Overview of Indian Economy & Fixed Income Outlook

Indias GDP: in a slowdown mode

GDP Snapshot (% YoY) Real GDP Agriculture Industry Services Consumption -Pvt Consumption -Govt Consumption Gross Capital Formation -Gross Fixed Cap Form.
Source: Central Statistics Office, Citigroup

FY10 8.4 1.0 8.4 10.5 8.1 7.0 14.3 15.6 6.8

FY11 8.4 7.0 7.2 9.3 8.1 8.1 7.8 11.1 7.5

FY12 6.5 2.8 3.4 8.9 5.4 5.5 5.1 5.5 5.6

FY13E 6.4 3.0 4.1 8.3 5.8 6.0 5.0 5.4 5.5

Industry contributing to slowdown

Source: Citigroup

Fiscal expansion since crisis

Fiscal expansion since crisis

Fiscal Deficit
The slippage in fiscal deficit can be attributed to cut in tax rates and increase in subsidies since the financial crisis.

Fuel subsidies have increased from 0.1% in FY08 to 0.8% of GDP in FY12
Given that the crude prices have fallen, still assuming crude @ $100 and govt share of losses at 45%, it amounts to nearly 0.5% of GDP (Rs 500 bn)

Fiscal Deficit in FY13

In FY13, the government has proposed the following:
Increased service tax from 10% to 12% Raised excise duties from 10% to 12% A cap on the subsidy at 2% for FY13

Tax revenue collections are achievable provided growth holds up Non Tax revenue includes Rs 400 bn from telecom Non Debt Capital receipts include disinvestment of Rs 300 bn dependent on market conditions Expenditure involves capping of subsidies at 2%. Difficult to achieve unless painful prices increases are implemented
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Inflation likely to be range bound

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% WPI core - manu-food

M ar -0 Ju 8 n0 Se 8 p0 D 8 ec -0 M 8 ar -0 Ju 9 n0 Se 9 p0 D 9 ec -0 M 9 ar -1 Ju 0 n1 Se 0 p1 D 0 ec -1 M 0 ar -1 Ju 1 n1 Se 1 p1 D 1 ec -1 M 1 ar -1 Ju 2 n12
Source: Bloomberg

RBI expects WPI inflation to be 6.5% by March 2013

Source: RBI

Extension beyond vertical line reflects the base effect going forward till Aug 12
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Inflation moving parts .

Agri commodities:
No major increase in productivity Rising Minimum Support Prices (MSPs)

Protein based items:

Shift in dietary habits with increasing per capita income

Commodities/Crude Oil:
Slowdown in global/Chinese economy helping in keeping soft outlook Suppressed inflation in mineral oil group assuming full pass through (3.54%)

Non food Manufacturing inflation:

Slowing growth has reduced pricing power of domestic corporates

Liquidity (LAF) to remain negative

150,000 100,000 50,000 -50,000 -100,000 -150,000 -200,000 -250,000
0 1 0 0 10 11 10 11 11 12 1 1 r-11 1 2 r-12 l-1 l-1 r-1 ay -1 vvyynnppa a a o o a a e e a a Ju Ju -J -J -M 1-M -S -N -M 1-M -S -N -M 1-M 111 1 1 0 0 1 0 0 1 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Source: Bloomberg

LAF (Rs crs)

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Depreciating INR
60.0 55.0 50.0 45.0 115.0 40.0 35.0 30.0 120.0 125.0 130.0 INR (LHS) JPMREER (RHS) 95.0 100.0 105.0 110.0

De Fec-0 M b- 07 ay 8 Ju -08 Se l-0 8 Nop- 0 8 Ja v-0 8 Apn-0 9 Ju r- 0 9 Au n-0 9 O g- 0 c 9 De t- 0 9 M c-0 M ar- 19 ay 0 Ju -10 Se l-1 0 Nop- 1 0 Ja v-1 0 Apn-1 1 Ju r- 1 Au n-11 1 O g- 1 c 1 De t- 1 1 M c-1 M ar- 11 ay 2 -1 2
INR-Indian Rupee, JPMREER- JP Morgan Real Effective Exchange Return Source: Bloomberg

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Current account deficit

As % of GDP Current a/c deficit Net Gold Imports Net Oil Imports Fx reserve External debt
NA: Not Available

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 -0.6 0.7 1.3 2.3 -0.3 -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 0.3 0.3 0.2 0.5 0.9 0.5 0.6 0.4 0.8 1.2 1.9 3.0 2.5 3.0 2.8 3.2 3.9 4.0 4.1 5.4 4.1 4.1 9.2 11.3 15.0 18.8 19.6 18.2 21.0 25.0 20.6 20.5 18.0 22.0 20.7 20.7 18.8 18.6 16.7 18.2 18.1 18.3 19.2 18.1

FY12 -3.8 2.3 4.9 15.6 NA

Avg. prices FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Gold price ($ per troy oz.) 272.1 277.7 325.5 377.6 413.9 476.6 628.4 765.8 867.2 1023.0 1293.5 1634.7 Oil ($/bbl) - Brent 24.9 25.0 28.5 38.0 55.3 66.1 72.7 98.5 62.7 80.3 110.9 118.8
Bulk of the deterioration in current account deficit is on account of gold imports.

Source: BofA-ML

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BoP marginal deficit likely

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External sector vulnerability indicators

Source: Bloomberg, HDFC Bank

Worsening but not as bad as in FY91

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Mitigating factors in the medium term

Global risk rally Lower oil prices Lower Gold imports Measures to tap NRI deposit Further relaxation of ECB norms / FII norms for debt

Dollar bond issuance targeted at NRIs like RIB (in 1998) and IMD (in 2000)

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10.0

4.0

5.0

6.0

7.0

8.0

9.0

10 year G-sec yield

Source: Bloomberg

10 yr yld (%)

Repo rate (%)

Ju nD 02 ec Ju 02 nD 03 ec -0 Ju 3 nD 04 ec Ju 04 nD 05 ec -0 Ju 5 nD 06 ec -0 Ju 6 nD 07 ec Ju 07 nD 08 ec -0 Ju 8 nD 09 ec -0 Ju 9 nD 10 ec Ju 10 nD 11 ec -1 Ju 1 n12
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Outlook in Summary
Inflation to be range bound going forward. Core inflation expected to fall gradually. Fiscal consolidation going to be challenging RBI to continue with OMOs and expect further rate cuts in the current fiscal Both long term and short yields should fall in the next six months

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Thank you

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