india: macroeconomic update treading in choppy waters...sector, as nbfcs slow lending activity. •...

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India: Macroeconomic Update

Treading in choppy waters

Radhika Rao

Economist, DBS Group Research

November 2018

Private & Confidential

2Source: DBS Research, RBI, government stats, CEIC & Bloomberg data

India: Overview

• Recent sharp correction in oil prices and stabilisation in USD have been key catalysts for near-term

reprieve.

• Global volatility hurt economies which run twin deficits; Indian rupee had depreciated to a record low

past 74.0/USD in October, before recovering 4% in November

• 10Y bond yields have eased 40bp from year’s highs as domestic and foreign investors return

• As financial markets stabilise, pressure on the real economy is likely to persist.

• Growth kickstarted FY19 on a strong note, up 8.2% in the June quarter. Tight financial conditions, limited

fiscal headroom and weaker farm sector are likely to moderate growth below 7% by end-FY.

• Inflationary risks have receded helped by low food costs, base effects and seasonal factors. This, along

with signs of tentative global reprieve, gives the RBI leeway to keep benchmark rates on hold in December.

• External balances are under pressure on lagged impact of oil and rupee. FY19 current account gap is likely

to widen to -2.7% of GDP, with the FY19 BOP to slip into red.

• Fiscal deficit might widen a notch vs targeted -3.3% of GDP, but contained at -3.5%.

• Slowdown in non-bank lending activity, is likely to tilt the balance in favour of banks; but credit growth

will nonetheless moderate.

• Global risks have taken a breather but not vanished:

• Fund allocations away from EM markets is likely to persist, as the US Fed tightens policy.

• Waivers from Iranian sanctions are likely to last till mid-2019 beyond which oil is back in focus



India: reforms overview



Indian economy: heatmap

Matrix FY13 FY14 FY15 FY16 FY17 FY18f FY19f

GDP (GVA basis) 5.5 6.2 7.1 7.9 6.6 6.7 7.1

Consumption 5.4 7.4 6.9 5.5 8.7 6.6 8.5

Exports grow th -1.4 4.9 -0.8 -15.7 5.4 10.5 4.0

Inflation 10.2 9.6 6.0 4.9 4.5 3.6 4.0

Current account -4.7 -1.7 -1.3 -1.1 -0.7 -1.9 -2.7

Fiscal balance -4.8 -4.6 -4.0 -3.9 -3.5 -3.5 -3.3

Interest rates 7.5 8.0 7.5 6.75 6.25 6.00 6.5

USDINR eop 54.4 61 62.6 66.2 64.9 65.0 74

10 year G Sec yields 7.9 8.8 7.7 7.5 6.7 7.3 7.9

Comm banks NPA ratio 3.4 4.1 4.6 7.8 9.6 11.6 12.00

Brent prices 102.5 111 60.3 48.1 47.1 56 75



Indian economy: FY19 growth to improve



Indian economy: … but sequential pace to moderate

- Non-farm sector consumption

- Cyclical investment rise

- Sharp correction in oil prices point to a healthier 2HFY19

- Fiscal headroom narrows

- Manufacturing activity eases despite festive support

- Base effects

- External sector drag



Indian economy: moderate inflation gives RBI leeway to pause



Indian economy: moderate inflation gives RBI leeway to pause

Table: Snapshot of RBI's projections

Meeting Inflation Growth

August'17Sl ightly above 4%

by March 2018 qtrFY18: 7.3% (GVA)

October'174.2-4.6% in Q4 FY18;

4.5% Q4 FY19FY18: 6.7% (GVA)

December'17 4.3-4.7% in H2 FY18 FY18: 6.7% (GVA)

February'18

5.1% in Q4 FY18;

5.1-5.6% in H1 FY19

& 4.5-4.6% in H2

FY18: 6.6% (GVA)

FY19: 7.2% (GVA)

Apri l '18

4.5% in Q4 FY18;

4.7-5.1% in H1 FY19

& 4.4% in H2

FY18: 6.6% (GDP)

FY19: 7.4%

June'184.8-4.9% in H1 FY19;

4.7% in H2 (incl

HRA)

FY19: 7.4% (GDP)

August'18

4.8-4.9% in H1 FY19;

4.8% in H2 (incl

HRA); 5.0% in Q1

FY20

FY19: 7.4% (GDP);

H1 7.5-7.6%;

H2 7.3-7.4%

Q1 FY20 - 7.5%

October'183.9-4.5% in H2 FY19;

4.8% in Q1 FY20

FY19: 7.4% (GDP);

Q2: 7.4%;

H2: 7.1-7.3%

Q1 FY20 - 7.4%



Indian economy: Non-banks face challenges



Indian economy: Non-banks face challenges

• We continue to look for banks to increase their share as a primary source of funding to the commercial

sector, as NBFCs slow lending activity.

• Stricter lending controls on NBFCs and tougher operating environment is likely to impinge on their

ability to expand their books, prompting them to scale back their aggressive growth targets.

• Initial phase of panic in September, all NBFCs were viewed in the same light and endured a broader

sell-off. Nerves have since settled as markets differentiate between solvency and liquidity risks within

the sector.

• Higher-quality entities i.e. with a strong promoter or shareholder backing, lower reliance on wholesale

funding, favourable sectoral and geographical spread, will be able to withstand volatile market

conditions.

• Recent calm has seen NBFCs return to the bond markets, with gradual move likely to lower reliance on

commercial papers and move up the duration curve.



Indian economy: Past the worst point for the banking sector



Risks: Twin deficits to re-widen, lower oil brings relief

Fiscal deficit as % of GDP

FY16 FY17 FY18 FY19 BE FY19f

-3.9 -3.5 -3.5 -3.3 -3.4-3.5

Current account deficit as % of GDP

FY15 FY16 FY17 FY18 FY19f

-1.3 -1.1 -0.7 -1.9 -2.7



Indian Rupee: support measures (first tranche)



Indian Rupee: subsequent measures



Indian Rupee: What else is in store?



Indian Rupee outlook



Indian Rupee – historical annual performance



DBS Forecasts

GDP growth, % YoY CPI inflation, % YoY, ave

2016 2017 2018f 2019f 2016 2017 2018f 2019f

China 6.7 6.9 6.6 6.2 2.0 1.6 2.1 2.3Hong Kong 2.0 3.8 3.3 2.9 2.4 1.7 2.5 2.7India* 8.0 7.1 6.7 7.4 4.9 4.5 3.6 4.0Indonesia 5.0 5.1 5.1 5.2 3.5 3.8 3.2 3.8Malaysia 4.2 5.9 4.7 4.5 2.1 3.9 1.1 2.5Philippines** 6.9 6.7 6.3 6.5 1.3 2.9 5.3 4.7Singapore 2.0 3.6 3.4 3.0 -0.5 0.6 0.7 1.8South Korea 2.9 3.1 2.9 2.9 1.0 1.9 1.5 1.8Taiwan 1.4 2.9 2.7 2.2 1.4 0.6 1.3 1.0Thailand 3.2 3.9 4.5 4.2 0.2 0.7 1.1 1.6Vietnam 6.2 6.8 6.9 6.6 2.7 3.5 3.6 3.8

Eurozone 1.8 2.5 1.9 1.8 0.2 1.5 1.8 1.4Japan 0.9 1.7 1.1 0.9 -0.1 0.5 0.8 1.0United States*** 1.5 2.3 3.0 2.5 1.3 2.1 2.5 2.0* refers to year ending March ** new CPI series *** eop for CPI inflation



DBS Forecasts

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35India 6.00 6.25 6.50 6.50 6.50 6.75 6.75 7.00Indonesia 4.25 4.75 5.75 6.00 6.25 6.50 6.50 6.50Malaysia 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25Philippines 3.00 3.50 4.50 4.75 5.00 5.25 5.25 5.25Singapore** 1.45 1.52 1.64 1.85 2.10 2.30 2.55 2.70South Korea 1.50 1.50 1.50 1.75 1.75 1.75 1.75 1.75Taiwan 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.00 2.00Vietnam*** 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25

Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10United States 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50* 1-yr lending rate; ** 3M SOR ; *** prime rate

Policy interest rates, eop



DBS Forecasts

Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20

China 7.10 7.20 7.15 7.10 7.05 7.00 6.95 6.90Hong Kong 7.85 7.85 7.84 7.83 7.82 7.81 7.80 7.79India 74.0 75.0 76.0 77.0 76.5 76.0 75.5 75.0Indonesia 15000 15200 15400 15600 15500 15400 15300 15200Malaysia 4.25 4.30 4.28 4.25 4.23 4.20 4.18 4.15Philippines 53.5 54.0 54.5 55.0 54.8 54.5 54.3 54.0Singapore 1.42 1.44 1.43 1.42 1.41 1.40 1.39 1.38South Korea 1180 1200 1190 1180 1170 1160 1150 1140Thailand 33.5 34.0 33.8 33.5 33.3 33.0 32.8 32.5Vietnam 23500 23600 23550 23500 23470 23440 23410 23380

Australia 0.68 0.66 0.67 0.68 0.69 0.70 0.71 0.72Eurozone 1.10 1.08 1.09 1.10 1.11 1.12 1.13 1.14Japan 116 118 117 116 115 114 113 112United Kingdom 1.26 1.24 1.23 1.22 1.23 1.24 1.25 1.26Australia, Eurozone and United Kingdom are direct quotes

Exchange rates, eop


23

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india: macroeconomic update treading in choppy waters...sector, as nbfcs slow lending activity. •...

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