Credit Suisse says that the government needs to persuade RBI governor D Subbarao to boost growth and lower debt servicing costs by reducing interest rates. That’s classic pitch by a brokerage that wants a bull run on the back of cheaper money.
Credit Suisse, an international brokerage has said in its recent report on the Indian economy that while the budget will be influential, finance minister P Chidambaram should work hard to both help the rate cutting cause and avoid a sovereign debt downgrade in 2013.
Economists in India feel that wholesale price inflation remained stubbornly high, despite the weakness of activity and commodity price inflation, throughout 2012. Credit Suisse argues that it is easy to give up hope of seeing a material decline in price pressures even in 2013. There is no statistically robust evidence of a structural increase in inflation and the modelling work (by Credit Suisse analysts) suggests that core and headline WPI inflation will drop below 4% and 6% respectively by mid-2013. If this is right then the controversial view of another 125 basis points (bps) of repo rate reductions seems perfectly plausible, according to Credit Suisse analysts. After all, brokerages love nothing more than low interest rates which create a nice bull market. Analysts have shifted the timing of the final move to July from March, still expecting a 50 bps cut on 29th January.
On the forex front, Credit Suisse’s quantitative analysis suggests that the current account deficit will still shrink in 2013. Stronger growth bodes well for a lower fiscal deficit, while the government could surprise many with a tighter-than-expected February budget. Although the brokerage expects global import demand to strengthen in 2013 to the benefit of Indian exports, industrial production in India is also set to pick up, boosting imports.
Credit Suisse is looking forward to a further rally in local currency sovereign bonds, with the 10-year yield likely to fall at least as low as 7.5% by mid-year, also helped by the diminishing prospect of a near-term ratings downgrade. Although it finds it hard to be structurally positive about the currency, it anticipates a short-lived rally, most likely in the March quarter of 2013.
In its projections for the year 2013, Credit Suisse observes, “barring significant upside food and/or fuel price shocks we expect headline WPI inflation to surprise the current market consensus of 7.6% in 2012/13 and 6.5% in 2013/14 on the downside. We are looking for figures of 7.4% and 6% respectively (changed from 7.2% and 6.2% previously).”
Credit Suisse in its projections also points out “In 2012/13 as a whole we now expect a trade deficit of $195 billion (10.6% of GDP), shrinking to $175 billion in 2013/14 (8.3% of GDP). These in turn are likely to be associated with current account deficits of around $80 billion (4.4% of GDP) in the current financial year and $65 billion (3.0% of GDP) in 2013/14. While the former is higher than the last forecast of 4% and above consensus, the latter is quite a bit lower than the 3.5% figure, previously expected and below consensus.”
On GDP growth, the analysts from Credit Suisse say, “We have made a small further downward adjustment to our 2012/13 GDP growth forecast to 5.7% from 5.9%, while opting to leave our 2013/14 forecast at 6.9% (the consensus is at 5.5% and 6.5% respectively). For the record, we are expecting growth to average an above-trend 7.5% in 2014/15, assuming the interest rate views, described below, are correct.”
On the bond market, Credit Suisse is optimistic despite threats from rating agencies like Fitch and predicts, “On the basis of a 125 bps of repo rate reductions our bond strategist is looking for the 10-year yield to fall at least as low as 7.5% by the middle of the calendar year.”
On rupee predictions, Credit Suisse is “looking for the rupee to be Rs53.50 against the US dollar in March, before dropping back to Rs56.5 by the end of 2013.”
“We expect to get around Rs800 crore at current prices,” finance minister P Chidambaram told reporters after the meeting of the Cabinet Committee on Economic Affairs (CCEA), which approved the disinvestment in EIL
New Delhi: The government has decided to offload its 10% stake in consultancy major Engineers India (EIL) through a public offer, which may fetch it around Rs800 crore this fiscal, reports PTI.
“We expect to get around Rs800 crore at current prices,” finance minister P Chidambaram told reporters after the meeting of the Cabinet Committee on Economic Affairs (CCEA), which approved the disinvestment in EIL.
The disinvestment will take place through Further Public Offering (FPO), he said.
Mr Chidambaram expressed the hope that disinvestment of the leading engineering consultancy firm would happen this fiscal.
After the disinvestment, the government’s shareholding in the company would come down to 70.40%. The paid up equity capital of the company, as on 31 March 2012 was Rs168.47 crore.
The government holds 80.40% stake in EIL, a ‘Miniratna’ firm. In 2010, it had divested 10% stake through an FPO in EIL.
To a query, Mr Chidambaram said, “The OFS (Offer for Sale) mechanism is not available in this case”, as the company is already compliant with market regulator SEBI’s public holding norms. Besides, it is not in top 100 companies in terms of market capitalisation.
The government used the OFS route, popularly known as auction method, to divest its stake in NMDC and Hindustan Copper this fiscal. SEBI introduced OFS to help companies achieve minimum public holding norms.
The government has proposed to raise Rs30,000 crore by way of disinvestment in 2012-13 and so far it has been able to realise just over Rs6,900 crore. Disinvestment of Oil India and NTPC is lined up for January and February.
EIL is leading provider of design, engineering and project management and consultancy services firm for the hydrocarbon sector.
HSBC said the fiscal and current account deficits have turned ‘uglier’. The recent reform push, if sustained, should help lift growth and ‘beautify’ the twin deficits, but it will take some time
New Delhi: HSBC has cut India's growth forecast for this fiscal to 5.2% from 5.7%, citing insufficient progress on structural reforms and slow implementation of infrastructure investment projects, reports PTI.
HSBC has lowered India's growth forecast for this fiscal to 5.2% from 5.7% projected earlier, and for financial year 2013-14 to 6.2% from 6.9%.
HSBC said the fiscal and current account deficits have turned ‘uglier’, but the recent reform push, if sustained, should help lift growth and "beautify" the twin deficits, but it will take some time.
“We think the reform process will take time and it will likely be another three years before growth returns to 8% on a sustained basis,” Qu Hongbin MD and co-head Asian Economics Research at HSBC said in a research note.
Growth is expected to recover from 5.2% the current fiscal to 6.2% in 2013-14 and further to 7.5% in 2014-15.
Meanwhile, rating agency Fitch warned this week of a downgrade in India's sovereign rating in the next 12-24 months citing slowing GDP growth and weak public finances.
In April and June last year, another rating agency S&P, had warned of further downgrades, which would put India into a junk status from the current lowest investment grade rating of BBB-.
HSBC, however, lauded the government’s reforms push and said: “All in all, policy in India is moving in the right direction and the reforms will likely continue to inch forward, although much still needs to done and some of the bills may not passed in the near term.”
“However, it is important to be realistic about how long this will take. These types of policies need time to kick in,” the report added.
HSBC said India is likely to see a gradual recovery in growth as reforms process gathers pace and implementation of infrastructure projects pick up, which in turn would help alleviate supply side constraints and slowly revive the investment cycle.
Moreover, a gradual stabilisation of global economic conditions during 2013 would also help support the moderate recovery, HSBC said.
In the first half of FY13, the GDP clipped at a poor 5.4%, and the government expects to close the fiscal year under 5.7%.
Over the medium term it is crucial for the government to continue the consolidation efforts at both the central and state government level, to achieve fiscal sustainability, which would eventually help to bring growth back to the levels seen a few years ago.
Earlier in September last year, HSBC had cut India’s growth forecast for 2012-13 to 5.7% from 6.2% projected, citing lack of 'reform traction' in the country and weak global economic backdrop.