Download Week ended June 28, 2013 Indian Economic Update

Week ended June 28, 2013
Indian Economic Update
Cabinet Committee on Economic Affairs (CCEA)
approved the coal price pass-through mechanism,
while it deferred the decision on gas pricing. The
Finance Minister indicated that the Cabinet is likely
to take up the issue of FDI caps towards mid-July.
India’
India’s Q4 Current Account Deficit (CAD) narrows
to 3.6% of the GDP
RBI released the Balance of Payment (BoP) data
for Q4 FY2013 and FY’2013 one day ahead of
schedule. Current account deficit corrected to
3.6% of the GDP in Q4 FY2013 from a historically
high 6.5% of GDP in the previous quarter. For
FY2013, CAD remained wide at 4.8% of the GDP
as compared to 4.2% of the GDP in FY2012.
Indices
June 21, 2013 June 28, 2013
10 year G-Sec
7.44%
7.45%
(7.16% 2023 Bond)
IIP
2.3%
(March 2013)
WPI Inflation
4.70%
(April 2013)
10 years US
2.53%
2.47%
treasury yield
Source: Bloomberg, Values taken at 17.00 IST
Financing the CAD a key challenge going forward
Indian Rupee has remained under stress in the
near term and breached the psychological level of
60 during the week and is currently trading
around 60.27. Though the depreciation pressure is
primarily on account of stress in the global
financial markets, led by hawkish FOMC comment
regarding Fed QE tapering, wide current account
deficit too poses a risk to the Rupee.
Though the capital flows were relatively benign in FY2013, going forward, CAD financing could pose
a challenge in light of tight liquidity scenario in the Global Financial Markets. Therefore, in the
medium to long term, steps need to be taken to narrow the CAD, through efforts to boost exports
sector performance. In this regard, enhancing productivity through higher investment in the
manufacturing sector is a crucial step in the right direction. Meanwhile, the recent steps taken to
discourage gold imports, should also improve CAD.
India registered a Balance of Payment (BoP) surplus of USD 4 bn in FY2013 as against a deficit of
USD 13 bn in FY2012, Fed QE tapering key risk to financing the CAD in FY2014.
Global Update
FED Chairman, Bernanke said the same day that the Fed may begin dialing down its quantitative
easing this year and end it in mid-2014 if the economy is achieving the central bank's objectives.
US economic data came better than expected, in terms of key data releases, durable goods orders
rose by 3.6% in May, business spending plan was up 1.1%. Other reports showed that new singlefamily home sales were near a five-year high in May while the consumer confidence came at its
highest level in more than five years. Overall, the data suggest that the US economy has started to
pull out of a soft patch and it supports the Federal Reserve's view that risks to the economy have
lessened.
On the other hand, US Commerce Department noted that the economy expanded at a slower pace of
1.8% qoq (annualised), compared with a previously reported 2.4%qoq (annualised) pace. With the
downward revision of Q1'2013 GDP data, the pressure of Fed QE tapering have eased somewhat.
Equity
Indian stocks started week in red amidst negative
cues from Asian peers. Soon it turned green,
aided by firm cues from European peers. Valuebuying in select stocks like oil and gas and
capital goods aided the benchmark indices.
Further depreciation in the Rupee weighed on
expectations of a rate cut by the RBI in its next
policy meeting kept indices under pressure.
Equities rebounded sharply, tracking positive
global cues. A narrowing of India's Q4 FY2013
CAD to 3.6% of GDP from previous quarter's
print of 6.7% of GDP aided sentiment. Also,
broad based value buying by investors, kept the
benchmark indices supported.
Indices
June 21, 2013 June 28, 2013
Change
BSE Sensex
18774.24
19395.81
3.20%
Dow Jones
14799.4
15024.49
1.50%
FTSE 100
6116.17
6240.49
1.99%
Nikkei 225
13230.13
13677.32
3.27%
Hang Sang
20263.31
20803.29
2.60%
Source: Bloomberg, Values taken at 17.00 IST
The Cabinet Committee on Economic Affairs (CCEA) approved a new method for gas pricing, in line
with recommendations of the Rangarajan Committee. CCEA also approved a hike in the minimum
support price (MSP) of Kharif crops for the 2013-14 crop year. BSE Sensex rallied 520 points, Nifty
ends nearly 160 points up as CCEA approves gas price hike supported by positive global cues on last
trading day of the week.
Stock market ended week in green, Sensex by 3.20% and Nifty by 3.08%.
Debt
The 10Y benchmark bond yield rose 12 bps to
end at 7.43% last week, its biggest weekly rise
since early August-2012, amidst continued FII
debt sell off. The sharp Rupee depreciation has
further exacerbated losses in gilts, given that it
poses a constraint towards monetary policy
easing.
This week, Indian Government bonds were
volatile as sharp depreciation in the Rupee
weighed on expectations of a rate cut by the RBI
in the next policy meeting. Movement in US
Treasuries kept influencing gilts during the week.
Yield Curve has steepened sharply
Source: Bloomberg, ICICI Bank Research
Recovery in Rupee towards the end of the week boosted sentiments, sharp decline in FY2013 CAD
and increase in BoP surplus provided support to gilts. LAF has improved sharply in this month on
account of a sharp increase in Government spending.
As the volatility in the markets persists amidst persistent Rupee depreciation and rise in US treasury
yields coupled with domestic supply pressures, the bond markets are likely to remain under
pressure.
The 7.16% 2023 bond yield closed at 7.45%, higher than previous week close of 7.44%.
Gold
Post rally in gold prices on Friday, gold was trading lower, hovering around the lowest level since
September 2010 amidst broad based speculation of tapering of bond buying by the Fed and significant
Dollar strength.
IMF report showing that Central Banks of Turkey, Russia and Kazakhstan increased their gold holdings
in May provided support to the yellow metal. However, Gold prices fell sharply as positive US
economic data releases added to speculation of tapering of Fed's asset purchases. Strength in the US
Dollar coupled with weak investment demand for the bullion further weighed on prices.
Downward revision in US Q1 GDP data, weakness in the Dollar and value buying supported gold
prices towards end of the week. However, gold prices slipped sharply on the back of strength in the
Dollar and uncertainty surrounding the duration of the Fed's bond-buying programme.
Oil
Last week Brent declined amidst continued
strength in the Dollar coupled with concerns
over economic recovery in China, following the
recent credit-crunch faced by banks.
INR corrected following the Fed rhetoric
However, prices received some support on the
back of value buying after the recent losing
streak and continued geopolitical tensions in the
Middle East early this week.
Prices also remained supported as data released
by US Energy Department showed that refiners
in US boosted crude processing rates to 90.2%
last week, the highest since this year. However,
the report also showed that crude inventories
rose by 18,000 barrels last week, which capped
the upside in prices.
Source: Bloomberg, ICICI Bank Research
Currency (USD / INR)
The depreciation pressure on Indian Rupee
persists and USDINR tested the level of 60.71
during the week. The pressure on the INR stems
partly from relatively hawkish FOMC comment,
trade deficit and Capital outflows from India.
The currency received support from the Q4
FY2013 BoP data releases which showed a
significant improvement in CAD and increase in
BoP surplus. Dollar sales by banks and exporters
coupled with firm gains in domestic stocks
further supported the Rupee. However, strong
month end Dollar demand by oil importers
capped the downside in the USDINR pair.
Indices
June 21, 2013 June 28, 2013
Change
Gold spot ($/ounce)
1296.42
1202.22
-7.84%
Brent ($/bbl)
100.91
102.87
1.91%
WTI ($/bbl)
93.69
97.27
3.68%
USD / INR
59.2675
59.39
-0.21%
DXY Index
82.318
82.894
0.69%
EUR USD
1.3122
1.3069
0.41%
Source: Bloomberg, Values taken at 17.00 IST
Overall while the currency is likely to witness heavy volatility in line with other EM currencies. We
expect some stabilisation from the current levels on account of prospects of improving domestic
fundamentals and policy action.
We believe that the Dollar Rupee pair will trade most of the time within 56-58.5 band, although
intermittent spikes beyond our range cannot be ruled out as global market volatility will continue
unabated.
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