Economy
DBS report points to economic headwinds
Development Bank of Singapore Ltd (DBS) has forecasted 7.8% GDP growth for India in FY15-16, pointing out that the recovery would be gradual and uneven. A pick-up in auto sales and consumer goods production is a good indicator of the improvement of urban spending, it says. The upcoming pay commission hikes and a normal monsoon will lift consumption both in urban and rural areas. 
 
However, the report raised the concern that there is a clear disconnect between industrial production and manufacturing GDP. If we ignore base effect differences, industrial production rose by merely 2.2%, while manufacturing GDP jumped by 9.3%
 
Indian rupee has remained the worst performing currency in Asia in 2016. The report further forecasts rupee depreciation in the next few quarters and greater volatility in Q3CY2016. Non-resident deposits maturing in September-November 2016 is as event risk. The potential outflows on account of the maturity of these deposits could lead to a number of consequences. Firstly, there may be a short-term impact on domestic liquidity and a squeeze on the balance of payments position. It could also hurt banks' deposits growth. It estimates that USD/INR is estimated to trade between 66.5 and 72.3 for the rest of 2016. It estimates a rupee to dollar conversion rate of 69.6 in Q3CY15-16 and a rate below 70 in the next three quarters.
 
On the fixed income front, the report estimates that the 2-year and 10-year bond yields will reach 7% and 7.6% respectively by mid-2017. There is a small window for policy easing in Q3FY15-16 as disinflation has passed. It estimates that net exports will remain flat/ slightly negative. With respect to corporate earnings, there were early indications of a turnaround. However, a rise in input prices in the future may adversely affect margins. 
 
On a global scale, the report raises concerns about the decline in working age population in many countries. For instance, the working age population is falling by 1% every year in Japan. In Europe too, the working age population growth has fallen to zero/slightly below zero. In the US too, the working age population growth has slowed down to 0.4% currently from 1.3% in 2000. Labour force growth and productivity growth are components of GDP growth. The report states that due to the low labour force growth, the potential GDP growth rate in these countries is low. The potential GDP growth rates in Japan, Europe and US comes at merely 0.5% p.a, 1.5% pa. and 1.9% p.a., if we were to assume 1.5% productivity growth. The actual GDP growth rates in these countries exceed the potential GDP growth rates. Given this harsh reality in these countries, the report grimly states, “In short if you are worried about slow growth today, get used to it.” It states that rather than worrying about global growth being too slow, market participants and central bankers must consider the possibility that it is running pretty fast. 
 
With respect to Asia, the report mentions, “Asia's growth today amounts to US $ 1 trillion each year. This is equivalent to adding the GDP of an entire Germany to the world's economic map once in every 3.2 years. Even after estimates of slower growth, 10 years down the lane, Asia will add one Germany every 2.2 years. Asians should not worry about Brexit as Asia would replace UK and add 3 more on top of that, in the next 8 years.

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FCNR deposits maturity could make foreign exchange markets uneasy
Around $ 25 - $ 27 billion of foreign currency non-resident (FCNR (B)) deposits are expected to mature from September to November. There is a fear among many market participants that the rupee may become volatile by 2016-end due to the maturity of these deposits, especially if exports continue to decline. According to an SBI report, “Declining  export  performance could  be  already  adversely  affecting  the  exporters’  ability  to handle  the  currency  woes  and  hence  there  is  the  possibility  of forward  contracts  getting  rolled  over.” 
 
There is a possibility of poor export performance as the global macro-economic environment is weak. India's merchandise exports have been on a declining trend since December 2014. Goods exports from India have declined by around 6.7% to $20.56 billion in April 2016 as compared to the year ago period. The SBI report further states, “It  is  expected  that  the  expiry  of  these  FCNR  (B)  deposits  will  lead  to  outflow  of  dollar  liquidity  from  the  Indian markets  if  dollar  counter parties  (exporters)  renege  on  their  commitment.” In such a scenario, the RBI may intervene in the market to provide dollar liquidity from its reserves. This may lead to a liquidity squeeze in the rupee money market. Despite the fact that the RBI has hedged its swap positions, there may be maturity mismatch in these positions.  This may lead to disruptions in Indian forex and money markets. 
 
There are many ways to deal with this situation, says SBI. The first option is that the Reserve Bank of India (RBI) will accumulate dollar reserves up to September-November 2016 period. During the period of the maturity of these deposits, it could provide dollars to the market and allow the reserves to dip. The second option is that the Government may issue a Sovereign Dollar Bond to make up for the dollar shortage. It may do so directly or through institutions like India Infrastructure Finance Company Ltd (IIFCL) or Indian Railway Finance Corporation Ltd (IRFC). The third option is to provide relaxation in Cash Reserve Ratio (CRR) during the period of maturity of deposits. For instance, SBI estimates that a 1% reduction in CRR would infuse around Rs1,00,000 crore into the system. Another option is to relax Liquidity coverage ratio (LCR) restrictions during that point of time.  RBI may use combination of such measures to counter the problem. 
 
FCNR deposit is a kind of fixed deposit made by non-resident Indians with banks. At present, it is estimated that FCNR deposits account for around 1.7% of the deposits in the banking system. Earlier, in September 2013, during a currency crisis, the RBI had opened a window to banks to swap the fresh FCNR dollar funds in order to protect the falling rupee and build foreign exchange reserves. During the period when the window was open, banks mobilized a huge $34.3 billion and swapped them with the RBI. 
 

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COMMENTS

Hemant Chitale

6 months ago

The problem is that those FCNR deposits were at much higher interest rates than what would be offered for renewals or new bonds -- unless the RBI were willing to take the risk of higher interest rates again !

REPLY

MG Warrier

In Reply to Hemant Chitale 6 months ago

Yes. Interest rates have gone down globally. No denying that the deposits were received at a rate 'above normal'. Now, India has option to repay the deposits when they mature and accept fresh deposits @ present market rates. It was in this context I referred to swelling forex reserves. The worries are overdone by vested interests (including bankers!)

Tikam Patni

6 months ago

With exports falling, corporate capacity utilisation remaining poor, banks facing crisis in stressed assets, and govt remaining engaged in vote politics. ..we are up for very bad days ahead. ..

MG Warrier

6 months ago

Dr Subramanian Swamy reportedly called these deposits due to mature in another six months or so ‘a time bomb’. Perhaps, now on, analysts, economists and media may spend precious time and energy suggesting ways and means to handle the situation. It is their job. Unlike many outside think, banks keep an account of their receipts and payments and there is an ongoing review for Asset-Liability-Management. No deposit matures without the prior knowledge of the individual/institution which has accepted it. RBI Governor has already mentioned that there is no reason for worry about the availability of resources, even if these forex funds flow out of the country, which may not happen. Our Forex reserves position has improved by about $100 billion during the last 3 years or so.

Auto industry sees sustained recovery in May 2016
The automobile industry produced a total of 4,312,859 vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-May 2016 as against 3,875,828 in April-May 2015, registering a growth of 11.28% over the same month last year, according to a release from Society of Indian Automobile Manufacturers (SIAM).
 
The sales of passenger vehicles grew by 8.65% in April-May 2016 over the same period last year. Within the passenger vehicles segment, passenger cars, utility vehicles and vans grew by 0.50%, 39.37% and 6.69% respectively during April-May 2016 over the same period last year.
 
The overall commercial vehicles segment registered a growth of 17.12% in April-May 2016 as compared to the same period last year. medium & heavy commercial vehicles (M&HCVs) registered a growth at 21.49% and light commercial vehicles grew by 13.93% during April-May 2016 over the same period last year. 
 
Three Wheelers sales grew by 31.75% in April-May 2016 over the same month last year. passenger and goods carrier sales grew by 36.93% and 11.96% respectively in April-May 2016 over April-May 2015.
 
Two-wheelers sales registered a growth at 15.29% during April-May 2016 over April–May 2015. Within the two-wheelers segment, scooters, motorcycles and mopeds grew by 30.27%, 9.54% and 14.77% respectively in April-May 2016 over April-May 2015. 
 
In April-May 2016, overall automobile exports declined by 9.64%. While passenger vehicles and commercial vehicles registered a growth of 3.51% and 1.65%, three-wheelers and two-wheelers declined by 54.27% and 3.95% respectively in April-May 2016 over April-May 2015.
 

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