[T.S.R:16468] India: Time To Say Your Prayers (Credit Suisse)

Credit Suisse-Emerging Markets

India: Living On A Prayer

We forecast a tepid 2011-12 with GDP growth declining to 7.7 per cent, a sequential rise in interest rates by atleast another 75 bps, rising Bond Yields, rising commodity prices and earnings downgrades for most companies that rely on basic commodities for growth. And finally exporters will suffer as the Re/Dollar cross moves to Rs 42.

 

Without wishing to pour cold water on what is a very favourable long-term growth story, we believe India's macroeconomic fundamentals will disappoint the consensus in a number of respects next year. 

First, we think the main drivers of economic growth, including interest rates, the exchange rate, oil prices and world trade will turn from positive to negative influences on activity in the not too distant future. We have cut our 2011/12 GDP growth forecast to a bottom-of-the-range 7.7%.

Second, while the year-on-year rate of Wholesale Price Inflation is set to fall further in the next few months, it might bottom in early 2011 at around 6%.  

Our estimate suggests WPI inflation will trend higher through the rest of next year if commodity prices rise from current levels. We wouldn't be surprised if sequential rates of WPI inflation have already troughed.  

Third, a combination of more dovish comments from the RBI and falling yearon-year inflation rates has led most to believe that policy rates are at or very close to a peak. This has, however, been the consensus view for some time and we believe further upside rate surprises are in store. Our forecast is for a total of 75bp repo and reverse repo rate hikes by around the middle of 2011. 

Fourth, domestic liquidity conditions may ease somewhat, but we expect them to remain reasonably tight as lending growth continues to outpace the increase in deposits. 

So what does this mean for markets? For equities, the onus will likely be on companies to drive a positive wedge between the top and bottom lines of their profit and loss accounts. If this fails, then investors will have to hope that nothing comes along to stem the flow of liquidity emanating from the US. 

As for the bond market, our macroeconomic view presents something of a mixed bag. However, on balance, the fixed income team is modestly constructive. An important point to bear in mind is that the 10-year bond yield is highly likely to flatten or fall before policy rates have peaked. With the majority of the rate rises now behind us, the pace of tightening slowing and domestic liquidity easing a little, we should be at or close to the top in yields. 

Our foreign exchange analysts are looking for the Indian rupee to appreciate further over the coming 12 months, targeting a rate of INR42 against the USD. 

This is, however, largely a function of a weak USD view and the team is cognisant of the domestic risks surrounding the rupee. In particular, deterioration in global risk sentiment would likely hit the rupee harder than most other Asian currencies given the country's high current account deficit and equity-focused foreign inflows. 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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