Weekly Macro Perspectives November 30, 2013

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1 Dr Rupa Rege Nitsure Chief Economist Bank of Baroda Weekly Macro Perspectives November 30, Agriculture India s agriculture sector growth rose to a nine-quarter high of 4.6% in Q2, FY14 on the back of above normal monsoon and record kharif (summer crop) production esp. in oilseeds and cotton. The south-west monsoon, which is critical for Indian agriculture, was 6.0% above normal this year. Planting of rabi crop (winter crop) in India has gathered pace with area under wheat, rice, pulses and oilseeds rising decently aided by better soil moisture and higher storage in major reservoirs. Though farmers in Uttar Pradesh, the top wheat grower, have been hampered by not being able to harvest sugarcane and plant wheat, the area under the cereal is up by over 10% compared with the corresponding period last year. According to India s Ministry of Agriculture, rains in Oct 13 have encouraged farmers in Madhya Pradesh and Rajasthan to take up wheat on a large scale. Reports from Madhya Pradesh say that many farmers are switching over to wheat, mainly from chana (gram), attracted by the additional bonus the State Government has been giving for the last two years. 2. Global economic highlights of the week Europe is no longer the forbidden zone for U.S. money market funds, which have been adding to their holdings of securities from the region's banks after slashing their exposure during the height of the euro zone debt crisis two years ago. According to a report by JPMorgan Securities, U.S. prime money market funds, which can invest outside of U.S. government securities, raised their euro zone holdings in Oct 13 to the highest level since Aug 11. As per the statement of the central Bank of China (Nov. 26), China has decided to rely on market based reforms to unleash fresh growth drivers to support its economy rather than on ultra-loose fiscal or monetary policies. Japan's economy is gaining momentum, data for Oct 13 showed, with consumer prices excluding food and energy rising 0.3% from a year earlier, the biggest gain since The slew of indicators released on Nov 29 suggests that the ultra-loose monetary policy and 1

2 stimulus strategy of Prime Minister Shinzo Abe is helping end a long bout of deflation for the world's No. 3 economy. Six world powers reached an interim nuclear cooperation agreement with Iran this week that is expected to eventually ease the stifling economic sanctions on Iran. The deal gave Iran US$ 7 bln in financial relief, most from allowing limited oil sales over the next six months. In exchange, Iran agreed to several concessions including destroying its stockpile of weapons grade uranium. While the job picture has brightened a bit in the U.S., its factory activity appears to be losing momentum with business spending on capital goods weakening and new orders for longlasting manufactured goods falling last month. On Nov. 29, the rating agency S&P lowered the credit rating of Netherlands, which is suffering from an anaemic economy, slumping house prices and falling consumer confidence, to "AA+" from "AAA". This left Germany, Luxembourg and Finland as the only members of the 17-nation Euro zone with the top rating from all three leading credit agencies. Low inflation and high unemployment continue to weigh on the Euro zone economy, although data published on Nov. 29 th showed a slight improvement in conditions across the currency bloc. Inflation in the Euro zone hit 0.9% in the year to this month, up from October s low of 0.7% but still well below the European Central Bank s target of just under 2%. Unemployment in October was 12.1%, down from 12.2% in September, with the number of people without jobs falling by 61,000 to 19.3 mln. It is the first time since the beginning of 2011 that unemployment has fallen for the region. 3. Indian economic and policy highlights of the week India could step up imports from Iran next month and start transferring billions of dollars owed it for oil as early as next week following a deal to curb Tehran's nuclear programme. India is Iran's second-largest buyer and currently owes Tehran about US$ 5.3 bln for oil shipments, according to government and refining sources. On Nov 26 th, India s Reserve Bank allowed banks to treat loans given to medium manufacturing enterprises after Nov. 13 as priority sector advance, in its efforts to provide enhanced liquidity support to the MSME sector. The RBI also allowed incremental bank loans to medium services enterprises extended after Nov. 13 to up to Rs 100 mln and raised the loan limit given to micro and small service enterprises to Rs 100 mln from Rs 50 mln that will be treated as priority sector advance. This facility will remain open until end- March, India s apex industrial body ASSOCHAM this week called on all concerned stakeholders including the opposition to build consensus for prioritization of passing six key bills viz., DTC, GST, Insurance Laws (Amendment), Coal Mines (Nationalization) Amendment, Higher 2

3 Education and Research and National Commission for Heritage Sites during the upcoming Winter Session of the Parliament. According to ASSOCHAM, there is an urgent need to support UPA government s efforts to legislate aforesaid key bills vis-à-vis social development and economic security in national interest and to further accelerate the positive momentum gradually taking ground in our economy. India s trade with Africa increased by 10 fold from around US$ 7 bln in FY04 to about US$ 70 bln in FY13 which is highest amongst all the regions such as Europe, America, Asia and CIS & Baltics, said the research arm of PHD Chamber of Commerce and Industry. The reason could be attributed to the increased importance of African countries in India s bilateral trade relations. With the increasing diversification of India s global trade towards emerging and developing countries, Africa has emerged as an important partner for India for trade and commerce during the recent years. The RBI has communicated that Tata Sons Ltd. has withdrawn its application made on July 1, 2013 for a new bank licence. The company has indicated that its current financial services operating model best supports the needs of the Tata Group s domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the Group s diverse stakeholder base. According to Indian media reports, Reliance Industries Ltd (RIL) has shut another well on the main gas fields in the eastern offshore KG-D6 block due to high water ingress. This is the 10 th well to be shut since late India s Reserve Bank has exempted foreign banks from paying stamp duty if they convert their branch into a wholly-owned subsidiary. India s quarterly GDP growth in Q2, FY14 improved to 4.8% (y-o-y) supported by a smart pick up in agriculture, exporting industries, power generation and construction sectors. From the monetary policy perspective, this GDP print is unlikely to change the course of action by the RBI and its hawkish stance will continue as long as CPI-led inflation stays way above its comfort level. India s fiscal deficit in the first seven months (Apr-Oct) of FY14 reached 84.4% of the full year budgeted target on slower growth of tax revenues (6.8%, yoy) but much faster growth of expenditures (18.3%, yoy). According to Nomura s fiscal run rate monitor the run rate on the fiscal deficit has been higher in FY14 largely due to frontloading of government spending and weaker-than-expected growth in tax revenues. On Nov 29, India s Reserve Bank extended revised interest rates on non-resident Indian deposits (FCNR B) until Jan 31 st, subject to review. It also issued draft norms for entry of banks into insurance broking. According to its statement, banks with a net worth of not less than Rs 5 bln as on Mar 31 st and net NPL ratio of not more than 3.0% will be eligible for entering into insurance broking. It also said that interested banks must have posted a net profit in the last three consecutive years and should have a capital adequacy ratio of not less than 10.0%. 3

4 According to RBI, Indian bank loans rose 15.5 % (yoy) as on Nov 15, while deposits were up 15.4% (yoy). While outstanding loans declined by Rs bln to Rs trln in the two weeks to Nov. 15, bank deposits decreased by Rs bln to Rs trln. The Broad Money Supply, i.e., M3 grew at the pace of 13.8% (yoy) as on Nov 15 primarily supported by the growth in banks retail term deposits and currency with the public. India s foreign exchange reserves further increased by US$ 2.69 bln to US$ bln as on Nov 22, 2013, as per the RBI s latest weekly report. The reserves had increased by US$ 1.46 bln to US$ bln in the previous week ended Nov Indian money market review this week Weighted average call money rate steadily declined from 8.73% to 7.75% this week (Monday to Friday) as liquidity in the system remained comfortable. On Saturday, the twoday call rate ended at 4.00%-4.50%. Banks borrowing under the repo window too averaged lower at Rs 366 bln this week versus an average of Rs 411 bln last week. The borrowing from the MSF facility has come down substantially after the RBI extended the term repo window. It averaged around Rs 76 bln this week versus Rs 150 bln last week. While 91-day T-bill rate eased from 8.95% to 8.80% during the course of this week, 361-day T-bill rate eased from 9.89% to 8.77%. Three-month CP rate too declined from 9.57% to 9.33% during this week. CDs were raised for the tenures ranging from two to twelve months with interest rates varying from 8.99% (amt: Rs 400 cr for 36 days) to 9.30% (amt: Rs 300 cr for 62 days). According to money market dealers, liquidity in the banking system has become comfortable due to month-end government spending and inflows from RBI s dollar swap windows. Due to improved liquidity conditions, the cut-off at the RBI s 14-day term repo variable rate auction on Nov 29 th was set sharply lower than the previous auction. 5. Government bond yields to increase further next week The yield on 10-year benchmark Govt. of India bond eased significantly from 9.10% last week (7.16% 2023 paper) to 8.74% this week (8.75% 2023 paper) as the new benchmark came into existence. The bonds rallied in earlier part of the week (Mon to Wed), as rupee was gaining strength. With no major triggers, the market is witnessing a natural demand shift for the new benchmark with range-bound movement in the existing paper. Government bond prices fell on Thursday after the Economic Affairs Secretary, Govt of India gave a statement that the government would meet its borrowing target but would calibrate its debt sales plans according to market conditions. 4

5 The bearishness continued on Friday as well ahead of the announcement of India s quarterly GDP data for Q2, FY14. Even though GDP data was in line with expectations, we see some bearishness in the Indian government bonds next week as the US 10-year bond yield ended at almost 2-month high on Nov 29 th on Fed taper speculation. We expect the yield on new benchmark paper in the range of 8.74% to 8.80% next week. 6. No sharp movement seen in the rupee next week Indian rupee appreciated by 0.68% against US dollar to this week and posted its second straight weekly gain. The rupee was helped earlier in the week (up 1.16% up to Wednesday) by the rally in the euro and the biggest weekly gain in domestic shares since the week ended Oct. 11. However, it weakened for a second consecutive session on Friday (Nov 29) as month-end dollar demand from oil firms offset an increased global investor demand for risk that sent other currencies such as the euro higher. We don t expect any sharp movement in the rupee next week. There will be some support to the currency from relatively better GDP data (4.8% in Q2 versus 4.4% in Q1). However, there will be some pressure on the currency as the central bank ends special currency swap windows to banks raising funds abroad - which had brought US$25 bln in inflows since the end of Sept Positive outlook for Indian stocks next week The US-Iran peace deal had a favourable impact on stock markets across the globe this week. This positive international development coupled with improved GDP data for the Indian economy helped Indian stocks gain a strong 2.8% this week. Majority of the Asian markets reported strong gains with the Japanese and Chinese indices clocking gains of 1.8% and 1.1%, respectively. Rally in the Indian markets, on expectations of benign crude price and recovery in economic growth, was marked by a strong rebound across the board. All the sectoral indices ended the week in the green with stocks in interest-sensitive sectors mainly Capital Goods (up 8.3%), Banking (up 4.3%) and Auto (up 4.1%) witnessing maximum gains. Traders expect a positive bias for Indian stocks in the near term based on a mildly positive GDP data, steady pick up in exports and a stronger rural economy supported by heavy monsoon rains. 5

6 8. Crude price near $ per bbl in New York on Nov 29, 2013 While US oil price ended at US$ per barrel this week, the Brent crude settled at US$ per barrel. Expectations that more Iranian crude will come back to the market capped prices this week. Iran and six world powers clinched a deal on Nov. 24 to curb its nuclear program in exchange for initial sanctions relief. Oil traders are now eyeing ongoing disruptions and violence in OPEC member Libya. More than 40 people were killed in an explosion at an army depot in southern Libya after locals tried to steal ammunition, according to officials, the latest in a series of clashes highlighting the government's inability to restore order. Disclaimer: The views expressed in this newsletter are personal views of the author and do not necessarily reflect the views of Bank of Baroda. Nothing contained in this publication shall constitute or be deemed to constitute an offer to sell/ purchase or as an invitation or solicitation to do so for any securities of any entity. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy, completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. Bank of Baroda Group or its officers, employees, personnel, directors may be associated in a commercial or personal capacity or may have a commercial interest including as proprietary traders in or with the securities and/ or companies or issues or matters as contained in this publication and such commercial capacity or interest whether or not differing with or conflicting with this publication, shall not make or render Bank of Baroda Group liable in any manner whatsoever & Bank of Baroda Group or any of its officers, employees, personnel, directors shall not be liable for any loss, damage, liability whatsoever for any direct or indirect loss arising from the use or access of any information that may be displayed in this publication from time to time. 6

Weekly Macro Perspectives

Dr Rupa Rege Nitsure Chief Economist Bank of Baroda +91-22-66985216 Weekly Macro Perspectives November 23, 2013 1. Agriculture According to the latest data by India s Ministry of Agriculture, the rabi