With the worsening current account and fiscal deficits and rushed policy-making, Nomura feels that Indian economy will have a tough time bouncing back, with balance of payments issues to be the cornerstone of her recovery
In a Special Report, Nomura Singapore is bearish on the Indian economy, critical of the Reserve Bank of India (RBI) policies and sees the Indian rupee (INR) depreciating to 75 to the US dollar, from current levels. “Based on our FX valuation analysis, INR is still around 10% overvalued, which means that spot USD/INR could move toward 75 to reach an equilibrium value,” said the note.
Nomura feels that economic recovery would be difficult considering that the current account deficit (CAD) and fiscal deficit have grown too large, putting the economy in a precarious position from a policy-making perspective. “The ability of the government to stabilise INR over the medium-term will be more difficult than Indonesia (another country suffering from similar economic dilemma), as the country suffers from both a large current account and fiscal deficit. According to Nomura, the cumulative current account deficit has worsened from -4% of the gross domestic product (GDP) in 2008 fiscal to a whopping -16.7% of the GDP in 2013 fiscal. This is expected to lead to balance of payments (BoP) pressures within the next three to six months, resembling the 1991 economic crisis.
However, Nomura feels that the RBI (and the government) has damaged its credibility in its fight to stem the rupee slide by taking several ‘reactionary’ and short-term measures which are of little value in the long-term. The note says, “Apart from the liberalisation of FDI caps, most of the government measures were quick-fix solutions and are unlikely to yield major long-term gains. The RBI’s interest rate defence has also failed. An interest rate defence is never a costless strategy. The RBI wants to control FX but without any collateral damage to growth, which is impossible to achieve. In our view the problem is that the RBI is trying to achieve inconsistent goals, which sends confusing signals, increases volatility, and damages the RBI’s credibility.”
The ability to contain he deficit without damaging long term prospects is a key challenge for both the government and the RBI, particularly the challenge of repaying some of the short-term bonds maturing in FY14, amounting to $172 billion. Another key issue is question of cross-border loans, which are almost the same levels of the reserves, at $273 billion. Unlike portfolio flows (equity and debt), cross-border loans are related to bank operations, investments and trade credit. Yet, if you consider our foreign exchange reserves, it is low compared to the obligations. India’s foreign exchange reserves are currently worth $278.8 billion, down 6% from the beginning of the year. “Foreign equity holdings as a percentage of market capitalisation is at a multi-year high of 24.7%. However, India’s vulnerability relative to Indonesia’s looks even higher once cross-border loans and short-term external debt are taken into consideration. The risk of outflows (especially for India) is growing given slow growth, the prospect of rising inflation and mounting risks of negative credit events,” warned the report.
It is also pertinent to note that India has just roughly 6-8 months of import cover, the lowest levels since late 1990s. In other words, India has enough reserves to guarantee imports for the next six months if the economy were to come to a standstill or currency crisis blows over. The threshold level is four months.
To plug the current account deficit gap and raise funds, Nomura believes there are six options for the government and policy makers to consider, apart from exports.
With the election year coming up next fiscal, Syrian crisis blowing over and, more importantly, the Federal Open Markets Committee (FOMC) meeting coming up mid-September to decide the quantitative easing tapering timeline, there is only so much room for policy makers to manoeuvre and wriggle India out of the crisis in terms of capital inflows and outflows. India needs to export a lot more than normal. A lot depends on Rahuram Rajan and his actions when he becomes the RBI chief. But he does not have magic bullets.
“Continuing concerns on the growth outlook, rising credit risks, deteriorating bank asset quality and worsening fiscal pressures suggest that risks remain skewed to the downside over the next six months. Thus, we maintain our negative view on India’s economic outlook,” the report concluded.
Continuing concerns over India's growth outlook, rising credit risks, deteriorating bank asset quality and worsening fiscal pressures suggest that risks remain skewed to the downside over the next six months, says Nomura
India’s manufacturing purchasing managers' indexes (PMI) slipped into the sub-50 contraction zone at 48.5 in August from 50.1 in July – its lowest reading since March 2009. The decline was due to a sharp fall in the output and the new orders sub-indices.
"(India's) growth is going from bad to worse. India's real gross domestic product (GDP) growth fell to 4.4% in second quarter (Q2), and with the average PMI much lower in Q3 (49.3 in July-August versus 50.5 in Q2), it seems domestic demand weakened further in early Q3 as well. Continuing concerns over the growth outlook, rising credit risks, deteriorating bank asset quality and worsening fiscal pressures suggest that risks remain skewed to the downside over the next six months. Thus, we maintain our negative view on India’s economic outlook over next 3-6 months," says Nomura Financial Advisory and Securities (India) Pvt Ltd, in a report.
According to Nomura, India's domestic and external demand has weakened. The new orders sub-index remained in contractionary territory at 47.5 in August from 49.5 in July, even as the new export orders index fell to 49.8 from 52.4. This suggests that both domestic and external demand weakened further in August. According to the survey, orders fell most in the intermediate goods sector, while consumer goods producers recorded a slight fall.
Even the output sub-index contracted for the fourth consecutive month (to 47.5 from 49.8), indicating that weak demand, competition and persistent supply-side pressures are forcing Indian manufacturers to cut production as well as inventories. The finished goods inventory sub-index fell to 48.4 from 50.1, commensurate with weak output. The new orders/inventory ratio fell to 0.98 from 0.99 and has been below 1.0 for three consecutive months, which is indicative of weak future demand, Nomura says.
According to report, however, price pressures have now eased. It said, "The input price sub-index eased to a 57.8 from 60.6, while the output prices sub-index fell to 51.8 from 53.4. With the currency continuing to weaken, the lower pass-through to output prices reflects weak demand and suggests that margins are under pressure."
In a clarification, HDFC Bank told the RBI that since it could not get details from seven complainants out of 12, it could not resolve their grievances. However, one of the complainant left out by HDFC Bank spent Rs36 for over 15 days by making two visits to the Branch and 15 calls to retrieve his eight paisa
In April, Moneylife wrote about how customers of HDFC Bank were being harassed with its new know your customer (KYC) norms. Several people shared their experiences with us. Moneylife followed up with HDFC Bank and the Reserve Bank of India. Taking cognisance of the issue, RBI issued a notice to HDFC Bank seeking clarification. The Bank sent its reply to the RBI, however, stated that it could not get details from seven customers out of 12, including Avinash Murkute and hence, was not able to resolve these customers’ problems.
Mr Murkute says, “It is shocking that the signatory to clarification letter from HDFC Bank (to the Reserve Bank of India- RBI) has mentioned that I have not provided account details. How and why one shall provide his account numbers of closed accounts? One Madhurima Manmohandas of HDFC Bank did write and ordered me in June 2013, to provide my account number within seven days. If it had been a polite request, I would have responded to her in equally polite manner. This demonstrated how serious HDFC was in responding to the RBI. When they (HDFC Bank) cannot read letters by speed post and require 15 days to refund 8 paisa, why should one respond to the order from HDFC Bank?”
Here is the first person account from Mr Murkute about his dealings with HDFC Bank…
I have abandoned and deserted HDFC Bank and included them in the list of defaulter’s as they still owe me Rs36.00 towards cost of recovering 0.8 paisa from the Bank in a case where cheque was deposited of RsXXXXX.08 and credit was given of RsXXXXX.00 only. This was violation banking double entry accounting mechanism and provisions. The Bank and its Kothrud, Pune branch and branch manager took 15 days and two personal visits by me and 15 phone calls to their centre of excellence and state of the art customer (harassment) call centre and equally harassing grievance resolution nodal officers and appellate authority to credit the eight paisa in my account.
I have closed all my four accounts including demat account way back in 2009 and I have obtained closure confirmation letter of each account. For closure of demat account, they made me oscillate from one office to another like Bank, Branch, HDFC Securities and so on. What was given in writing by HDFC Bank’s corporate office was not acceptable to branches. What is more interesting that even the vice president of HDFC Bank for depository operations, named R Venugopalan (my record reference No.339/HDFC/ Depository Date: May 26, 2009) doesn't read and respond to written communications.
Many times, they refused to print entries in my passbook on flimsy grounds. At times, they insisted that new account should be opened through agents only.
In spite of my number 9********9 is included in do-not-disturb (DND) list, HDFC keeps calling me several times for opening demat account, deposit account, car loans, home loans Every time protest was lodged with HDFC’s corporate office and every time they replied that this will not happen again but (the calls) still continuing. Every time they advise me register separately with each office and each branch of HDFC. This is in violation of national DND which HDFC never respected.
Once HDFC Bank gave me a double credit of Rs160 due to human error. I was quick to point this to them, and then they adjusted this additional credit of Rs160 by debiting from my account. HDFC Bank should learn this sense of urgency and honesty and its training managers should try to impart to its senior management so that ground realities can improve.
In the year 2009, I could have eaten six Vada pavs and HDFC Bank have deprived of my six vada pavs ( Rs36.00) and the chief managing director of the Bank should be made to understood this agony. If RBI would like a written complaint and / or more information, they can take this as feedback for the same. Everybody gets a chance to be equal.