Economics Markets Strategy - the DBS Vickers Securities Equities ...

More documents

Recommendations

Info

Economics: India Economics – Markets – Strategy Even if India produced all its oil and operated as a closed economy, domestic oil prices might have risen due to oil demand We expect another 25bp rate hike by Sep08 So again the question to ask is who and what is ultimately responsible for the rising global commodity price inflation? According to our analysis, (see section “On a clear day”), in 2006, India and China together accounted for two-thirds of the incremental petroleum demand and India alone accounted for about 15% of the incremental demand. In other words, even if India produced all its oil and operated as a closed economy, oil prices would have likely risen and fuelled inflation. Fuel subsidies are also shielding India’s demand from higher oil prices, so strong demand from India clearly plays a role in driving oil prices higher. It is for this reason that we think that India should not ignore fuel price led inflation. It is imperative in the long-run to cut subsidies, let the price mechanism work and avoid “suppressed” inflation. Interest rate: not yet peaked from a longer-run perspective It is clear that the rising headline inflation rates should not be ignored. Rising inflation pushes down real interest rates and increases wage hike demands creating a risk of wage-price spiral. Indeed, the RBI’s 25bp repo rate hike late on June 11 was aimed at controlling inflation expectations. In India, fuel subsidies also suppress inflation and widen the fiscal and current account deficits. Therefore, we believe that policy rates have not peaked in India. At some point, the economy would have to factor in rising oil prices and raise rates. At that point, oil prices may also moderate as the “price mechanism” that is clogged right now by subsidies in emerging markets begins to work. Nonetheless, our sense is that rates may yet go up in 2009. In the near-term, however, we expect only one more 25bp rate hike in 3Q08. Twin deficit scare and implications for ratings India’s current account deficit is likely to widen sharply to 2.7% of GDP in FY2008 (and 1.8% of GDP estimated in FY2007) from around 1%-1.2% of GDP in preceeding years. The central government’s fiscal deficit might exceed the budgeted 2.5% of GDP by as much as 1.5%-pts on account of expenses related to central government pay revisions, farm loan waiver and duty cuts to control inflation. This calculation doesn’t include off-budget oil bonds issued to oil companies which amounts to another 1.7% of GDP. However, unlike South East Asian countries, deficits are funded with domestic savings in India. India’s external debt stands at only 17% of GDP. The banking sector is also a captive market for government bonds as banks are required to hold 25% of their assets in cash or government bonds as part of the statutory liquidity reserve requirement. Therefore, the higher fiscal deficit, by itself, should not materially hurt the balance of payments, leading to a spiral of weaker currency and higher deficits. India also has the scope to raise corporate taxes in the short-term to fund higher subsidies - a bad move from a policy perspective but one that will help the ruling Congress-led coalition reach general elections in mid-2009 without virtually ensuring its doom. As long as oil prices do not rise further, we think ratings agencies are likely to give India the benefit of the doubt, seeing the present fiscal slippage as a temporary setback. Note: Annual and quarterly forecasts / references in the text and the table refer to calendar year forecasts unless specified as fiscal year (FY). 98
Economics – Markets – Strategy Economics: India India Economic Indicators 2007** 2008(f) 2009(f) 1Q08 2Q08(f) 3Q08(f) 4Q08(f) 1Q09(f) 2Q09(f) Real output (99/00P) GDP 9.0 8.6 8.6 8.7 8.9 8.6 8.6 8.5 8.6 Agriculture 4.5 2.8 3.0 2.9 4.6 3.4 0.8 2.8 3.0 Industry 8.1 6.7 8.7 5.8 6.2 6.7 6.3 7.3 8.1 Services 10.8 10.5 9.9 11.2 10.2 10.5 11.0 10.5 10.2 Construction 9.8 13.4 10.9 12.6 17.2 12.2 15.2 9.3 10.1 External (nominal) Merch exports (USD bn) 160 200 239 45 46 49 49 56 56 - % YoY 25 25 20 27 29 30 18 24 21 Merch imports (USD bn) 250 321 385 68 82 76 82 82 90 - % YoY 31 28 20 41 45 30 22 19 9 Trade balance (USD bn) -90 -121 -146 -23 -36 -27 -32 -26 -34 Current a/c balance (USD bn) -21 -35 -41 -3 -18 -7 -10 0 -12 % of GDP -1.8 -2.7 -2.8 n.a. n.a. n.a. n.a. n.a. n.a. Foreign reserves(USD bn, eop) 180 329 345 n.a. n.a. n.a. n.a. n.a. n.a. Inflation WPI inflation (% YoY) 4.6 6.8 4.9 5.7 8.3 9.0 6.7 3.4 1.8 Manfg WPI (% QoQ, saar)*** 5.2 7.6 6.0 10.5 13.3 5.5 5.5 5.9 6.0 Other Nominal GDP (USD tn) 1.2 1.3 1.5 n.a. n.a. n.a. n.a. n.a. n.a. Fiscal deficit (% of GDP) -3.0 -4.0 -4.0 n.a. n.a. n.a. n.a. n.a. n.a. Money supply(M3, annual avg) 20 21 22 n.a. n.a. n.a. n.a. n.a. n.a. * % growth, year-on-year, unless otherwise specified ** Annual data refers to fiscal years beginning April of calendar year. *** Used as a proxy for core by the RBI IN – nominal exchange rate INR per USD 44 44 43 43 42 42 41 41 40 40 39 6/11/2007 10/10/2007 2/8/2008 6/10/2008 IN – policy rate %, rev repo rate 8.0 7.0 6.0 5.0 4.0 Feb-01 Jul-02 Dec-03 May-05 Oct-06 Mar-08 Sources for charts and tables are CEIC, Bloomberg and DBS Research (forecasts and data transformations) 99
Page 1 and 2:
Economics Markets Strategy 3Q 2008
Page 3 and 4:
Economics - Markets - Strategy June
Page 5 and 6:
Economics - Markets - Strategy June
Page 7 and 8:
Economics - Markets - Strategy Econ
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Economics - Markets - Strategy Curr
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Economics - Markets - Strategy Yiel
Page 47 and 48:
Economics - Markets - Strategy Yiel
Page 49 and 50: Economics - Markets - Strategy Yiel
Page 59 and 60: Economics - Markets - Strategy Asia
Page 73 and 74: Economics - Markets - Strategy Econ
Page 99: Economics - Markets - Strategy Econ
Page 151 and 152:
Page 153 and 154:
Page 155:
Economics - Markets - Strategy 3Q 2
show all

Economics Markets Strategy - the DBS Vickers Securities Equities ...

Create successful ePaper yourself

Delete template?

Save as template?