likely pick up as US Treasury yields
begin to go up (Chart 6). Our US rate strategists see the US 10y
climbing to 4% by December 2011.
↓ Equity flows = ↑FDI + ↑ debt flows + ↑ECBs + ↑NRI deposits
We expect capital inflows to be sufficient to fund the current account deficit. This
conservatively assumes that portfolio flows contract to US$12bn from FY11’s
US$30bn estimate. In particular, we expect FII equity flows to slow with India
strategist, Jyoti Jaipuria, expecting range-bound markets – with a 21750
December 2011 BSE Sensex target - on rising interest rates, higher commodity
costs and earnings downgrades. At the same time, the drop in FII equity flows
should be compensated by:
pick up in FII debt flows, following the US$25bn hike in foreign
institutional investment limit in corporate bonds;
higher FDI, with Delhi expediting project clearances. Besides, the
recently announced US$7bn BP-Reliance mega FDI deal will be a
support; and
corporates raising external commercial borrowings (ECBs) abroad with
domestic borrowing costs going up. In particular, telcos will likely raise
long tenor fx loans (of US$8bn) to partly fund their US$22bn of 3G
payments to the fisc.
We think there is a strong possibility that the RBI may finally hike the premia
over Libor – currently 100-175bp – on non-resident deposit rates
in order to attract more capital inflows.
Because growth always funds itself
What does conventional wisdom get so wrong about India’s BoP? The power of
the India story to attract its own financing! (Chart 7) After all, it is really the import
demand from high growth that is generating the current account deficit. In fact,
the share of consumer goods is limited to 15% of imports (Table 3). And so, the
very growth that widens the current account deficit also raises the money for it.
We had never shared concerns – that were ever so fashionable last July – that
the Indian economy was “over consuming” itself into an unsustainably large
current account deficit. Table 3 shows that the share of consumption goods in
imports has not really changed over the past 20 years. It is true that “official” gold
imports have climbed after the liberalization of the mid-1990s. At the same time,
former RBI Governor Reddy estimated that “smuggled” gold imports worked out
to about 8% of imports in pre-reform years.
Fx intervention unlikely: nostro 19% of current account
This begs the question, will the RBI buy fx? Not now, in our view. True, Governor
Subbarao would obviously want to buy back the US$35bn of fx reserves sold
during the 2008 credit shock. At the same time, given US$100+/bbl oil prices, the
RBI will likely not want to take chances with the INR. The scope for RBI fx
intervention is also circumscribed by a large current account deficit. Banks' fx
(nostro) balances, that measure potential fx intervention, have actually slid to a
bare 19% of the current account deficit from 99.4% in FY06 (Charts 8-9).
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