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 (winter crop) acreage in the country rose 6.8% (yoy) to 31.42 mln ha until Nov. 21 st, as good moisture level in the soil after well distributed rains during the kharif (summer) season boosted planting. Wheat acreage climbed to 12.75 mln ha from 10.16 mln ha a year ago, while farmers planted rice across 73,000 ha, against 64,000 ha last year. Total area under pulses rose to 8.60 mln ha, from 8.51 mln ha a year ago. Rise in total pulses acreage was mainly attributed to higher planting in Assam, Maharashtra, Madhya Pradesh & Rajasthan. According to the Indian government s first advance estimates, Kharif food grain output for FY14 is seen at 129.32 mln tn, lower than the targeted 130.50 mln tn, but higher than 128.20 mln tn produced a year ago. 2. Highlights of IIF s (Washington) Global Economic Monitor, Nov. 2013 Recent data in both mature and emerging markets (EM) have been consistent with the global economy achieving a significant pick-up in growth in 2014, with a particular increase in momentum in mature economies (notwithstanding some temporary weakening in Jul- Sept, 2013 in Japan & the Euro Area). Nevertheless, concerns remain whether this acceleration will materialize and central banks have continued to take out insurance against disinflation risks. The Federal Reserve has been clear that it will be cautious in slowing the pace of asset purchases and the ECB cut its policy rate by 25bp to an all-time low. Continued commitment to monetary policy support in mature economies reflects policymakers worries about the strength of the recovery. Uncertainty about the amount of slack and thus the extent of disinflationary pressures remains salient as unemployment is high and GDP growth remains at best close to trend. 1
In emerging market economies, growth momentum has been supported by a rebound in Chinese GDP growth in Jul-Sept, 2013 and generally easier external financing conditions since early Sept, 2013. Capital flows to emerging market economies are recovering from their summer lows, but the tightening in funding conditions will likely continue to weigh on growth in some countries as banks are increasing lending standards. The IIF expects global growth to pick up to 3.0% in 2014 from 2.3% in 2013 led by a measured acceleration in mature economies. However, it remains concerned about downside risks both those affecting global growth as well as those specific to individual countries. So far as emerging markets are concerned, risks related to the phasing out of easy US monetary policy (& the uncertainty surrounding it) remain substantial with significant impacts on capital flows to these markets. In particular, India and Indonesia would most directly be affected by a further deterioration in external financing conditions on the back of rising U.S. interest rates. 3. Indian economic and policy highlights this week According to Fitch Ratings agency, India s government will have to rely on its budget for the financial year ending March 2015 (FY15) to fund a part of the current financial year's oil subsidies bill. The government allocated Rs 650 bln for petroleum subsidies in FY14, of which Rs 450 bln was used to pay oil marketing companies for the subsidy gap incurred in the previous financial year. This leaves the government with Rs 200 bln to meet its share of the under-recovery. This is likely to be insufficient, and it is likely that the government will have to tap around Rs 450 bln from next year's budget. According to the RBI sources, it wants to move to a system where the banking sector s reliance on overnight borrowing from the RBI will be reduced to the minimum. Globally, many central banks rely on term lending rather than on overnight lending. Sources say the RBI will deliberately go slow in removing the cap on funds banks can borrow via the LAF, even as it unwinds other emergency measures imposed to prop up the rupee. While LAF is a liquidity management tool, Indian banks are using it to fund their loan-book and are not sufficiently active in creating a good deposit base. [Source: Reuters India]. The minutes of a pre-policy meeting of the RBI s technical advisory committee on monetary policy released on Nov 21 st show that majority of the committee members were in favour of increasing the policy repo rate by 25 bps at the RBI s last policy review, in line with the RBI Governor s decision on Oct 29. India is preparing to lobby major trading partners including Japan, Iraq and Venezuela to accept rupee payments for some of their exports, one of a series of moves to stabilise the 2
volatile currency and make it more globally acceptable. According to sources, a panel set up in Aug 13 to study currency swaps has now won support from the India s ministries of finance, commerce and its central bank to target about ten countries for such deals, focusing on oil exporting nations and others that run large trade surpluses with India. India s economy is expected to improve marginally in the current financial year with its GDP at market price projected to expand by 3.4% from 3.3% in the previous fiscal, as per the report released by a Paris-based think-tank OECD on Nov 19 th. It further said that the country's economic activity is expected to recover gradually as rupee depreciation supports exports, infrastructure projects cleared by the Cabinet Committee on Investment come on stream and political uncertainty declines after the general election due in the spring 2014. International Rating agency Moody s has maintained its negative outlook on India s banking system as per its statement released on Nov 19 th, reflecting the effects of the rupee s volatility, persistent inflation and slowing economic growth. According to the RBI s Report on Trends & Progress in Banking for FY13, Indian banking industry needs to grow to an estimated Rs 288 trln by 2020 to support the economic growth envisaged in the 12 th Plan (2012-17). The regulator said it is necessary to reduce banks' requirements of investing in government securities in a calibrated way and the scope for such reduction will increase as government finances improve. According to RBI, Indian bank loans rose 16.4 % (yoy) as on Nov 1, while deposits were up 15.4% (yoy). While outstanding loans grew by Rs 439.3 bln to Rs 56.59 trln in the two weeks to Nov. 1, bank deposits increased by Rs 1.19 trln to Rs 74.25 trln. The Broad Money Supply, i.e., M3 grew at the pace of 14.1% (yoy) as on Nov 1 supported by good growth in banks retail term deposits and currency with the public. India s foreign exchange reserves further increased by US$ 1.46 bln to US$ 283.57 bln as on Nov 15, 2013, as per the RBI s latest weekly report. The reserves had increased by US$ 819.5 mln to US$ 282.11 bln in the previous week ended Nov 8. 4. Indian money market review this week Weighted average call money rate steadily declined from 8.75% to 8.70% this week due to reduced demand from borrowing banks. Banks borrowing under the repo window averaged around Rs 411 bln this week versus an average of Rs 404.4 bln last week. However, borrowing from the MSF facility has come down substantially after the RBI extended the term repo window. While 91-day T-bill rate moved in the range of 8.80% to 8.95% this week, the 364-day T-bill rate hovered in the range of 8.85% to 8.96%. Some firming up of T-bill rates was observed towards the end of the week. 3
Three-month CP rate too hovered in the range of 9.45% -9.95% during this week. CDs were raised for the tenures ranging from two to twelve months with interest rates varying from 9.04% (amt: Rs 300 cr for 67 days) to 9.30% (amt: Rs 35 cr for 12 months). Last week, the RBI announced OMOs of Rs 800 bln to ease liquidity concerns.the RBI governor had said the central bank was monitoring the liquidity conditions closely and would take necessary steps to address them when needed. 5. Sentiment may improve for government bonds next week The yield on 10-year benchmark Govt. of India bond hardened this week by 8 bps to 9.10%. The government bonds continued to remain bearish on persistent selling pressure from banks and corporates on the back of high inflationary expectations and the possibility of further monetary tightening. On Nov 22, India s government raised Rs 70 bln in 10-year bonds at a coupon rate of 8.83%, marginally higher than market expectations. The 8.83% bond will replace the existing benchmark, the 7.16% paper, after few more issuances. Last week, the RBI announced OMOs of Rs 80 bln to ease liquidity concerns and bring bond yields down. Next week, Government bond prices may be supported due to strong demand for the new 10-year 8.83%, 2023 bond that was auctioned on Friday (Nov 22). Likely OMOs by RBI may also support government bond prices. However, the print of quarterly GDP data for India due on Nov 29 th and any sharp movement in US treasury yields will also impact the sentiment and movement in Indian government bond prices next week. 6. Resistance seen in Rupee/USD pair around 63.40-50 Indian rupee appreciated 0.4% this week to 62.87 per US dollar posting its first weekly gain in last six weeks on likely RBI intervention. Weak dollar overseas in the wake of dovish testimony by the Federal Reserve chief nominee Janet Yellen, which indicated tapering of the stimulus programme may be delayed, also helped the rupee recovery. Fresh capital outflows and almost flat local equities, however, restricted the rupee s rise. According to Forex traders resistance for the rupee/usd pair is at 63.40-63.50 levels; if these levels are breached convincingly then rupee may depreciate over 64 level. The trading range for rupee expected for the next week is between 62 and 64. 4
7. More volatility seen in Indian stocks next week Global stock markets posted modest gains this week on positive economic data points for the US economy like tame inflation and fewer-than-expected weekly jobless claims. Yet, the fears of Fed scaling back its monetary stimulus sooner than later resurfaced as the minutes of the Fed s late October policy meeting indicate that officials are searching for other means to support the economy & that short term term interest rates are likely to remain low for a long time. Indian markets closed in red (down 1.2% on weekly basis) on the back of Fed tapering fears and weakening of FIIs interest in Indian stocks. Most of the sectoral indices ended the week in the red with stocks from consumer durables and auto space posting maximum losses. Indian stocks may remain volatile next week as investors churn portfolios ahead of monthly derivatives contract expiry on Nov 28 th and announcement of quarterly GDP data (for Q2, FY14) on Nov 29 th.uncertainty about the foreign fund flows has also been weighing on the sentiment at this moment. 8. Crude price at $ 94.84 per bbl in New York on Nov 22, 2013 The price of crude oil slipped below US$ 95 per barrel on Friday (Nov 22) but still finished the week with a gain of 1.2%. The weekly gain in oil prices was supported by upbeat key economic data from the US economy and a smaller-than-expected build up in U.S. crude inventories in the week ended Nov. 15. The oil market also drew support with Brent surging to the highest (US$ 110.62 per bbl) since mid-october as Iranian diplomats and their counterparts from the five permanent members of the U.N. Security Council and Germany hadn t reached a deal over the Islamic republic s nuclear activity by 22 November, 2013. An interim deal however seemed more likely by the end of the week. 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 5
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