While FY09 may be a crunch time for India, given the situation of a rising current account deficit and lower capital flows, the pressure could ease a bit from FY10
IT IS difficult to make a call on how FY10 is likely to pan out, but one thing is clear, the days of 9%+ growth are over, believes Citigroup. As per a recent Citigroup Global Market report, India has lost the opportunity to sustain those levels for now, with growth coming in around 7%+ levels in FY09-10.
With supply side measures not really being effective in bringing inflation down, Citi expects RBI to continue to raise rates to temper demand-side pressures. Much further monetary tightening however poses downside risks to both Citi’s FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively.
Rising interest rates and input costs are also likely to result in a deceleration in investments to 10.4% and 7.9%, respectively. But what could possibly offset this are the low real interest rates and improvements in productivity. While higher rates will impact growth, the Citi report maintains that today corporate India is in a better shape, productivity has improved and savings have risen.
While nominal interest rates have gone up, real interest rates are low. Productivity has increased and ICORs (incremental capital output ratio) in India are relatively lower. Indian corporate is significantly underleveraged as compared to the past. Most sectors other than perhaps retail/ real estate, investments are being carried out to meet existing demand rather than that of the previous cycle — in anticipation of demand and work in progress on big-ticket projects in areas such as oil and gas, minerals and metals and infrastructure are unlikely to get completely derailed as most of the projects have escalation clauses and back-to-back supply arrangements, the report highlighted.
A widening current account deficit and a deceleration of flows will likely result in a net reserve accretion of $6bn in FY09 vs $92bn in FY08. As a result, we expect the rupee to trade in the Rs 42.5-43.5 range. The rupee would have been weaker were it not for RBI intervention and recent measures (special market operations, ECB liberalisation, higher FII investment in debt) taken to hold up the unit.
“As regards bonds, factoring in the fuel price hike, repo rate and CRR hikes as well as the probability of further monetary tightening, bond yields edged almost 100bps higher with the 10-year trading at 9.15% from 8.2% levels last month. Assuming another round of monetary tightening this month, yields could edge towards 9.25% levels,” says the report.
While FY09 is likely to be a crunch time for India, given the situation of a rising current account deficit and lower capital flows, the pressure could ease a bit from FY10, believes Citigroup as the new hydrocarbon discoveries by Reliance, ONGC, GSPCL and Cairn come on stream.
“While the discovery by Cairn is purely oil, those by Reliance and ONGC/ GSPCL are natural gas. Thus, savings would result to the extent that: indigenous crude can substitute imported oil and natural gas can replace naphtha (which can then be exported). We expect India’s current account deficit to decline to 2% in FY10 from 4% in FY09. Though further rate hikes do pose downside risks to the FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively, some factors might work to our advantage,” Citi said.
IT IS difficult to make a call on how FY10 is likely to pan out, but one thing is clear, the days of 9%+ growth are over, believes Citigroup. As per a recent Citigroup Global Market report, India has lost the opportunity to sustain those levels for now, with growth coming in around 7%+ levels in FY09-10.
With supply side measures not really being effective in bringing inflation down, Citi expects RBI to continue to raise rates to temper demand-side pressures. Much further monetary tightening however poses downside risks to both Citi’s FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively.
Rising interest rates and input costs are also likely to result in a deceleration in investments to 10.4% and 7.9%, respectively. But what could possibly offset this are the low real interest rates and improvements in productivity. While higher rates will impact growth, the Citi report maintains that today corporate India is in a better shape, productivity has improved and savings have risen.
While nominal interest rates have gone up, real interest rates are low. Productivity has increased and ICORs (incremental capital output ratio) in India are relatively lower. Indian corporate is significantly underleveraged as compared to the past. Most sectors other than perhaps retail/ real estate, investments are being carried out to meet existing demand rather than that of the previous cycle — in anticipation of demand and work in progress on big-ticket projects in areas such as oil and gas, minerals and metals and infrastructure are unlikely to get completely derailed as most of the projects have escalation clauses and back-to-back supply arrangements, the report highlighted.
A widening current account deficit and a deceleration of flows will likely result in a net reserve accretion of $6bn in FY09 vs $92bn in FY08. As a result, we expect the rupee to trade in the Rs 42.5-43.5 range. The rupee would have been weaker were it not for RBI intervention and recent measures (special market operations, ECB liberalisation, higher FII investment in debt) taken to hold up the unit.
“As regards bonds, factoring in the fuel price hike, repo rate and CRR hikes as well as the probability of further monetary tightening, bond yields edged almost 100bps higher with the 10-year trading at 9.15% from 8.2% levels last month. Assuming another round of monetary tightening this month, yields could edge towards 9.25% levels,” says the report.
While FY09 is likely to be a crunch time for India, given the situation of a rising current account deficit and lower capital flows, the pressure could ease a bit from FY10, believes Citigroup as the new hydrocarbon discoveries by Reliance, ONGC, GSPCL and Cairn come on stream.
“While the discovery by Cairn is purely oil, those by Reliance and ONGC/ GSPCL are natural gas. Thus, savings would result to the extent that: indigenous crude can substitute imported oil and natural gas can replace naphtha (which can then be exported). We expect India’s current account deficit to decline to 2% in FY10 from 4% in FY09. Though further rate hikes do pose downside risks to the FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively, some factors might work to our advantage,” Citi said.
