Macro and Products Call (MPC)

August 31, 2018 Dipankar Mitra

Somnath Mukherjee
Research, ASKWA
 -5
5
2
3
4
7
8
9

0
0
1
5
6

-15
10
15
20
25
10

-20
-10
Jun-12 5.3 Jun-12 4.9
Sep-12 16.4 Sep-12 7.5
Dec-12 3.1 Dec-12 5.4
Mar-13 0.4 Mar-13 4.3
Jun-13 -3.0 Jun-13 6.5
Sep-13 -8.2 Sep-13 7.3
Dec-13-14.1 Dec-13 6.5

Sources – CMIE ASKWA Research

Mar-14 -6.9 Mar-14 5.3
Jun-14 0.9 Jun-14 8.0
Sep-14 -0.4 Sep-14 8.7
Dec-14 7.6 Dec-14 5.9
GDP growth

Mar-15 -4.2 Mar-15 7.1

Jun-15 -5.8 Jun-15 7.7
Sep-15 -3.6 Sep-15 8.2
Dec-15 -9.8 Dec-15 7.3
Mar-16 -4.2 Mar-16 9.3

Imports of goods and services

Jun-16 0.2 Jun-16 8.1
Sep-16 -0.4 Sep-16 7.6

Higher trade deficit to act as a drag (YoY%)

Dec-16 10.1 Dec-16 6.8
Mar-17 6.6 Mar-17 6.1
Jun-17 18.5 Jun-17 5.6
Sep-17 10.0 Sep-17 6.3
Dec-17 10.5 Dec-17 7.0
Both base-effect and seasonal pattern supportive of a 8% growth

Mar-18 10.9 Mar-18 7.7

-5
0
5
10
15
20

-10

-5
5

0
10
15
20
25

-10
Jun-12 9.0
Jul-16
Sep-12 4.8
Sep-16 Dec-12 1.8
Mar-13 2.1
Nov-16
Jun-13 -3.1
GDP Growth – our best chance to hit 8%

Jan-17 Sep-13 -3.7

Mar-17 Dec-13 -3.0
Mar-14 -4.9
GCF

May-17 Jun-14 8.4

Jul-17 Sep-14 9.5
Dec-14 5.4
Sep-17
Mar-15 7.5
Nov-17 Jun-15 0.0
Sep-15 1.0
Jan-18
Dec-15 7.4
Mar-18 Mar-16 5.0
Jun-16 10.0
May-18
Sep-16 4.6
Dec-16 3.5
Mar-17 1.1
Jun-17 5.1
Sep-17 8.0
loans

Dec-17 10.1
Industry

Services

Personal
and allied

Mar-18 14.9
Some turnaround in investment too is expected on low base (YoY%)

Agriculture
Services sector credit growth point to high growth in the sector (YoY%)

Total Credit
Inflation – CPI to remain stable in 2018; WPI to race ahead

Inflation is broadly within target (YoY%) Rural wage growth is near all time low (YoY%)
CPI WPI RBI Target Rural wage growth rate
20
7.4

8
18

5.8
5.1

6 16

4.8
4.7

4.6
14
4 8 12

2.2
2.2
6 10
5
2 4 4
8
6
0
4 3.5
-0.4

2 2.9
-2
-3.5

Apr-13

Apr-14

Apr-16

Apr-17
Apr-15
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Oct-13

Oct-16

Oct-17
Oct-14

Oct-15
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
-4
YTDFY15 YTDFY16 YTDFY17 YTDFY18 YTDFY19

INR depreciation to affect WPI more with only limited impact on CPI WPI to diverge ahead of CPI in the coming period (YoY%)
% of basket affected by INR movement CPI WPI
70 14
61.7
12
60
10
50 8
6
40 4
2
30
0
20 -2
9.9 -4
10
-6
0 -8
Feb-14

Feb-15

Feb-16

Feb-17

Feb-18
Aug-13

Aug-14

Aug-15

Aug-16

Aug-17
Nov-17
Nov-13

Nov-14

Nov-15

Nov-16

May-17

May-18
May-14

May-15

May-16
CPI WPI

Sources – CMIE ASKWA Research

Fiscal – moving into the comfort zone
Combined deficit coming within 6% of GDP in FY19 (% of GDP) Correcting fiscal unlikely to provide growth stimulus
Govt. Final Consumption Expenditure (YoY %)
Central Government State Governments Combined

29.0
12 35
30

22.5
19.0
9.8 25

17.6

16.9
10
9.5 20

12.3
12.1
11.3

10.1
8 15

8.3
8.3

8.2
7.6
7.1

6.8
10

4.1

3.8
3.0

2.4
5.9
6 5
4.1 0
4 -5

-2.3
-6.0
-10

-7.2
2 -15

Mar-14-13.7
Dec-12-13.9
-20
0

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Sep-12

Sep-13

Sep-16

Sep-17
Sep-14

Sep-15
Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17
Mar-13

Mar-16

Mar-17

Mar-18
Mar-15
FY02
FY03
FY04
FY05

FY07

FY09
FY10
FY11
FY12

FY14

FY16
FY17
FY18
FY19
FY06

FY08

FY13

FY15

Despite election year, Centre’s fiscal remains restrained (YoY%) Indeed there could be positive surprise on borrowing (INR tn)
Gross fiscal deficit (GFD) Net tax revenue Expenditure Market borrowing by Central Govt. (INR tn)
60 7
6.1
50
5.8 5.8 6.0
6 FY17
40 5 4.6 4.6
FY18 BE
34 4.1 4.2
30
4
FY18 RE
20 2.9
3
FY19 BE
10 9 2.0
13 14 35 2
0 H1 FY19 Actual
-4 -3 1
-10
YTDFY15 YTDFY16 YTDFY17 YTDFY18 YTDFY19 0
Gross Market Borrowing Net Market Borrowing
Sources – CMIE RBI, ASKWA Research
External – depreciation a genuine worry that we need to hedge

CAD/GDP higher but much lesser than crisis levels (% of GDP) FIIs flows remained volatile though overall positive
5.0 4.8 Debt Equity
4.5 4.3 10
8

Flows by FIIs/FPIs in USD bn

4.0
6
3.5
2.9 2.9 4
3.0
2.5 2
2.5
1.9 0
2.0 1.7
-2
1.5 1.3
1.1 -4
1.0 0.7 -6
0.5 -8

Dec-15

Dec-16

Dec-17
Dec-13

Dec-14
Aug-13
Oct-13

Oct-14

Aug-15
Oct-15

Aug-16

Aug-17
Oct-17
Aug-14

Oct-16
Apr-15

Apr-16

Apr-17

Apr-18
Apr-14
Feb-14

Feb-15

Feb-16

Feb-18
Feb-17
Jun-14

Jun-15

Jun-17

Jun-18
Jun-16
0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E

INR performs better than other EMs, limiting its relative depreciation Lower Rupee do not help correct trade deficit automatically
70
EM Currency Index
65

GBP 60
3yr
INR/USD

JPY 1yr 55

3mth 50
EUR
1mth
45
DXY 1W
40
INR
35
-5 0 5 10 15 20 25
-20 -15 -10 -5 0 5 10 15
Trade deficit (USD bn)
Sources – CMIE RBI, ASKWA Research
Equities: Earnings divergence seen with overhang of corporate
banks’ NPA problem
Nifty 50: Strong top-line growth contrasts that of bottom-line (YoY%) Widespread divergence in corporate profitability (YoY%)
Total income net of P&E PAT net of P&E 80 64 Jun-18
25 60 46
21 34
20 40 21
15 20
0
10
7 -20
5 -40 -13
0 -60
-5 -80
-10 -100 -78
-15
-20
-25
-30
Sep-14

Sep-15

Sep-16

Sep-17
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Dec-14

Dec-15

Dec-16

Dec-17
Mar-14

Mar-15

Mar-16

Mar-17

NPAs have affected around 10% of bank’s book (INR bn) Mar-18 Significant amount of NPAs yet to be recognized (INR bn)
90,000 FY17 FY18
60
80,000 Loss assets 54
49
70,000 50
Doubtful assets
60,000
40
50,000 Overhang of > INR 3 tn 34
Sub-standard assets
40,000
potential NPAs still 28
30
Total Advances
30,000
20
20,000 Standard assets 10
10 8 8 7
10,000 6
3
0 Total NPAs
0
FY01

FY03

FY05

FY15

FY17
FY07

FY09

FY11

FY13

NPAs Unrecognised Irregular Clean Layer Total Loans

NPAs Borrowers
Sources – CMIE RBI, ASKWA Research
Debt: Credit quality- improved but divergence marks bond
market too
Share of investment grade papers risen (% share in value) However, share of default category relatively high (% share in value)
Share of Investment grade in total rating (%) Inadequate safety Risk prone
94.5
Default Total Non-investment
94
94.0 9
8
93.5
7
93.0
6
92.5 92 92 5
92 Default
92.0 4
92
3
91.5
2
91.0
1
90.5 0
YTD FY15 YTD FY16 YTD FY17 YTD FY18 YTD FY19 YTD FY15 YTD FY16 YTD FY17 YTD FY18 YTD FY19

Deleveraging process finally succeeding on lower interest rates (%) Credit spread first lower on lagged response to G-sec market but
Debt to equity ratio Interest cover now being normalized (%)
Prime lending rate (max) Base rate
Repo (Year-end) (10-yr AAA - 10-yr Gsec) (10-yr AAA - 10-yr Gsec) 10 Y G-Sec (RHS)
14

12
2.0 8.0
10 1.8 7.8
1.6 7.6
8 1.4 7.4
1.2 7.2
6 1.0 7.0
0.8 6.8
4
0.6 6.6
2 0.4 6.4
0.2 6.2
0 0.0 6.0
Apr-17

Apr-18
Feb-17

Sep-17

Feb-18
Jun-17

Jun-18
Jul-17

Jul-18
Mar-17

Mar-18
Dec-17
Oct-17
Aug-17

Aug-18
Nov-17
Jan-17

Jan-18
May-17

May-18
FY01
FY02
FY03
FY04

FY06

FY08
FY09
FY10
FY11

FY13

FY15
FY16
FY17
FY18
FY05

FY07

FY12

FY14

Sources – CMIE RBI, ASKWA Research

 Summary

Hits: Domestic Economy

1. GDP growth: ~8% mark; low base, strong seasonality, services growth
2. Inflation: ~4% in remaining FY19; WPI to run ahead
3. (Centre + State) fiscal: ~6% in FY19; lower borrowing possible
Misses: External
1. INR to remain volatile; trade deficit won’t autocorrect
Equity: Neutral: Sales high but earnings diverge
Debt: Neutral: Credit quality improve; divergence to keep spread stable

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