impact of oil-2011

8/7/2019 Impact of Oil-2011

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India Macro ScanIndia Macro Scan

Impact of OilImpact of Oil

&&Macroeconomic Outlook Amidst Global UncertaintiesMacroeconomic Outlook Amidst Global Uncertainties

MumbaiApril, 2011


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on o : mpac on n a


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Relatively low importance of troubledcountries

5

10

15

20

25

30Oil imports (mn tonnes)

OmanMauritania

Saudi ArabiaAlgeria JordanTunisia

MoroccoBahrainLebanon

UAEKuwait

Qatar

Arab League Index of Unrest

Oil imports from Egypt and Libya form a minor portion of Indias oil importbill

Risk of a contagion spreading to the Gulf countries remains as depicted byEconomists Arab League Index of Unrest

While Egypt was primarily a concern about transit, Libya's production

represents one third of the world's spare capacity and hence the possibility ofcomplete disruption in supply has spooked the oil market

0

S a u d i A r a b i a I r

a n I r a q

N i g e r i a

S o u t h A m e r i c a

K u w a i t

U A E

A n g o l a

O m a n

Q a t a r

A s i a

E u r a s i a

Y e m e n

E g y p t

N o r t h A m e r i c a

0 20 40 60 80 100

YemenLibyaEgyptSyria

raq


4/45

OPECs reserve capacity adequate tocompensate Libyas production loss

1

2

3

4

5

6

UAE Saudi Arabia Qatar Libya Kuwait

Spare capacity of OPEC members(mbpd)

OPEC collectively pumped 29.4 mbpd in January 2011 and has about 5 mbpd ofspare capacity of which Saudi Arabia accounts for 3.1 mbpdSaudi Arabias reserve capacity is adequate to make up for the loss of

production in LibyaHowever, a simultaneous shutdown in production in multiple regions has the

potential of throwing the oil supply in a disarray, and push crude prices higheron a sustained basis

0

J a n - 1

0

F e b - 1 0

M a r - 1

0

A p r -

1 0

M a y - 1

0

J u n - 1

0

J u l - 1 0

A u g -

1 0

S e p -

1 0

O c t - 1

0

N o v - 1

0

D e c - 1

0


5/45

Limited impact on economic growth

-20

-15

-10

-5

0

5

10

15

8

9

10

11

12 Non-Farm GDP (% YoY)

WPI Fuel Minerals (% YoY 6m lag, RHS, Inverted)

The impact of international crude oil prices gets diluted in case of India asprices of diesel, kerosene, LPG continue to be heavily administered

Only petrol prices have seen government deregulation although there is a

substantial lag with which prices are adjustedIf average oil price remains in the range USD 100-110 pb in FY12, then theimpact on non-farm GDP growth would be limited

20

25

305

6

J u n -

0 5

M a r - 0

6

D e c - 0

6

S e p -

0 7

J u n -

0 8

M a r - 0

9

D e c - 0

9

S e p -

1 0

J u n -

1 1


6/45

High oil prices impact inflation with a lag

-40

-20

0

20

40

60

80

100

0

2

4

6

8

10

12

WPI (% YoY)

Brent (% YoY, RHS)

India Energy Consumption by Sub Sectors

Iron and Steel

ChemicalsCement

Food and Tobacco

Aluminium

Pulp, Paper and Printing

ATF and naptha prices continue to be dominated by international pressuresHowever the pass through of international prices is not instant as items likediesel, kerosene, and LPG continue to be administered (petrol prices werederegulated by the government earlier this year)

With a lag of 3-6 months, WPI inflation generally responds with an increase of

0.4% for every 1% increase in oil prices (this includes the second round impact)Pass through of crude prices to high energy consumption sectors such as Iron& Steel, Cement, Chemicals is likely to weigh on core inflation

-80

-

-2

A p r - 0

5

O c t - 0

5

A p r - 0

6

O c t - 0

6

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

0

ex e an ea er

Other


7/45

Fisc appears vulnerable to oil shock

FY09 FY10 FY11* FY12*

Average oil price (USD pb) 83 70 85 110

Total underrecoveries (` bn) 1042 461 950 1300Financed by:Upstream companies (` bn) 329 144 426 540

The government gave a subsidy of over ` 700 bn in FY09 when underrecoveries exceeded ` 1 trillion

Total under recoveries are expected to touch ` 1300 bn in FY12 if oil pricesaverage around USD 110 pb

The government has budgeted only ` 230 bn as petroleum subsidy for FY12If average oil price rises by 25-30% in FY12, then petroleum subsidy could

overshoot the budgeted target by approximately ` 300 bn this could potentiallyadd 0.3% to the fiscal deficit

Government (` bn) 713 260 384 536


8/45

Impact on INR to be limited

FY11USD 83 USD 105 USD 110 USD 115

Exports 242 290 290 290Non Oil 279 322 322 322Oil 96 121 126 131TB 133 153 158 163

FY12

300

400

500

600

700

800

900

By 2020To be added in 2011-12Current

Strategic Petroleum Reserves (mn barrels)

We expect concerns on current account deficit to be manageable as long as oilprice averages less than USD 110 pb

In the absence of significant strategic petroleum reserves, higher crude prices

on a sustained basis would translate into higher oil imports in value termsA positive BoP surplus in FY12 should help in containing the adverse impactof high oil price

Invisibles 87 100 100 100Curnt a/c -46 -53 -58 -63% of GDP -2.7 -2.7 -2.9 -3.2

0

100

200

US Japan China India


9/45

as oil exports have picked up

2.0

2.5

3.0

3.5

4.0

4.5

8

10

12

14

16

18

20 Oil production (USD bn) Oi l exports (USD bn, RHS)

2.5

3.0

3.5

4.0

4.5

5.0

Ratio of oil imports to oil exports

Indias oil production and exports have seen a pick up over the last 6-monthsOil exports have increased vis--vis oil imports on a relative quantitative scale

exports have likely touched USD 4 bn level on a monthly basis

While high oil price will have a negative effect on oil imports, it would at thesame time have a positive impact on oil exports

1.0

1.5

46

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

01.5

2.0

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

0


10/45

Remittances unlikely to be affected in a big way

Source of Remittance Inflows into India

North America

Gulf

Europe

South America

East Asia

Africa

Others

Average Utilisation Pattern of Remittances sent to India

Family Maintenance

Deposits in Banks

Investment in Property

Investment in EquitySharesOthers

India is the top remittance receiving country and has the 2nd largest emigrantpopulation in the world

While the Gulf region contributes close to 27% of the total remittance inflows,it is considerably lower than North Americas share of 38%

Chances of the ongoing geopolitical crisis in the MENA region adverselyaffecting remittance inflows is low

However, India could suffer from lumpiness in the inflows due to temporaryretrenchment of migrant workers and economic crisis in the Gulf countries


11/45

Rates likely to carry an upside bias

80

100

120

140

160

7

8

9

10

1110Y bond yield (%)

5Y OIS (%)

Brent (USD pb, RHS)

High oil price impacts both inflation and fiscal deficit (in case of limited or nopass through)

High persisting inflation could imply tighter monetary policy while high fiscaldeficit could imply higher market borrowings

Under both the conditions, long term rates would carry an upward bias

20

40

60

4

5

6

A p r - 0

5

O c t - 0

5

A p r - 0

6

O c t - 0

6

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

0

A p r - 1

1

Correlation ofoil with 10Y yield = 72%Correlation of oil with 5Y OIS = 71%


12/45

o a naps o


13/45

Global themes

Private consumption continues to support the ongoing global economic recovery

Recovery remains unbalanced while in most economies output is still belowpotential, most of the emerging market economies are now facing the problem ofoverheating

Sovereign concerns in the euro area continue to persist; need for fiscal consolidationcan potentially soften the recovery process in some of the European countries

Emer in market economies facin u side risks to inflation in contrast inflationar

pressures in most of the developed economies continues to remain subdued

The increase in commodity prices due to a combination of the ongoing recovery inglobal growth and geopolitical unrest in the MENA region would add to headlineinflationary pressures in the near term

Monetary policy tightening by the Asian central banks to continue in 2011; developedcountry central banks to move slowly with caution

Intervention risks to remain in the FX markets with capital inflows amidst policytightening in Asia

The natural calamity in Japan to have limited impact on global growth and inflation


14/45

US: Housing and labor market yet torecover

-15

-10

-5

0

5

10

15

20

-40

-30

-20

-10

0

10

20

30

New Home Sales (% YoY)

Construction Spending (% YoY, RHS)3

4

5

6

7

8

4

5

6

7

8

9

10

11Spread with U-6 (%, RHS)

Unemployment Rate (%)

Housing sector continues to remain weak despite reaching a likely bottomduring 2009-10

This has impaired consumers balance sheet through negative wealth effect With real activity remaining weak, labor market conditions have also remained

fragileAlthough the unemployment rate has fallen below 9%, the broader measure of

unemployment (U-6 rate) continues to remain at an elevated level

-20-50

F e b - 0 1

F e b - 0 2

F e b - 0 3

F e b - 0 4

F e b - 0 5

F e b - 0 6

F e b - 0 7

F e b - 0 8

F e b - 0 9

F e b - 1 0

F e b - 1 1

23

M a r - 0

1

M a r - 0

2

M a r - 0

3

M a r - 0

4

M a r - 0

5

M a r - 0

6

M a r - 0

7

M a r - 0

8

M a r - 0

9

M a r - 1

0

M a r - 1

1


15/45

US: Inflation has picked up, but remainssubdued

0

1

2

3

4

5

6CPI (% YoY)

Core CPI (% YoY)

CPI inflation reached a 10-month high of 2.2% in Feb-11Core CPI inflation reached an 11-month high of 1.1% in Feb-11 With economic recovery still remaining soft, upward pressure on core inflation

is unlikely to sustain

-3

-2

-

F e b - 0 1

F e b - 0 2

F e b - 0 3

F e b - 0 4

F e b - 0 5

F e b - 0 6

F e b - 0 7

F e b - 0 8

F e b - 0 9

F e b - 1 0

F e b - 1 1


16/45

Market expectations from Fed

30

40

50

60

70

80Probability of a Fed hike implied by Fed Fund Futures (%)

Any Fed hike is virtually ruled out in April 2011The probability of hike in the December 2011 FOMC meeting currently (as on

April 12 th ) stands below 50%

0

10

20

A p r

2 0 1 1

J u n

2 0 1 1

A u g

2 0 1 1

S e p

2 0 1 1

N o v

2 0 1 1

D e c

2 0 1 1

J a n

2 0 1 2

M a r

2 0 1 2

l b l b d


17/45

Global recovery in 2011 to be sustained,moderation anticipated

IMF Forecasts (WEO, April 2011)

2009* 2010 2011 2012

GDP (% pa)

US -2.6 2.8 2.8 2.9Eurozone -4.1 1.7 1.6 1.8

UK -4.9 1.3 1.7 2.3

a an -6.3 3.9 1.4 2.1

Growth in advanced economies is expected to moderate to 2.4% in 2011from 3.0% in 2010

Inflation in advanced economies is expected to increase to 2.2% in 2011from 1.6% in 2010

China 9.2 10.3 9.6 9.5CPI Inflation (% pa)

Advanced Economies 0.1 1.6 2.2 1.7Emerging Economies 5.2 6.2 6.9 5.3


18/45

Global commodity themes

Commodity prices have picked up with the ongoing recovery in the global economy Gold price has touched an all time high Silver prices have already jumped up by 22% in 2011

Aluminum prices are up by over 9% on a YTD basisRecent geopolitical unrest in parts of Africa and Middle East have increased the tail risk

Brent has increased by roughly 29% on a YTD basis

EM appetite for commodities should continue to put a floor to pricesThe commodity rally stoked in the last few months on the back of QE-2 and an ailing Dollar, should remain in flavor in H1-2011

A run up in commodity prices in 2011 could moderate the ongoing recovery process

Re-emergence of a risk event in European peripheral economies could mar the riskappetite for commodities

Chinas deliberate soft landing also runs a risk of weighing on demand and henceglobal commodity prices


19/45

India themes

Economic growth set for a moderation in FY12 to 8.3% we expect the effect of growthmoderation to be amplified in H1 due to statistical base effect

Rising core and fuel inflation to provide downside risk to growth

While consumption is expected to be the key driver of GDP growth in FY12, headwindsfor investment has emerged due to ongoing monetary tightening

Average WPI inflation expected to remain in the range 7.5-8.0% in FY12 With global commodity prices remaining high, capacity constraints are helping

-

On the rate front, we expect RBI to continue tightening in FY12 and look for another 50bps hike in both repo and reverse repo rates

The government has budgeted for an improvement in the fiscal deficit to 4.6% in FY12from 5.3% in FY11. We expect subsidies to overshoot the budgeted target and increasethe fiscal deficit to 5.1% .

FII flows turned positive in Mar-11 (at USD 1.5 bn vis--vis USD -0.7 bn in Feb-11); Netflows in Apr-11 have already exceeded USD 1.3 bn

We expect Rupee to weaken to 45.00 by Jun-11 and 46.50 by Dec-11 on the back of rising oil prices, a stronger Dollar, and a mild moderation in domestic growth


20/45

n a: row se or a m -cyc e mo era on

GDP gro th picks p b t signs of


21/45

GDP growth picks up, but signs ofmoderation emerge

GDP by SectorFY10 FY11

(In % YoY) Q1 Q2 Q3 Q1 Q2 Q3 GDP (at Factor Cost) 6.3 8.6 7.3 8.9 8.9 8.2Agriculture 1.8 1.2 -1.6 2.5 4.4 8.9Industry 2.9 6.3 10.0 11.7 8.9 5.7Mining & Quarrying 6.9 6.6 5.2 8.4 7.9 6.0Manufacturing 2.0 6.1 11.4 13.0 9.8 5.6Electricit 6.2 7.5 4.5 6.2 3.4 6.4

After growing by 8.9% in H1 FY11, GDP growth moderated to 8.2% in Q3 FY11Agriculture records the strongest performance in Q3 FY11 post the drought in

the previous fiscal yearBoth industry and services growth moderated in Q3 FY11

Services 8.5 10.8 9.2 9.4 9.6 8.7Construction 5.4 5.1 8.3 10.3 8.7 8.0Trade, Hotels, Transport & Communication 5.5 8.2 10.8 11.0 12.1 9.4Financing, Insurance, Real estate etc 11.5 10.9 8.5 7.9 8.2 11.2Community, Social and Personal Services 13.0 19.4 7.6 7.8 7.4 4.8

Strong Agri growth reiterated by estimates


22/45

Strong Agri growth reiterated by estimatesof crop production

Crop 2006-07 2007-08 2008-09 2009-10 2010-11**Rice 93.35 96.69 99.18 89.09 94.11Wheat 75.81 78.57 80.68 80.80 84.27*

Coarse Cereals 33.92 40.76 40.03 33.55 40.21Pulses 14.20 14.76 14.57 14.66 17.29*Foodgrains 217.28 230.78 234.47 218.11 235.88*Oilseeds 24.29 29.76 27.72 24.88 30.25*

Achievement of Production of Major Crops (mn tons)

The record level of production of wheat, pulses, oil seeds and sugarcane inFY11 reflects the likely possibility of agri GDP surprising us on the upside

Sugarcane 355.52 348.19 285.03 292.30 340.55Cotton # 22.63 25.88 22.28 24.22 33.92**Record high** 3rd Advance EstimatesSource: Directorate of Economics and Statistics, Department of Agriculture and Cooperation


23/45

FY12 growth to stay within trend

4

6

8

10

12Agriculture Industry Services GDP(% pa)

After bottoming out at 6.8% in FY09, GDP growth is expected to rebound toaround 8.8% in FY11

We expect FY12 GDP growth to moderate to around 8.3% as impact of policytightening plays out completely

-2

0

2

FY08 FY09 FY10 FY11* FY12**

* CSOs advance estimate; ** Our estimates

Consumption will remain the key driver of


24/45

Consumption will remain the key driver ofgrowth in FY12

4

5

6

7

8

9

10Private Consumption (% pa)

Private Consumption Trend (% pa)

3

6

9

12

15

18

21Investment (% pa)

Investment Trend (% pa)

Domestic consumption has picked up and is likely to be the key driver ofgrowth in FY12

However, inflation and tight monetary policy could possibly keep investmentgrowth below the medium term trend

2

3

F Y 9 7

F Y 9 8

F Y 9 9

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

-30

F Y 9 7

F Y 9 8

F Y 9 9

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1


25/45

Gradual moderation reflected in IIP

FY10 FY11IIP 15.1 3.6 10.0 7.8

Mining & Quarrying 10.5 11.0 0.6 9.6 6.5Manufacturing 79.4 16.1 3.5 10.4 8.1Electricity 10.2 7.3 6.7 5.8 5.4

Trends in Industrial Production (% YoY)

Sectoral

April-February Weight Feb-10 Feb-11

IIP growth has so far remained healthy with Apr-Feb FY11 growth lying inhigh single digits

Recent moderation is expected to continue for the next 4-5 months; IIP growthto start rebounding in H2 FY12

Full year growth in FY11 expected around 7.7%

Basic Goods 35.6 8.5 5.9 6.8 6.5Capital Goods 9.3 46.7 -18.4 19.0 8.7Intermediate Goods 26.5 15.9 8.4 13.6 9.1Consumer Goods 28.7 6.3 11.1 5.9 7.5

Durables 5.4 29.1 23.4 23.8 21.8

Non-Durables 23.3 -0.8 6.1 0.3 1.9

Capital goods to drag investments lower


26/45

Capital goods to drag investments loweramid greater volatility

0

5

10

15

20

25

30

7 )

Y e a r l y V o l a t i l i t y

Capital Goods

IIP ex Capital Goods

0

10

20

30

40

50 GDP-InvestmentsIIP-Capital Goods (3mma)IIP-Capital Goods (12mma)

(% YoY)

Persistent weakness in capital goods poses downside risk to investment side ofthe GDP

High input costs and policy tightening is tempering with demand conditionsVolatility in capital goods has increased four times in the last two years

F Y 9

F Y 9

F Y 9

F Y 9

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 0

F Y 1

F Y 1 1 ( A p r - F e b

-20

-

Q 1 F Y 0 6

Q 3 F Y 0 6

Q 1 F Y 0 7

Q 3 F Y 0 7

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1


27/45

Inflation to precede growth in policy focus


28/45

Food inflation has eased, but protein


29/45

Food inflation has eased, but proteininflation remains a concern

20

40

60

80

100Vegetables Condiments & Spices(% YoY)

0

10

20

30

40

50Milk

Eggs, Meat & Fish

Fruits

(% YoY)

Primary food inflation continues to remain close to double digitsAlthough vegetable prices have corrected after the spike observed in Dec-Jan

FY11, fruit prices continue to remain elevated

High protein food items like milk, eggs, fish, meat, etc. have seen very highinflation over the last 1-2 years

-20

0

M a r - 0

7

S e p -

0 7

M a r - 0

8

S e p -

0 8

M a r - 0

9

S e p -

0 9

M a r - 1

0

S e p -

1 0

M a r - 1

1-20

-10

M a r - 0

7

S e p -

0 7

M a r - 0

8

S e p -

0 8

M a r - 0

9

S e p -

0 9

M a r - 1

0

S e p -

1 0

M a r - 1

1

Ri k f i fl i i li d?


30/45

Risk of inflation getting generalized?

4

8

12

16

20

Core WPI

Non-Core WPI

(% YoY)

8

10

12

14

16

4

6

8

10

12

14 WPI (% YoY)3M Ahead Inflation Expectation (%, RHS)1Y Ahead Inflation Expectation (%, RHS)

High non-core inflation raises the risk of a pass through effect to core inflationCrude oil price has risen by more than 30% since end Dec-10 this raises the

risk of a hike in domestic retail pricesThere is lack of clarity on deregulation of diesel and LPG prices as of now

RBIs recent survey of households shows a worsening of inflation expectationsin Q4 FY11 over both a 3-month and 1-year horizon

-4

A u g - 0

5

F e b - 0 6

A u g - 0

6

F e b - 0 7

A u g - 0

7

F e b - 0 8

A u g - 0

8

F e b - 0 9

A u g - 0

9

F e b - 1 0

A u g - 1

0

F e b - 1 1

4

6

0

2

S e p - 0 6

M a r - 0

7

S e p - 0 7

M a r - 0

8

S e p - 0 8

M a r - 0

9

S e p - 0 9

M a r - 1

0

S e p - 1 0

Average inflation unlikely to come down


31/45

g ysignificantly in FY12

4

6

8

10

12Estimated WPI trajectory

Average WPI inflation is expected around 9.3% in FY11Despite a slight moderation, inflation is once again expected to pick up in

FY12

We expect average WPI inflation to come around 7.5-8.0% in FY12 higherthan RBIs medium term target of 5.5%

-2

0

2

M a r - 0

9

J u n - 0

9

S e p - 0

9

D e c - 0

9

M a r - 1

0

J u n - 1

0

S e p - 1

0

D e c - 1

0

M a r - 1

1

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r - 1

2

F l i fl ti ith & / f l i hik


32/45

Fuel inflation with & w/o fuel price hike

DateEffective

price afterhike (Rs)*

% gainEffective

price afterhike (Rs)

% gain

16/6/2004 35.71 5.9 22.74 4.61/8/2004 36.81 3.1 24.16 6.25/11/2004 39.00 5.9 26.28 8.8

21/6/2005 40.49 6.6 28.45 7.67/9/2005 43.49 7.4 30.45 7.06/6/2006 47.51 9.2 32.47 6.615/2/2008 45.52 4.6 31.76 4.25/6/2008 50.56 11.0 34.80 9.4

Time line of Price Hikes

8

9

10

11

WPI inflation

Forecast

High crude prices and soaring subsidy burden are likely to push thegovernment to hike fuel prices, probably post the ongoing state elections

We believe that the June Syndrome (out of the last 10 price hikes beforederegulation in petrol prices last year, 5 have been rolled out in the month of

June) may strike once again this yearIncorporating a ` 2 hike in both petrol and diesel prices in month of June, WPI

inflation is likely to top 10% in the month of August

. . . .27/2/2010 47.43 6.3 35.47 7.9

26/6/2010 51.43 7.3 40.10 5.216/12/2010 55.87 5.615/1/2011 58.37 4.5

Jun-11 60.37 3.4 42.1 5.0

Petrol Price Deregulation 6

M a r - 1

0

M a y - 1

0

J u l - 1 0

S e p -

1 0

N o v - 1

0

J a n -

1 1

M a r - 1

1

M a y - 1

1

J u l - 1 1

S e p -

1 1

N o v - 1

1

J a n -

1 2

M a r - 1

2

WPI inflation with fuel hike


33/45

qu y e c o move owar s s com or level in Q1 FY12

Liquidity eases at the beginning of FY12


34/45

Liquidity eases at the beginning of FY12

2

3

4

5

6-1 000

-500

0

500

1,000

1,500 Net LAF (Rs bn) Call Rate (%, RHS, Inverted)

+1%NDTL ( bn)

-1% NDTL ( bn)

Liquidity turned surplus for a brief period in AprilYear end government spending in FY11 and under maintenance of CRR

balances were primarily responsible for the temporary easing With the commencement of the auction season and a pick up in autonomous

outflows, liquidity is expected to turn negative and move towards -1% of NDTLby end May-11

7

8-2,000

-1,500

A p r - 1

0

J u n -

1 0

A u g - 1

0

O c t - 1

0

D e c - 1

0

F e b - 1 1

A p r - 1

1

Liquidity deficit to persist through


35/45

H1 FY12

-500

0

500

1,000

1,500

2,000

2,500

CRR

Currency in Circulation

Non-Tax

Tax

Auction

Estimated month end l iquidity ( ` bn)

Liquidity deficit is likely to come below the 1% of NDTL level this monthHowever, the deficit is likely to increase towards the end of H1 FY12 and

expected to exceed the 1% of NDTL mark by end Sep-11

-2,500

-2,000

-1,500

-1,000

A p r - 1

1

M a y - 1

1

J u n - 1

1

J u l - 1 1

A u g - 1

1

S e p - 1

1

ov . xpen ure

Redemption

Coupons

Net Liquidity


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on y e s e y o carry an ups e r s

Jul-Aug likely to be the best time in


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H1 FY12

200

300

400

500

600

700Gross NetG-Sec Supply in Dated Securities in H1 FY12 (INR bn)

Tenors H1 FY11 H2 FY11 H1 FY12Less than 5Y 13.4 16.3 05-9 Y 24.6 19.6 34.0-42.410-14 Y 38.0 36.6 40.0-48.4

Share in gross borrowing (%): Dated securities

The government will borrow ` 2500 bn gross borrowing in H1 FY12 thiswould constitute 61% of the full year borrowing target

With redemption of ` 594 bn in H1 FY12, net borrowing will amount to ` 1908

bn this would result in an average net borrowing size of ` 355 bn in Q1 FY12and ` 280 bn in Q2 FY12

0

100

Apr May Jun Jul Aug Sep

- . . . - .

Above 20Y 13.0 12.4 9.6-14.4

Upside risk to yields likely in FY12


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Upside risk to yields likely in FY12

H1 FY12 H2 FY12* H2 FY12**Total Supply 2,350 2,030 2,430

Central Government 1,900 1,530 1,930State Government 450 500 500

MSS 0 0 0Special Bonds 0 0 0

Total Demand 1,993 2,302 2,313Banks 1,043 1,552 1,563

G-Sec Supply Pressure ( ` bn)

6

7

8

9

10

2.5

3.0

3.5

4.0

4.5

5.0

5.5US 10Y Yield

India 10Y Yield (RHS)

Last 5Y correlation = 42%Last 1Y correlation = 3

Excess supply situation to persist in FY12 can potentially increase by ` 500 bnon the back of a rise in subsidy payments

SLR @ 24% could pose a risk under these circumstances With another 50 bps expected policy hike from the RBI in FY12, the yield on

the 10Y g-sec likely to move towards 8.30% in the next 6-months

End of QE2 program by the Fed in Jun-11 could provide an upside risk

Insurance Cos. 500 450 450

Others 450 300 300RBI 0 0 0

Supply-Demand Gap 357 -272 117

41.5

2.0

A p r - 0

6

O c t - 0

6

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

0

A p r - 1

1


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upee e y o wea en n e near o me um erm

Fundamentals still in favor, but impact


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could diminish in FY12

0

2

4

6

8

10Average yearly change in USDINR (%)

Higher than average growth has been supportive of Rupee With an expectation of moderation in economic growth and inflation

remaining at elevated level, downside risks to Rupee likely to gain traction

Global risk sentiment and commodity prices to provide cues

-6

-4

-2

High Growth/High Inflation

High Growth/Low Inflation

Low Growth/High Inflation

Low Growth/Low Inflation

BoP to remain in surplus in FY12


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BoP to remain in surplus in FY12

FY07 FY08 FY09 FY10 FY11* FY12*Trade Balance -61.8 -91.5 -119.5 -118.4 -133.0 -158.0Invisibles 52.2 75.7 91.6 80.0 87.0 100.0Current Account -9.6 -15.7 -27.9 -38.4 -46.0 -58.0(as % of GDP) -1.0 -1.3 -2.3 -2.8 -2.7 -2.9

FDI 7.7 15.9 19.8 18.8 9.0 20.0Portfolio 7.1 27.4 -14.0 32.4 33.0 25.0

Highlights of India's Balance of Payments (USD bn)

BoP surplus to remain within USD 15-20 bn range in both FY11 and FY12 We expect USDINR around 45.00 by Jun-11 and 46.50 by Dec-11 high oil

price, stronger Dollar, and a moderation in domestic growth would keep Rupee

under pressure* Our estimates with GDP of USD 1725 bn and USD 1991 bn in FY11 and FY12 respectively; ** Includes errors & omissions

oans . . . . . .

Others 6.0 22.6 -7.3 -11.0 -7.0 0.0Capital Account 45.2 106.6 6.8 53.4 63.0 75.0(as % of GDP) 4.8 8.6 0.6 3.9 3.7 3.8

Overall BoP** 36.6 92.2 -20.1 13.4 16.0 17.0

(as % of GDP)** 3.9 7.4 -1.7 1.0 0.9 0.9

Summary


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Summary

US recovery to continue gradually; Fed to remain on holdthrough 2011 QE2 expected to end in Jun-11; Dollar to regain strength in H2

India growth to moderate to 8.3% in FY12 with inflationremaining a concern; expect RBI to hike another 50 bps Fiscal management would be challenging in FY12; tough for the government

to maintain 4.6% deficit with firm commodity prices FY12 net market borrowing of ` 3.4 trillion carries an upside risk to the tune

of ` 500 bn With SLR now reduced to 24%, bond yields likely to carry an upside risk;

expect 10Y g-sec yield to move towards 8.30% over the next 6-months Liquidity deficit likely to stabilize around ` 500-600 bn by end May-11 BoP surplus of approximately USD 17 bn to be supportive of Rupee in FY12 However, the combination of high inflation and an expected moderation in

growth would provide a downside risk to Rupee Global growth and commodity prices remain the key risk for both domestic

interest rates and currency


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an ou


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impact of oil-2011

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