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India Macro Watch
RBI balance sheet: Lot of
ammo to fight contagion
Bottom line: Sufficient fx reserves still to fight contagion
„ The RBI's just-released balance sheet supports our view that it has sufficient
ammunition to contain contagion from a potential US double dip. Still, 2008 has
certainly taken its toll, and, as in case of almost every central bank, the war
chest is that much weaker than before. Fx reserves, at 2.5x of short-term
external debt (of 1-year residual maturity), are well above the 1x recommended
by the Greenspan-Guidotti rule. Table 1 shows this is also in line with BRIC
levels. Nonetheless, they have slipped from pre-crisis 3x levels. Similarly, the
RBI’s net worth (excluding revaluation), at 10.3% of assets, remains well
above cross-country levels (Table 2). Nevertheless, it has fallen short of the
RBI's own 12% norm with softer international rates pulling down return on fx
assets to 1.7% from 4.8% in FY08. Do find the RBI’s Annual Report at:
http://rbi.org.in/scripts/AnnualReportPublications.aspx?year=2011
Why it matters: India’s BoP risks overdone
„ We continue to advise investors to ignore inevitable chatter about India's
'external vulnerabilities' as the world becomes a more and more volatile place.
During the Lehman collapse, we had always argued against the ever so
fashionable "vulnerability" rankings that simply totted up current account
deficits and fx reserves to short-term debt ratios. Reality surely is far more
complex! Not surprisingly, India (and Indonesia), that topped such lists,
weathered the Lehman crisis best (along with China). Why? Because India
follows a very different paradigm of domestic demand-led growth than most
other export-led Asian economies. Not surprisingly, the very domestic demand
that widens the current account deficit also attracts its financing. Do also read
our S&P downgrade report here.
Key points: 25bp final Sep 16 RBI rate hike, cuts April -
„ We grow more confident of our call that the RBI will hike 25bp on September
16 and cut from April onwards after reading today’s RBI Annual Report.
Although the tone remains hawkish, there is now greater appreciation of the
rising risks to its 8% FY12 growth forecast from higher rates relative to the July
26 policy. In particular, Gov Subbarao now recognizes downside risks to
private consumption demand, on the demand side, and industrial growth, on
the supply side, due to high rates.
„ The RBI appears concerned that net household financial saving has come off
to 9.7% of GDP in FY11 from 12.1% last year. After all, this essentially reflects
the deceleration in deposit mobilization brought about by monetary tightening
to fight inflation (Table 3). Given that this reduces investment funding, we
expect the RBI to ease monetary conditions as soon as inflation comes off.
Next up in India: Continued sowing recovery
„ India: Sowing data (August 26), Friday, 26 August 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Watch
RBI balance sheet: Lot of
ammo to fight contagion
Bottom line: Sufficient fx reserves still to fight contagion
„ The RBI's just-released balance sheet supports our view that it has sufficient
ammunition to contain contagion from a potential US double dip. Still, 2008 has
certainly taken its toll, and, as in case of almost every central bank, the war
chest is that much weaker than before. Fx reserves, at 2.5x of short-term
external debt (of 1-year residual maturity), are well above the 1x recommended
by the Greenspan-Guidotti rule. Table 1 shows this is also in line with BRIC
levels. Nonetheless, they have slipped from pre-crisis 3x levels. Similarly, the
RBI’s net worth (excluding revaluation), at 10.3% of assets, remains well
above cross-country levels (Table 2). Nevertheless, it has fallen short of the
RBI's own 12% norm with softer international rates pulling down return on fx
assets to 1.7% from 4.8% in FY08. Do find the RBI’s Annual Report at:
http://rbi.org.in/scripts/AnnualReportPublications.aspx?year=2011
Why it matters: India’s BoP risks overdone
„ We continue to advise investors to ignore inevitable chatter about India's
'external vulnerabilities' as the world becomes a more and more volatile place.
During the Lehman collapse, we had always argued against the ever so
fashionable "vulnerability" rankings that simply totted up current account
deficits and fx reserves to short-term debt ratios. Reality surely is far more
complex! Not surprisingly, India (and Indonesia), that topped such lists,
weathered the Lehman crisis best (along with China). Why? Because India
follows a very different paradigm of domestic demand-led growth than most
other export-led Asian economies. Not surprisingly, the very domestic demand
that widens the current account deficit also attracts its financing. Do also read
our S&P downgrade report here.
Key points: 25bp final Sep 16 RBI rate hike, cuts April -
„ We grow more confident of our call that the RBI will hike 25bp on September
16 and cut from April onwards after reading today’s RBI Annual Report.
Although the tone remains hawkish, there is now greater appreciation of the
rising risks to its 8% FY12 growth forecast from higher rates relative to the July
26 policy. In particular, Gov Subbarao now recognizes downside risks to
private consumption demand, on the demand side, and industrial growth, on
the supply side, due to high rates.
„ The RBI appears concerned that net household financial saving has come off
to 9.7% of GDP in FY11 from 12.1% last year. After all, this essentially reflects
the deceleration in deposit mobilization brought about by monetary tightening
to fight inflation (Table 3). Given that this reduces investment funding, we
expect the RBI to ease monetary conditions as soon as inflation comes off.
Next up in India: Continued sowing recovery
„ India: Sowing data (August 26), Friday, 26 August 2011.
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