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BoP: Risks overdone…
naturally
US$5.4bn March 2011 quarter current account deficit
Actual: US$5.4bn
Previous: US$9.2bn
Consensus: US$6.0bn
BofA MLe US$5.2bn
Bottom line
„ Incoming data continue to support our standing call of balance of payments
(BoP) risks overdone. The March 2011 current account deficit has just come in
at US$5.4bn, in line with expectations. It is thus ending FY11 at a fairly benign
2.6% of GDP. On our part, we forecast the current account deficit at a fundable
2.7% of GDP (2.8% earlier) in FY12. Although we expect FII inflows to slow,
this should be compensated by a pick up in FDI and external commercial
borrowing (ECB). Our fx strategists forecast the INR at Rs44/USD by March
2012. For a detailed analysis, do see our last BoP-risks-overdone report here.
Why it matters
„ We continue to advise investors to ignore periodic complaints about BoP risks.
After all, it is but natural that India will have a large current account deficit as it
is powered by domestic demand rather than exports. Yet the very domestic
demand that widens the current account deficit by pumping up imports also
attracts the foreign capital to fund it. Note our estimates suggest that consumer
demand accounts for a bare 15% of imports.
Key points
„ 2.7% of GDP FY12 current account deficit: We forecast the current account
deficit at a fundable 2.7% of GDP in FY12 (Table 1). Given our house forecast
of US$100/bbl Dated Brent for FY12, a higher oil import bill will widen the trade
deficit. This, however, should be partly offset by a turnaround in non-software
services exports that are beginning to recover from the 2008 downturn.
Incidentally, the RBI has indicated that it will address import data discrepancies
that, in our view, are understating the current account deficit by 0.5% of GDP.
„ FDI, ECBs to neutralize lower FII inflows. Capital flows should be sufficient
to fund the gap. A pickup in FDI and ECBs should compensate for a slowdown
in FIIs inflows to US$12bn from US$30.3bn in FY11. Two mega FDI deals –
the BP-Reliance and Vodafone-Essar – have already been signed.
„ No fx intervention in FY12: We do not expect the RBI to buy fx in FY12 as it
will not want to take chances with the INR at a time of high ‘imported’ inflation.
After all, our balance of payments just about squares up. Banks’ nostro fx
balances, the pool for fx intervention, are currently a mere US$13.5bn.
Besides, there appears to be no hurry. Fx reserves, at 2.4x of short-term debt
of 1-year residual maturity, are still much larger than the 1x recommended by
the Greenspan-Guidotti rule (Table 2). That said, we would highlight that the
RBI would want to recoup the US$35bn sold in 2008 at the earliest opportunity.
Next up in India: Rainfall outlook
India: India Meteorological Department (July 4-8), Friday, 1 July 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BoP: Risks overdone…
naturally
US$5.4bn March 2011 quarter current account deficit
Actual: US$5.4bn
Previous: US$9.2bn
Consensus: US$6.0bn
BofA MLe US$5.2bn
Bottom line
„ Incoming data continue to support our standing call of balance of payments
(BoP) risks overdone. The March 2011 current account deficit has just come in
at US$5.4bn, in line with expectations. It is thus ending FY11 at a fairly benign
2.6% of GDP. On our part, we forecast the current account deficit at a fundable
2.7% of GDP (2.8% earlier) in FY12. Although we expect FII inflows to slow,
this should be compensated by a pick up in FDI and external commercial
borrowing (ECB). Our fx strategists forecast the INR at Rs44/USD by March
2012. For a detailed analysis, do see our last BoP-risks-overdone report here.
Why it matters
„ We continue to advise investors to ignore periodic complaints about BoP risks.
After all, it is but natural that India will have a large current account deficit as it
is powered by domestic demand rather than exports. Yet the very domestic
demand that widens the current account deficit by pumping up imports also
attracts the foreign capital to fund it. Note our estimates suggest that consumer
demand accounts for a bare 15% of imports.
Key points
„ 2.7% of GDP FY12 current account deficit: We forecast the current account
deficit at a fundable 2.7% of GDP in FY12 (Table 1). Given our house forecast
of US$100/bbl Dated Brent for FY12, a higher oil import bill will widen the trade
deficit. This, however, should be partly offset by a turnaround in non-software
services exports that are beginning to recover from the 2008 downturn.
Incidentally, the RBI has indicated that it will address import data discrepancies
that, in our view, are understating the current account deficit by 0.5% of GDP.
„ FDI, ECBs to neutralize lower FII inflows. Capital flows should be sufficient
to fund the gap. A pickup in FDI and ECBs should compensate for a slowdown
in FIIs inflows to US$12bn from US$30.3bn in FY11. Two mega FDI deals –
the BP-Reliance and Vodafone-Essar – have already been signed.
„ No fx intervention in FY12: We do not expect the RBI to buy fx in FY12 as it
will not want to take chances with the INR at a time of high ‘imported’ inflation.
After all, our balance of payments just about squares up. Banks’ nostro fx
balances, the pool for fx intervention, are currently a mere US$13.5bn.
Besides, there appears to be no hurry. Fx reserves, at 2.4x of short-term debt
of 1-year residual maturity, are still much larger than the 1x recommended by
the Greenspan-Guidotti rule (Table 2). That said, we would highlight that the
RBI would want to recoup the US$35bn sold in 2008 at the earliest opportunity.
Next up in India: Rainfall outlook
India: India Meteorological Department (July 4-8), Friday, 1 July 2011.
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