Only SME, mortgage, real estate, construction and roads sectors reported meaningful growth in October 2013, reports Nomura Equity Research based on RBI released sector-wise monthly loan data
As of October 2013, aggregate non-food credit growth was 17% y-y (year-on-year), with primary contributions from power (25.9% y-y), SMEs (small and medium enterprises 25.8% y-y), NBFC loans (non-banking finance companies loans 22.1% y-y) and mortgages (19.3% y-y). Loan growth for the industry sector ex power was 12.1% y-y. Annualized YTD (year-to-date) non-food credit growth was 12.7%, with four sectors (mortgage, power, NBFC and service SMEs) accounting for 53% of this growth. Month-on-month (m-m), SME, mortgage, real estate, construction and roads sectors have reported meaningful growth. These trends have been analysed by Nomura Equity Research in its Quick Note on RBI released sector-wise monthly loan data for October 2013.
Within SMEs, service sector SMEs continue to show very strong loan growth of 28% y-y, while manufacturing SME loans picked up this month to report 23.6% y-y growth. Agri loans were up 8% annualized YTD, much better than the usual seasonal trend of reporting a decline over this period, says the Quick Note from Nomura.
With loans to NBFCs coming off m-m, the big growth driver within the services segment was retail trade growing at 29.5% y-y. Loans to transport operators picked up a bit to 8% y-y. Services ex-SME growth was at 19.6%. Commercial real estate loans increased sharply in October 2013 to report 21.1% y-y growth, points out Nomura.
Since July 2013, the RBI’s move on hiking the MSF (Marginal Standing Facility) had driven a shift in corporate borrowing from the bond market to bank loans, but this trend has seen some reversal into October 2013, particularly for NBFCs and petrochemical sectors, where the loans outstanding dropped Rs260 billion m-m after having gone up by Rs685 billion from July to September 2013, says Nomura.
The Nomura analysis for the bank loan and deposit growth trends is given below:
The trend for priority sector lending is shown in the chart below:
Nifty and Sensex traded weak throughout the day as positive manufacturing data from US has strengthened case for tapering
As suggested last week, the stock market is in the process of giving up some of the recent gains. The weakness has surfaced as the US reported strong factory activity, which raised expectations that the Federal Reserve could taper sooner than later. The markets opened Tuesday lower, rebounded into the green during the morning session for a while before falling back into the red where it stayed for the rest of the session. The fall was cushioned by metals, commodities and realty which were buoyed after yesterday’s positive PMI data.
The BSE Sensex opened down at 20,857, hit an intra-day high of 20,927 and then trended down to an intra-day low of 20,817 before closing at 20,854 (down 43 points or -0.21%). Similarly, Nifty opened down at 6,204 briefly rebounded to hit an intra-day high of 6,225 then trended down to hit an intra-day low of 6,191 before closing at 6,201 (down 16 points, or -0.26%).
Most of the NSE indices fell today. Only a few such as metals, commodities, realty, energy and media have finished in the green. Media and realty finished strong moving up 1.08% and 1.17% respectively.
Of the 50 stocks on the Nifty, 22 advanced and 28 declined, indicating weakness. The top gainers were GAIL (3.06%); BHEL (2.76%); DLF (2.59%); Jindal Steel (2.54%) and NMDC (2.31%). The top losers were IndusInd Bank (-1.82%); Kotak Bank (-1.63%); Dr Reddy (-1.42%); HCL Tech (-1.32%); L&T (-1.27%).
According to Reuters, Indian silver imports jumped 40% to 338 tonnes in October from 241 tonnes in September, as per GFMS, driven by demand during the festivals and weddings season that starts from October and tapers off by early May. The price of silver in COMEX stood at $19/ounce. UBS has cuts its silver forecast to $20.50 for 2014, from $25.
Ratings agency CRISIL stated that Indian fiscal deficit is expected to come in at 5.2% of GDP for FY14, which it also expects CAD to inch up higher in Q3-Q4 FY14 to 3.1% of the GDP in FY14. CAD has reduced sharply due to lower trade deficit numbers.
Asian markets were mixed too, spooked by tapering talks. However, Tokyo’s Nikkei finished up 0.61% because the Japanese Yen weakened to 140/Eu for the first time since October 2008. It has weakened both against the dollar and Euro, making exports look good.
All European markets were trending down, too. France’s CAC-40 is down nearly 1.50% at time of writing this piece, while FTSE is down 0.80%.
US markets dipped on Monday despite good manufacturing data. The Institute for Supply Management (ISM) said its index of national factory activity rose to 57.3 in November—its best showing since April 2011—from 56.4 the prior month. This week will see a slew of important data namely: ADP private payrolls and ISM non-manufacturing numbers on Wednesday, GDP on Thursday and finally nonfarm-payrolls report caps on Friday. US stock futures were trending down in early trade.
In their latest note, Morgan Stanley has revised upwards their Indian economy growth estimates for 2013, 2014 as well as 2015. At the same time, it is cautiously optimistic about Indian economy prospects
Morgan Stanley believes that the Indian economy will be able to achieve 6% growth by 2015 from the current stagflation-type economic environment. It has revised and raised its Indian economy growth expectations for this year end as well as 2014, to 4.7% and 5.1% (India’s GDP grew at 4.8% as per data released on 29th November.) The note said, “We are lifting our 2013 and 2014 GDP growth estimates to 4.7% and 5.1%, respectively, from 4.4% and 4.6%.” It has revised its updates based on the following factors: delay in QE taper, improving the external funding environment; short-term policy fixes in the form of aggressive control on gold imports and FX swap-related dollar flows; better than expected export growth; and better than expected farm output.
The bullish and bearish scenarios
Morgan Stanley has plotted three outcomes for the Indian economy: bullish scenario, base scenario and bearish scenario. In the bullish scenario, it believes India will grow at 6% by 2014, while in the bearish scenario it believes that the Indian economy will grow at 4.2% by 2014. The below chart depicts their expectations.
What India must do to overcome challenges?
When it comes to forecasting, Morgan Stanley is cautiously optimistic and believes that 2014 would be the year of “adjustment” for the Indian economy, or the year at which the Indian economy will recover, provided certain challenges are overcome, and will also hinge on the outcome of the 2014 Indian elections. According to Morgan Stanley India must do three things:
However, to achieve all these collectively require the government as well as regulators like Reserve Bank of India (RBI) to initiate several policy actions and reforms, particularly increasing Indian household savings.
The note said, “The government sector will need to continue to be on a path of fiscal consolidation, ensure that rural wage growth do not spike up, and boost growth via policy reforms that will help to improve investment. These measures will help to improve productivity growth and moderate inflation pressures. At the same time, the central bank will also need to manage real rates in a way that incentivises households (savers) to increase their allocation towards financial saving (deposits) and away from gold. As deposit growth is lifted, liquidity for the banking sector (as measured by loan-deposit ratio) will also improve simultaneously, which can then be transmitted towards lower interest rates for the corporate sector.”
High inflation hurting, savers flocking to riskier assets: gold and real estate
High inflation has eaten retail investors savings, thus discouraging households from keeping money in bank fixed deposits and savings account (aka cash), and instead are moving to more risky instruments such as gold and properties. The note states, “High CPI inflation has kept real interest rates negative since the credit crisis, encouraging households to reduce financial savings and increase allocation to gold and real estate.” This has put a dent to the CAR. However, Morgan Stanley also expects inflation to moderate a bit. It says, “In our base case, we expect CPI inflation to finally decelerate to 7% in a sustained manner by December 2014 after five years of average inflation of 10%.”
Morgan Stanley states that one of the most important things the government must do is to encourage household savings. The note states, “Adjustment of the fiscal deficit and resultant deceleration in CPI inflation is critical to allow for increase in public saving and increase in household financial saving (deposits).”
RBI desperate measures to reduce CAR
In order to beef up household savings and prevent further deterioration in CAR, the government imposed controls on gold imports and increased dollar inflows via FX swaps (and thereby restricting rupee downfall. Morgan Stanley says, “These two near-term policy fixes will improve India’s balance of payments position by a combined US$50-55bn, thereby reducing the external pressures in the near term,” and “alleviate upward pressure on short rates.”
Banks in trouble
Since household savings is low, banks have had to rely on other sources to augment its deposit base. Moreover, banks are to blame as well. Their reckless lending has led to impairment of loans. The double-whammy of poor deposit growth and high credit growth has put further stress on bank balance sheets. As per Morgan Stanley, public sector banks impairment of loans stood at 10%. Public sector banks will have to slow down and lend less or else be recapitalised to stimulate growth without a slowdown. The note said, “We believe that as public sector banks provision fully for the underlying non-performing loans, their ability and willingness to lend for new investment will be constrained unless the government takes up a quick recap of their balance sheets.”
Moneylife had predicted this mess last year itself, in July, that this would snowball to a major issue. You can read the Cover Story here. With the banking system in trouble, Morgan Stanley expects capex, which depends on credit, to slow down and remain constrained within the next 12 months.
Exports the key to growth turnaround
Apart from controlling inflation, exports will be a key to bridging the CAR divide and GDO growth. Because domestic demand will be restrained viz low spending, low savings and such, the external sector becomes a catalyst. Morgan Stanley says, “The key factor that will influence the growth outlook in the near term will be external demand.” They also say, “We expect services exports to follow the trajectory of goods exports, showing recovery in the next six months. In this context we expect external demand to provide support to slight recovery in overall growth over the next three quarters.”
However, in order for this to happen, Morgan Stanley believes that the government must do two things to improve productivity: