Citi expects EM Asia to outperform in 2011; says transformational boom in India to continue

In a 100-page global economic and strategy report, Citi Research says the multi-decade transformational boom in China and India will continue, not just in 2011, but for some years to come. It sees modest growth in industrial economies and expects the ECB and BoJ to hold rates in 2011, and the Fed too, well into 2012

Citi Research believes that the downside risks for housing in the US still linger. It expects the recovery to be moderate because of the lower contribution from the consumer. However, since inflation is low and the decline in unemployment has stemmed, monetary policy will be accommodating through 2011 and beyond. It thinks that the tax hikes being discussed would be deferred. Despite policymakers holding rates, "cyclical forces should gradually show through to modestly higher long-term interest rates," it says in a recent report.

In the Euro area, Germany will be an outperformer and there will be large divergence in its performance vis-a-vis fiscally-strained periphery countries. More importantly, Citi believes that "the sovereign debt crisis will continue in 2011 and beyond." Unless money supply, credit growth, and inflation become threatening, the European Central Bank (ECB) should keep interest rates at 1%.

For China, Citi expects inflation to be at the forefront. "We expect tighter monetary policy to control inflation, with higher interest rates and a stronger currency." Inflation will also be a major impediment to major reforms that will be initiated next year to raise household incomes, accelerate urbanisation, deregulate the service sector and correct input price distortions.

For India, Citi expects FY11 GDP at 8.4% and FY12 at 8.6%. The government will play a major role in this growth, with its employment programme and an emphasis on infrastructure. The good harvest and urban demand will support growth. Spend on infrastructure is expected to double to Rs40 trillion in the 12th Plan period (FY13-17) from Rs20 trillion in the current plan (FY08-12).

Citi argues that inflation in India should come off to about 6% in 2011 from 8.5% levels currently. It warns that there's a stickiness in prices of primary articles, possibly because of rising incomes, changing dietary patterns and stagnant yields; fuel prices could also rise, leading to higher inflation. It expects the "Reserve Bank of India (RBI) to hike rates by 25bps in Q1FY11 and by a further 50bps in the course of 2011, taking the repo/reverse repo rate to 7% and 6% respectively."

On the fiscal front, although things are better than in FY10 with the uptrend in tax collections and divestments (Citi expects the central government to surpass its budget estimate of 5.5% in FY11), the outperformance will be muted due to "the supplementary budget eroding almost all the surplus revenues from the telecom auctions and rising oil underrecoveries."

However, it is not so optimistic on the external account front. It points out that despite an uptrend in software exports and remittances, slower exports and higher imports will probably result in the current account deficit crossing 3% of GDP. It remains concerned about the composition of flows; recent trends indicate a deceleration in foreign direct investment (FDI). "Given the core forex theme of structural dollar weakness and India's strong domestic growth, we expect the Indian rupee will continue to strengthen to Rs43.5/$ by March 2011 and Rs42/$ by March 2012. Appreciation would have been stronger were it not for the rising current account deficit."

For Japan, Citi Research expects the economy to return to the growth path in 2011 with a sustained expansion of the global economy. However, policy-making remains a big overhang for Japan as "policymakers have yet to show a comprehensive plan to revive the economy."

The report says the United Kingdom is likely to show decent growth of about 2.5% YoY in 2011, aided by the low pound and improving business investment. The biggest problems will be inflation, loose monetary stance, cost pressures from a weak pound, another VAT hike and the destruction of excess capacity in the downturn. A rate hike could happen only late in 2011.

In Latin America, Citi expects rate hikes in most regions after a strong recovery and rising inflation in 2010. For CEEMEA (Central Eastern Europe, Middle East and Africa), Citi says "private consumption is likely to remain a drag on growth in the emerging European countries due to weak credit supply and the tight fiscal stance. The inflation outlook is conducive to slow and measured rate hikes."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.) 


Manappuram’s gold loan business crosses Rs6,000-cr mark

Mumbai: Manappuram General Finance and Leasing Ltd (MAGFIL) has reported a quantum jump in its gold loan business to cross the Rs6,000 crore mark, reports PTI.

The company's total gold loan outstanding as on 5th December, stood at Rs6,003 crore, a press release issued here today stated.

It has increased by Rs3,447 crore as compared to the level of Rs2,556 crore that prevailed on 31 March, 2010, adding Rs3,447 crore from April 2010, the release said.

The company has also increased its nationwide branch network to 1,641, with the addition of 636 new branches during the current financial year.

Recently, CRISIL has enhanced the P1+ credit rating limit of the company to cover its short-term borrowings up to Rs2,000 crore. In July of this year, the rating agency had assigned its highest rating of P1+ for the company's short-term borrowings programme up to Rs1,000 crore.


Banks headed for deposit war at the cost of profits?

With SBI announcing a whopping 100bps increase in deposit rates, will the banks engage in an all-out war for deposits? High margins and tight liquidity may soon be a thing of the past

The days of fat profit margins and dearth of liquidity may be a thing of the past for the Indian banking system, as there are strong indications that banks may be headed towards a full-blown deposit war to attract funds from the public.

The country's largest lender, the State Bank of India (SBI), seems to have laid the foundation for a further build-up in deposit rates with its 50-150 bps hike across various maturities. Already, ICICI Bank has also raised its rates by 25-30 bps.

The higher rates will likely put pressure on the margins; no wonder that bank stocks have been sold heavily over the past couple of days. The BSE Bankex is down nearly 10% over the past one month as stocks like SBI (down 14%), Axis Bank, Bank of Baroda (down 12% each) and ICICI Bank (down 7%) have suffered heavy losses.

According to Macquarie research, "In the coming days we are likely to see more banks offering rates that are going to be very competitive and soon we may see deposit rates of 8.5%+ for the one-to-three-year maturity bracket." Macquarie said in a report that as banks head into the last quarter of the fiscal, unwilling to bring down their credit growth targets and requiring to honour the disbursements pipeline, they could turn desperate for deposits and would likely enter into a deposit rate "war".

Another leading research firm confirmed this view. "Given the high spread between deposit rates (70bps is a lot), other banks will have no choice but to follow suit and raise their deposit rates as well, mirroring the trend witnessed in September-December 2008. Since these rates are being offered at the longer end of the yield curve, a higher proportion of deposits are likely to be mobilised in the longer-end buckets, implying high-cost funds locked in for longer periods of time," the research firm said in a report.

Although the Reserve Bank of India (RBI) has been driving up key rates over the past one year, the banking system has been slow to respond on deposit rates. So while banks' lending rates were jacked upwards, deposit interest rates remained where they were, providing a healthy net interest margin (NIM) for banks. Now that deposits are getting re-priced with a considerable lag, these hefty margins will likely be squeezed in the coming quarters.

Macquarie said, "The clear asymmetric rate increases that banks are witnessing are bound to exert pressure on margins, particularly for government banks. While lending rates (base rate/PLR) have moved up by 50-75bps, retail deposit rates have already moved up by 150-200bps since June 10 and wholesale deposit rates have moved up by 300bps. We don't think banks have sufficient pricing power as already evident by asymmetric rate increases. Since deposits re-price with a lag in India, we expect margin pressure to be more evident beginning from 3QFY11 onwards."

Banks have also been facing a liquidity crunch, given the shortage of deposit inflows relative to credit demand. To fund this gap, most banks were making use of the RBI's special borrowing window-the liquidity adjustment facility (LAF)-for some time now. The central bank had allowed a relaxation in the statutory liquidity reserve (SLR) requirements in government securities from 25% to 23%, in addition to offering a second LAF window, with both facilities open till 28 January 2011.

But with deposit rates inching upwards, banks may no longer have to depend on the overnight window to maintain liquidity. What had hurt banks in their ability to attract deposits from the public was the negative real rate of return on deposits. With inflation running at a high 10% until recently, bank deposits were not a viable option for depositors. Instead, these funds were being directed into other financial instruments like small savings schemes and even physical assets like gold. Now that deposit rates are on the upswing, public savings will surely find their way into this channel, giving banks sufficient room to breathe on the lending front.



venkatramana Rao

6 years ago

Now only the banks are started moving in the right direction,acting as per the suggestion given by RBI.The banks can easily give 8.5 %plus for for maturity period of1year to3 years to tap the the deposits of small savers.The savers also will get adecent return to make their livelihood a reasonable one.

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