Credit Suisse’s dreambeat: Make money cheap

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.”


Government to divest 10% stake in EIL; aims to raise Rs800 crore

“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 lowers India’s FY13 growth forecast to 5.2%

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.


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