Dr Rupa Rege Nitsure
Chief Economist
Bank of Baroda
+91-22-66985216
Weekly Macro Perspectives
November 30, 2013
1. Agriculture
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India’s agriculture sector growth rose to a nine-quarter high of 4.6% in Q2, FY14 on the
back of above normal monsoon and record kharif (summer crop) production esp. in
oilseeds and cotton. The south-west monsoon, which is critical for Indian agriculture, was
6.0% above normal this year.
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Planting of rabi crop (winter crop) in India has gathered pace with area under wheat, rice,
pulses and oilseeds rising decently aided by better soil moisture and higher storage in
major reservoirs.
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Though farmers in Uttar Pradesh, the top wheat grower, have been hampered by not being
able to harvest sugarcane and plant wheat, the area under the cereal is up by over 10%
compared with the corresponding period last year.
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According to India’s Ministry of Agriculture, rains in Oct’13 have encouraged farmers in
Madhya Pradesh and Rajasthan to take up wheat on a large scale. Reports from Madhya
Pradesh say that many farmers are switching over to wheat, mainly from chana (gram),
attracted by the additional bonus the State Government has been giving for the last two
years.
2. Global economic highlights of the week
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Europe is no longer the forbidden zone for U.S. money market funds, which have been
adding to their holdings of securities from the region's banks after slashing their exposure
during the height of the euro zone debt crisis two years ago. According to a report by
JPMorgan Securities, U.S. prime money market funds, which can invest outside of U.S.
government securities, raised their euro zone holdings in Oct’13 to the highest level since
Aug’11.
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As per the statement of the central Bank of China (Nov. 26), China has decided to rely on
market based reforms to unleash fresh growth drivers to support its economy rather than
on ultra-loose fiscal or monetary policies.
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Japan's economy is gaining momentum, data for Oct’13 showed, with consumer prices
excluding food and energy rising 0.3% from a year earlier, the biggest gain since 1998. The
slew of indicators released on Nov 29 suggests that the ultra-loose monetary policy and
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stimulus strategy of Prime Minister Shinzo Abe is helping end a long bout of deflation for
the world's No. 3 economy.
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Six world powers reached an interim nuclear cooperation agreement with Iran this week
that is expected to eventually ease the stifling economic sanctions on Iran. The deal gave
Iran US$ 7 bln in financial relief, most from allowing limited oil sales over the next six
months. In exchange, Iran agreed to several concessions including destroying its stockpile
of weapons grade uranium.
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While the job picture has brightened a bit in the U.S., its factory activity appears to be losing
momentum with business spending on capital goods weakening and new orders for longlasting manufactured goods falling last month.
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On Nov. 29, the rating agency S&P lowered the credit rating of Netherlands, which is
suffering from an anaemic economy, slumping house prices and falling consumer
confidence, to "AA+" from "AAA". This left Germany, Luxembourg and Finland as the only
members of the 17-nation Euro zone with the top rating from all three leading credit
agencies.
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Low inflation and high unemployment continue to weigh on the Euro zone economy,
although data published on Nov. 29th showed a slight improvement in conditions across the
currency bloc. Inflation in the Euro zone hit 0.9% in the year to this month, up from
October’s low of 0.7% but still well below the European Central Bank’s target of just under
2%. Unemployment in October was 12.1%, down from 12.2% in September, with the
number of people without jobs falling by 61,000 to 19.3 mln. It is the first time since the
beginning of 2011 that unemployment has fallen for the region.
3. Indian economic and policy highlights of the week
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India could step up imports from Iran next month and start transferring billions of dollars
owed it for oil as early as next week following a deal to curb Tehran's nuclear programme.
India is Iran's second-largest buyer and currently owes Tehran about US$ 5.3 bln for oil
shipments, according to government and refining sources.
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On Nov 26th, India’s Reserve Bank allowed banks to treat loans given to medium
manufacturing enterprises after Nov. 13 as priority sector advance, in its efforts to provide
enhanced liquidity support to the MSME sector. The RBI also allowed incremental bank
loans to medium services enterprises extended after Nov. 13 to up to Rs 100 mln and
raised the loan limit given to micro and small service enterprises to Rs 100 mln from Rs 50
mln that will be treated as priority sector advance. This facility will remain open until endMarch, 2014.
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India’s apex industrial body ASSOCHAM this week called on all concerned stakeholders
including the opposition to build consensus for prioritization of passing six key bills viz., DTC,
GST, Insurance Laws (Amendment), Coal Mines (Nationalization) Amendment, Higher
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Education and Research and National Commission for Heritage Sites during the upcoming
Winter Session of the Parliament. According to ASSOCHAM, there is an urgent need to
support UPA government’s efforts to legislate aforesaid key bills vis-à-vis social
development and economic security in national interest and to further accelerate the
positive momentum gradually taking ground in our economy.
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India’s trade with Africa increased by 10 fold from around US$ 7 bln in FY04 to about US$
70 bln in FY13 which is highest amongst all the regions such as Europe, America, Asia and
CIS & Baltics, said the research arm of PHD Chamber of Commerce and Industry. The
reason could be attributed to the increased importance of African countries in India’s
bilateral trade relations. With the increasing diversification of India’s global trade towards
emerging and developing countries, Africa has emerged as an important partner for India
for trade and commerce during the recent years.
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The RBI has communicated that Tata Sons Ltd. has withdrawn its application made on July
1, 2013 for a new bank licence. The company has indicated that its current financial
services operating model best supports the needs of the Tata Group’s domestic and
overseas strategy, and provides adequate operating flexibility to its companies, while
securing the interests of the Group’s diverse stakeholder base.
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According to Indian media reports, Reliance Industries Ltd (RIL) has shut another well on the
main gas fields in the eastern offshore KG-D6 block due to high water ingress. This is the
10th well to be shut since late 2010.
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India’s Reserve Bank has exempted foreign banks from paying stamp duty if they convert
their branch into a wholly-owned subsidiary.
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India’s quarterly GDP growth in Q2, FY14 improved to 4.8% (y-o-y) supported by a smart
pick up in agriculture, exporting industries, power generation and construction sectors.
From the monetary policy perspective, this GDP print is unlikely to change the course of
action by the RBI and its hawkish stance will continue as long as CPI-led inflation stays way
above its comfort level.
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India’s fiscal deficit in the first seven months (Apr-Oct) of FY14 reached 84.4% of the full
year budgeted target on slower growth of tax revenues (6.8%, yoy) but much faster growth
of expenditures (18.3%, yoy). According to Nomura’s fiscal run rate monitor the run rate on
the fiscal deficit has been higher in FY14 largely due to frontloading of government
spending and weaker-than-expected growth in tax revenues.
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On Nov 29, India’s Reserve Bank extended revised interest rates on non-resident Indian
deposits (FCNR B) until Jan 31st, subject to review. It also issued draft norms for entry of
banks into insurance broking. According to its statement, banks with a net worth of not less
than Rs 5 bln as on Mar 31st and net NPL ratio of not more than 3.0% will be eligible for
entering into insurance broking. It also said that interested banks must have posted a net
profit in the last three consecutive years and should have a capital adequacy ratio of not
less than 10.0%.
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According to RBI, Indian bank loans rose 15.5 % (yoy) as on Nov 15, while deposits were up
15.4% (yoy). While outstanding loans declined by Rs 89.43 bln to Rs 56.50 trln in the two
weeks to Nov. 15, bank deposits decreased by Rs 354.2 bln to Rs 73.90 trln.
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The Broad Money Supply, i.e., M3 grew at the pace of 13.8% (yoy) as on Nov 15 primarily
supported by the growth in banks’ retail term deposits and currency with the public.
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India’s foreign exchange reserves further increased by US$ 2.69 bln to US$ 286.26 bln as on
Nov 22, 2013, as per the RBI’s latest weekly report. The reserves had increased by US$ 1.46
bln to US$ 283.57 bln in the previous week ended Nov 15.
4. Indian money market review this week
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Weighted average call money rate steadily declined from 8.73% to 7.75% this week
(Monday to Friday) as liquidity in the system remained comfortable. On Saturday, the twoday call rate ended at 4.00%-4.50%.
Banks’ borrowing under the repo window too averaged lower at Rs 366 bln this week
versus an average of Rs 411 bln last week.
The borrowing from the MSF facility has come down substantially after the RBI extended
the term repo window. It averaged around Rs 76 bln this week versus Rs 150 bln last week.
While 91-day T-bill rate eased from 8.95% to 8.80% during the course of this week, 361-day
T-bill rate eased from 9.89% to 8.77%.
Three-month CP rate too declined from 9.57% to 9.33% during this week.
CDs were raised for the tenures ranging from two to twelve months with interest rates
varying from 8.99% (amt: Rs 400 cr for 36 days) to 9.30% (amt: Rs 300 cr for 62 days).
According to money market dealers, liquidity in the banking system has become
comfortable due to month-end government spending and inflows from RBI’s dollar swap
windows. Due to improved liquidity conditions, the cut-off at the RBI’s 14-day term repo
variable rate auction on Nov 29th was set sharply lower than the previous auction.
5. Government bond yields to increase further next week
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The yield on 10-year benchmark Govt. of India bond eased significantly from 9.10% last
week (7.16% 2023 paper) to 8.74% this week (8.75% 2023 paper) as the new benchmark
came into existence.
The bonds rallied in earlier part of the week (Mon to Wed), as rupee was gaining strength.
With no major triggers, the market is witnessing a natural demand shift for the new
benchmark with range-bound movement in the existing paper.
Government bond prices fell on Thursday after the Economic Affairs Secretary, Govt of
India gave a statement that the government would meet its borrowing target but would
calibrate its debt sales plans according to market conditions.
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The bearishness continued on Friday as well ahead of the announcement of India’s
quarterly GDP data for Q2, FY14.
Even though GDP data was in line with expectations, we see some bearishness in the Indian
government bonds next week as the US 10-year bond yield ended at almost 2-month high
on Nov 29th on Fed taper speculation. We expect the yield on new benchmark paper in the
range of 8.74% to 8.80% next week.
6. No sharp movement seen in the rupee next week
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Indian rupee appreciated by 0.68% against US dollar to 62.44 this week and posted its
second straight weekly gain.
The rupee was helped earlier in the week (up 1.16% up to Wednesday) by the rally in the
euro and the biggest weekly gain in domestic shares since the week ended Oct. 11.
However, it weakened for a second consecutive session on Friday (Nov 29) as month-end
dollar demand from oil firms offset an increased global investor demand for risk that sent
other currencies such as the euro higher.
We don’t expect any sharp movement in the rupee next week. There will be some support
to the currency from relatively better GDP data (4.8% in Q2 versus 4.4% in Q1). However,
there will be some pressure on the currency as the central bank ends special currency swap
windows to banks raising funds abroad - which had brought US$25 bln in inflows since the
end of Sept’13.
7. Positive outlook for Indian stocks next week
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The US-Iran peace deal had a favourable impact on stock markets across the globe this
week.
This positive international development coupled with improved GDP data for the Indian
economy helped Indian stocks gain a strong 2.8% this week. Majority of the Asian markets
reported strong gains with the Japanese and Chinese indices clocking gains of 1.8% and
1.1%, respectively.
Rally in the Indian markets, on expectations of benign crude price and recovery in
economic growth, was marked by a strong rebound across the board. All the sectoral
indices ended the week in the green with stocks in interest-sensitive sectors mainly Capital
Goods (up 8.3%), Banking (up 4.3%) and Auto (up 4.1%) witnessing maximum gains.
Traders expect a positive bias for Indian stocks in the near term based on a mildly positive
GDP data, steady pick up in exports and a stronger rural economy supported by heavy
monsoon rains.
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8. Crude price near $ 92.72 per bbl in New York on Nov 29, 2013
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While US oil price ended at US$ 92.72 per barrel this week, the Brent crude settled at US$
109.69 per barrel.
Expectations that more Iranian crude will come back to the market capped prices this
week. Iran and six world powers clinched a deal on Nov. 24 to curb its nuclear program in
exchange for initial sanctions relief.
Oil traders are now eyeing ongoing disruptions and violence in OPEC member Libya. More
than 40 people were killed in an explosion at an army depot in southern Libya after locals
tried to steal ammunition, according to officials, the latest in a series of clashes highlighting
the government's inability to restore order.
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