Economic Intelligence Unit Baroda Corporate Center Bank of Baroda Mumbai Weekly Macro Perspectives July 4, 2015 1. Agriculture The Coffee exports rose by 11.49% to 92,368 tonne in April June but the unit value realisation was lower due to sluggish global prices. The unit value realisation declined to Rs. 1,68,300 per tonne in Q1, FY16 from Rs. 1,72,558 a tonne in the same period a year ago. As per Indian Metrological Department (IMD), for the country as a whole, cumulative rainfall during this year s monsoon has from June 1 upto 01 July was 13% above the Long Period Average (LPA) with excess rainfall in central and northwest India. The forecast for the period between July 6 and 20 is that there would be above normal rainfall in north and west India while peninsular India would receive below normal rains. As per the Agriculture Ministry, the Kharif crops have been sown on 306.06 lakh hectares (lha) on the back of above normal rainfall in June. The key Kharif crops include rice (paddy), oilseeds such as soyabean and groundnut, cotton, pulses, sugarcane and a range of coarse cereals, including jowar and bajra. 2. Global economic highlights of the week Greece defaulted on its sovereign debt owed to the IMF on 30th June. The first advanced country to default. The crisis has only escalated since then. The government called for a referendum on Sunday, 05th July to decide if it should accept the further bailout terms or not. A 'No vote' could set the stage for an eventual exit of Greece from the Eurozone. The European markets were hit hard this week due to these unprecedented developments. China's top securities brokerages would collectively invest at least 120 billion yuan ($19.3 billion) to help stabilise the country s stock markets after a slump of nearly 30 per cent since mid-june. A flurry of official policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, has failed to arrest the sell-off. The rout in China s highly leveraged stock market has become a 1
major worry for global investors, who fear a meltdown could destabilise the world s second-largest economy at a time when growth is already slowing. The headline HSBC/Markit Purchasing Managers' Index (PMI) for China for June fell to 51.8 from 53.5 in May, hitting its lowest since January but still indicating expansion for the 11th straight month. A reading above 50 points indicates growth on a monthly basis, while one below that points to contraction. The new business sub-component fell to 52.2, an 11-month low, from 54.4 in May, while the employment sub-index fell to its lowest in three months and indicated jobs were being shed. 3. Indian economic briefs of the week The Core sector data of Eight Industries accounting for 38% of IIP for the month of May 2015 rose by 4.4% while for Apr-May 2015 period, it was at 2.1%. Amongst the eight industries, Petroleum Refinery Production (7.9%), Coal (7.8%), and Electricity (5.5%) noted highest expansion. As per Government, total revenue receipts stood at 4.6% of Budget Estimate (BE) (3.2% prev.) while total expenditure was 14.8% of BE (15.6% prev.). The fiscal deficit number for Apr-May 2015 period stood at Rs 2.08 lakh crore. It is 37.5% of BE for FY16 while for corresponding period last year it was at 45.3% of BE. Overseas borrowings of companies excluding those of financial institutions and foreign investors holdings of onshore rupee bonds rose 40% in FY15 to $25.36 billion and by 79% over the last five years. The RBI has estimated that about 85% of corporate forex loans were unhedged until last year, and bankers say the ratio hasn t come down since then, indicating that only 15% of the $25.36 billion is hedged. According to Centre for Monitoring Indian Economy (CMIE) data, the value of stalled projects dipped 60.35% to Rs 79,300 crore in the quarter ended June this year from Rs 2,00,000 crore in the year-ago period. CMIE also said fresh capital expenditure by Indian companies remained sluggish in the first three months of this financial year, as lack of raw material and unfavourable market conditions were hurting many companies. According to Fitch Ratings Indian Banks Report Card FY15, the challenges for state-owned banks remain despite improving macro picture. Capital needs are likely to increase substantially each year up until FY19. The stressed assets are likely to have peaked and NPL (non-performing loan) accretion is easing. Nonetheless, the outlook for FY16 is more positive for Indian bank credit. The system-wide stressed-assets ratio is likely to begin falling against the backdrop of a more 2
favourable economic environment. Gross NPL accretion has already shown signs of deceleration. The RBI Governor Raghuram Rajan has said the economy is on the recovery path with signs of capital investments picking up. He said that the government was trying to put stalled projects back on track and the monsoon was so far been above normal. The RBI Governor said that the Greece issue is an evolving situation, and India s direct exposure to the debt-laden nation is very, very limited. Though, there may be some indirect impact. As per news reports, the Finance Ministry is working on a comprehensive package to help state-run banks, which are saddled with huge bad loans. As the Government's plan to spur a revival in credit to key sectors such as infrastructure, would be facilitated. The Nikkei Services Purchasing Managers' Index, compiled by Markit for India, dropped to a 15-month low of 47.7 in June from May's 49.6, well below the 50-level that separates growth from contraction. Five out of the six industries monitored reported falling activity and the new orders index sank to 47.3, its lowest level since December 2013. Weak demand also curtailed factory growth. With no pick up in capital expenditure, weak rural and export demand, and limited translation of a loose monetary policy into lower bank lending rates, Fitch Ratings has revised its real GDP growth forecast for India to 7.8%in FY16 from 8.0%, and to 8.1% in FY2017 from 8.3%. While it continues to expect acceleration in Indian growth, Fitch pointed out that there are some indications that it may be slower than previously expected. Downside risks to growth relate, for instance, to belowaverage rainfall during this year s monsoon season, although the first three weeks of June recorded above average rainfall. The Socio Economic and Caste Census on rural areas revealed that one out of three families is landless, less than 5% of the rural households pay income tax, but over 68% have mobile phones. It said that of the total 24.39 crore households in the country, 17.91 crore are in rural areas. Of the rural households, 18.46% belong to a Scheduled Caste and 10.97% to a Schedule Tribe while 68.5% belong to other categories. Five States with a high percentage of rural SC households are Punjab, West Bengal, Tamil Nadu, Himachal Pradesh and Uttar Pradesh. However, over 6.85 crore households (38.27%) hold no land, deriving a major part of their income from casual manual labour. Also, the number of households with destitutes or those living on alms is over 6.68 lakh; as many as 4.08 lakh households rely on ragpicking. 3
India s external debt at end-march 2015 showed an increase of US$ 29.5 billion (6.6 per cent) over end-march 2014, due to the rise in commercial borrowings and NRI deposits. Further, the increase in the magnitude of external debt was partly offset by the valuation gains resulting from the appreciation of the US dollar vis-a-vis Indian rupee and other major currencies. The external debt to GDP ratio stood at 23.8% at end-march 2015, recording a marginal increase over its level of 23.6%at end-march 2014. The short-term debt by original maturity at US$ 84.7 billion accounted for 17.8% of the total external debt as at end-march 2015 as compared with 20.5% at end-march 2014. Similarly, on residual maturity basis, the ratio of short-term debt to total debt worked out to 38.9% as compared with 39.6% a year ago. 4. Indian money market and government bond review this week The RBI, in consultation with the Government, released the indicative borrowing Calendar for State Development Loans for Q2, FY16. The borrowing number for SDLs is in the range of Rs 45,000-50,000 crore. During the week, a number of factors affected the market sentiments such as the heightened uncertainty on account of Greece s default of IMF loan and a call for referendum on July 5. Following the rejection of bids in previous auction, there was expectation that government was not comfortable with high yields. The auction of FII gilt limit was a positive for the market. The 10 year benchmark 7.72% GS 2025 closed at 7.80% compared to previous closing of 7.82%. The Call rate ended at 7.01% versus 7.11% compared to previous week s closing. 5. Rupee Movements During the week, the rupee appreciated from Rs 63.64 on June 26, 2015 to Rs 63.48 on July 3, 2015. India s forex reserves fell marginally by USD 0.24 billion to USD 355.2 billion during the week ended June 26, 2015. 6. Stock Market The global markets saw heightened concerns following the developments in Greece impacting the markets in Europe and US. The weakness in Chinese stock markets 4
continued. Even so, the domestic markets performed better on the back of better rainfall and hopes of pickup in capex cycles. The BSE Sensex rose from 27,811.84 on June 26, 2015 to 28092.79 on July 3, 2015, registering a weekly gain of 1.0%. The BSE Bankex grew by 2.2% during the week ending July 3, 2015 over the previous week close. 7. Crude Oil Prices Oil rig counts in the U.S. rose for the first time since December 2014 last week, weighing on the commodity's price and serving as a reminder of oversupply fears, which could impact year end price targets. U.S. crude futures and Brent crude for August delivery were around $55.60 and $60.56 respectively on Friday despite a number of more bullish price forecasts in recent months ---------------------------------------------------------------------------------------------------------- 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. 5