Rupee recovery will help RBI cut lending rates: Rangarajan

The Reserve Bank will have greater room to cut lending rates if the pressure on the rupee eases, the Prime Minister's Economic Advisory Council chairman C Rangarajan said today.

 
"On the last occasion, the decision took was largely influenced by external sector considerations. WPI was showing downward sign and non-food manufacturing inflation was below 3%.
 
"But the pressure on rupee prevented the RBI to go in that direction (of policy easing) and it took a pause. And therefore, if the pressure on the rupee eases, then it will give greater room for the Reserve Bank," Rangarajan told reporters on the sidelines of an event.
 
He was speaking here on the occasion of Statistics Day.

UPA’s gas price move isn’t reform, it is a ticking time bomb ? > Real reform is what the US did with shale gas. Sorry, Mr Chidambaram, we can’t buy this.

UPA’s gas price move isn’t reform, it is a ticking time bomb

The UPA has passed off mind-boggling foolishness as “reform” and the stock markets have had their weekly shot of adrenalin, with the Sensex soaring 520 points yesterday.
The celebrations will be short-lived, for the government’s decision to double natural gas prices from $4.2 per mmBtu to $8.4 per mmBtu from April 2014 is neither reform, nor sensible politics, nor good economics.

Rupee to tumble beyond 60? :: Karvy

Rupee to tumble beyond 60? Unlikely
INR depreciated sharply in latter half of May’13 and has continued to remain under pressure. Widening trade deficit
coupled with no respite from the capital inflows has pressurized the currency since May’13. Sharp spike in gold imports
in Apr‐May’13 with weaker exports is one of the main reasons for dwindling of the exchange rate. On anticipation of
ban in gold imports, banks imported significant portion of gold in May’13. Even after sharp INR depreciation of nearly
10.8% since the beginning of May’13, we do not expect any quick recovery in export growth as the growth is more a
function of global demand than currency driven. However, due to sticky nature of aggregate imports, we expect the
import bill to turn costlier and trade gap to widen further.
Currency in Real terms (based on REER 36 Trade weighted 04‐05 series) has depreciated by only 6.9% since the
beginning of the series while in Nominal terms the depreciation has been quite stark at 13.8%. The gap between the two
series is the sharpest gap observed in the entire series. Stagnation in real net inflow of foreign currency assets is the key
reason for rupee depreciation and we can see a new base of INR 56 for FY14. Delay in augmenting stable FX resource
will push rupee to newer lows. FX reserves have declined sharply by USD 26.7bn since 2008. Depleting foreign exchange
reserves have adversely impacted domestic liquidity. This leaves limited room for RBI to intervene and stall the sharp
depreciation of the currency.
Nearly 50% of the CAD financing in Apr‐Dec’12 was through the route of FII inflows. Since reversal of these inflows
can be immediate it augmented the sensitivity of the currency to the global events. Trimming of Fed stimulus package
by the year end has considerably narrowed down the interest rate differential between US and Indian bonds. However,
the rate differential is still large as compared to earlier years. This has triggered major reversals in FII debt investment
and other Interest sensitive instruments.
Our View:
Depreciation in rupee is likely to trigger imported inflation risks. Some of the food items such as pulses and oil seeds;
power & fuel items and precious metals & fertilizers are likely to see upward swing in prices. Adverse impact on
petroleum subsidies is also likely; as with every depreciation in rupee under recoveries increases by INR 75‐80 bn. So
depreciation of INR 5 has augmented the under recovery by INR 300 bn.
Immediate requirement for attracting sustainable long term inflows to finance CAD is necessary to mellow down the
volatility in the rupee. We do not expect government to raise reserves through NRI bonds as the spreads have corrected
sharply and there has been a huge influx in NRI deposits (high interest rates of 8.75%) in past few years. We can expect
influx in inflows in Real estate. However, we expect currency to remain under pressure as significant portion of CAD is
financed through short term inflows. On the trade deficit front, with join efforts taken from the government and RBI to
tackle the burgeoning gold imports we expect gold imports to remain subdued in the remaining months. Gold imports
on an average are nearly 26.0% of trade deficit lowering of gold imports will have positive impact on CAD. We expect
average INR to be at 56 while we expect INR to remain volatile and range in between 55‐59 in FY14.

UBS Investment Research :: Show me the money

UBS Investment Research
Macro Keys
Show me the money
The announcement of the Federal Reserve that it might, at some point this year,
consider buying fewer bonds in the US Treasury market has been met with
consternation in some quarters. There is a common misperception that the
Federal Reserve’s liquidity pumping operations must surely have flooded the
world with a tidal wave of cash, and so the turning off of the taps will lead to
some kind of draining of that cash with significant implications for markets.
As Stephane Deo and our asset allocation team have pointed out, there are
clearly implications from the Fed slowing its liquidity purchases. Implications
for the domestic US economy were covered by Maury Harris in the Macro
Keys “Life after QE” (21 June). However, the direct impact of dollar cash on
the global economy is conspicuously absent. Following the money trail does
not lead to tidal waves of cash floating the world’s financial market. US cash
flooded domestic checking accounts, not international markets
The following chart shows the quarterly acquisition of financial assets by the
Federal Reserve, accompanied by the quarterly acquisition of foreign bonds
and equities by US nationals. Clearly, the money printed by the Fed has
massively outstripped the inclination to purchase foreign securities from US

Utilities - Intent to improve coal for IPPs, modalities not clear :: Deutsche bank,

Utilities - Intent to improve coal for IPPs, modalities not clear [Abhishek Puri]
Press reports (Hindu, 21 Jun’13) suggest that the Cabinet Committee on Economic Affairs has approved the coal price pass-through mechanism. Key decisions – 1) Coal India will sign fuel supply agreements (FSA) with all 78 GW capacities – additional 16GW capacities approved to include cases of tapering linkage. Fuel supply will start after power purchase agreement (PPA) is signed. 2) Coal India annual supply quantity will be limited to 65/65/67/75% for FY14/15/16/17 for domestic coal and balance coal to meet 80% in FSA will be met through imports either by Coal India or directly by power generators. 3) Higher cost of imported coal will be allowed as a pass-through in tariffs. Ministry of Power (MOP) will issue advisory to Central Regulator (CERC) and State Regulators (SERC) to develop modalities for pass-through.
Indian Infrastructure - Needing much more than help from the weather gods [Manish Saxena]
We are encouraged by the monsoon, which is above normal, widespread and could help arrest the dip in India's water tables. This is good news for the economy as a whole, as power deficits decline, both from lower demand from the subsidized agri sector and higher supply from low-cost hydro. However, for the majority of infrastructure projects, built on structural shortages, this would mean a push-back in earnings. Notwithstanding strong 2H demand, we cut Coal India estimates by 4% to factor in the likely H1 miss, similar to cuts we made for the cement companies. Even for DG sets, sales may be pushed back, not good news for CUMM (Hold) and merchant power player IPPs.
Indian IT Services - Currency tailwind for the sector; HCL Tech and TCS key beneficiaries [Aniruddha Bhosale]
In our view, HCL Tech and TCS will be the main beneficiaries of the recent rupee depreciation. Our sensitivity analysis suggests that, ceteris paribus, for every 1% depreciation of the INR vs. the USD, earnings of the top-tier Indian IT service companies are likely to increase by 1.5-1.9%, while EBIT margins will be up 20-25bps in FY14E. We believe HCL Tech and Infosys are the most likely to post better-than-expected margin performance if the rupee weakness persists, while TCS will reinvest the gains from the weaker rupee to improve its top line. We reiterate our positive view on the sector, with TCS and Tech Mahindra our top picks.
India Economics Weekly - Will "taper" damage India? [Taimur Baig]
Will "taper" damage India? Since May 21, there has been a rise in global risk aversion as the US Federal Reserve has begun to provide guidance, in a manner somewhat more hawkish than expected, regarding its "tapering" of asset purchase program. India's markets have not been spared, with the INR depreciating the most against the USD in Asia (-6.6%), the Nifty declining by about 8%, and the 10-yr bond selling off by 2%. Plenty can be done to prevent the exchange rate from depreciating in a disorderly manner, in our view.

Oil & Gas Path-Breaking Gas Price Reform Executed :: Morgan Stanley Research

Oil & Gas
Path-Breaking Gas Price
Reform Executed
We have been highlighting gas price reforms as a
key industry catalyst: Media reports (CNBC-TV18,
June 27) suggest that the Indian government has
approved an increase in gas prices from US$4.2/mmbtu
now to US$8.4/mmbtu, based on the mechanism
suggested by the Rangarajan committee earlier this
year. The new gas price mechanism is believed to be
effective from April 1, 2014 and is valid for five years.
Within our coverage, the key gainers are E&P
producers ONGC and RIL: Assuming the higher gas
price of US$8.4/mmbtu and higher INR/USD of ~58, we
project upside of ~39% for ONGC and ~20% for RIL for
our F2015 earnings estimates. At constant currency, we
estimate the earnings upside at 26% for ONGC and 4%
for RIL. We highlight that the incremental EPS
contribution for RIL from gas prices is higher in F2017
and beyond, when production is expected to increase.
We estimate upside risks to our DCF value at 14% or
Rs55/share for ONGC and ~3% or Rs27/share for RIL.
GAIL is likely to face for higher gas costs for its
petrochemical and transmission division: We
assess the downside risks to GAIL’s earnings at
~10-12% and to our target price at Rs32/share.
Impact on economy and consuming groups: Of the
total domestic gas volumes of ~86mmscmd, three key
economically sensitive sectors – power, fertilizer and
LPG – consume ~67mmscmd. We see additional
burden for them of Rs197bn or 0.16% of GDP. If this
were to be completely passed on to end consumers, we
believe electricity tariffs for a gas-based plant need to be
moved >45% higher. The required increase in urea
prices would be over 60%
We maintain our estimates and await more clarity
on details of the gas price mechanism: The Oil
minister has suggested to the media that he and the
Finance minister will provide more details on Friday.

Coal India Limited All Drivers Falling into Place: Remain Overweight :: Morgan Stanley Research

Solid progress on volume growth enhancement,
recent demonstration of improving pricing power,
and likelihood of further augmentation of cash keep
us positive on the stock. Our recent analysis of the
Indian coal industry has reinforced our stance here.
Estimate changes: 1) We lower our F14-F15 dispatch
estimates by 0.2% and 0.7% mainly due to trends seen
so far in FY14. We raise our dispatch forecast by 1.3%
for F16. 2) After the recent price hike we assume CIL
raises notified prices for the non-power sector by 12% in
4QF14. 3) We reduce washed coal sales volume by
19% and 24% for F14 and F15 due to delays in CIL’s
washery projects. 4) We now think mining tax is likely to
be applied as a percentage of royalties; previously we
assumed a percentage of PAT. This is one of the main
reasons for our EPS estimate increases of 3% and 8% in
F14 and F15. We introduce F16e EPS at Rs55.2.
Investment thesis
1) With some improvement in the clearance process
for brownfield expansions, CIL is on track to post
healthy production growth starting 2HF14. We
estimate a production CAGR of 6.8% in F13-F16.
2) Recently CIL raised FSA prices for the power sector
after a gap of almost three years. We expect this to
raise investor confidence in CIL’s ongoing ability to
lift prices. We expect average realizations to rise by
5.3% in F14 and 6.4% in F15.
3) F13 cash balance is US$11.4bn (33% of market
cap) and post-capex net cash generation is about
US$4.3bn in F14e. This should prompt CIL to
increase its dividend per share from Rs14 in F2013
to Rs25 in F14e, translating into yield of 8.4%.
F14E adjusted EV/EBITDA is 3.9x – the 39% discount to
global peers seems harsh. In our view, it ignores an
EBITDA CAGR of 25% for F13-16E, with low risk.

Sharp INR Depreciation and After :: JPMorgan

 A widening CAD and fears over QE tapering have resulted in a sharp
sell-off in the INR (depreciating a significant 11% vs. US$ over the last
two months).
 Over the last 15 years, there have been 10 phases of meaningful INR
depreciation. In this report, we examine market performance over these
phases of depreciation and in the quarter after.
 The extent of under performance of Indian equities vs. peer group,
during phases of sharp INR depreciation has increased over the
recent past.
 Sectoral performance. Expectedly, defensives and export-oriented
sectors have outperformed during phases of INR depreciation. Utilities,
Financials, Industrials and Materials have tended to underperform. As
the INR bottoms out, sectoral performance has been more mixed.
Staples and Energy continued to outperform. But, Materials and
Industrials bounceed back from beaten down levels.
 Our portfolio stance has been biased for a while in favour of IT
services, Healthcare, Energy, state-owned Utilities and ‘sin’ stocks
within the consumption basket.
 At the macro level, the inverse relationship between the INR and WPI is
increasing due to better fiscal resolve on the part of the Government. The
relationship between GDP growth and the INR has strengthened too over
the last few years, suggesting that any sustained reversal in the INR
would be contingent on a durable economic recovery

India Strategy When the Dust Settles on the INR Quick Comment – Morgan Stanley Research,

India Strategy
When the Dust Settles on
the INR
Quick Comment – Impact on our views: The sharp
INR move has multiple implications for India. In
summary, earnings move higher net of the USD
positions and macro impact.
From a macro perspective, the inflation rate potentially
rises, yields go higher, and growth becomes more
uncertain. The RBI estimates that a 10% INR fall could
add approximately 60bps to WPI in the short run (in the
same quarter) and up to 120bps in long run. However,
the rupee move will also hasten the adjustment on the
external deficit. The rupee is arguably at fair value
(Exhibit 1) and, combined with the government’s effort
on fiscal consolidation, it will bring down the current
deficit in the next few months. A declining twin deficit is
good for equities. The sharp rupee depreciation could
also hasten reforms. Indeed, one of the reasons for the
shift in the government’s actions in September last year
was the prospects of a sharp rupee depreciation (if the
credit rating was downgraded) and its impact on inflation
in an election year. The downside risk is that the rupee
move tests the RBI’s patience and forces it to lift rates.
From an earnings perspective, corporate India runs a
net long USD position of around US$20 (simplistically
speaking, the current account net of oil, gold and
remittances – Exhibit 2) and earnings rise 1.5% for every
5% move on the currency. The negative macro impact of
the INR move will moderate the earnings gains. The
biggest potential beneficiaries and losers are outlined in
Exhibit 5. However, this could be different from the way
the equities react – Staples outperforms in all episodes
of rupee depreciation (Exhibit 4).
Corporate balance sheets, however, take a hit. This hit
is concentrated among a smaller group of companies.
We estimate forex liabilities at around US$200 billion. A
5% move increases liabilities by US$10 billion. From our
coverage universe, the worst-affected include Bharti,
RCom, Tata Power, Ranbaxy, United Spirits, United
Phosphorous, GESCO, Reliance Industries and
Bhushan Steel (not in that order).

Goldman Sachs: The global economy still has plenty of ‘room to grow’

Slack track: The global economy still has plenty of ‘room to grow’
Assessing size of output gaps allows us to anchor macro views
Global asset markets have re-priced substantially following hawkish policy
signals and perceived changes in the global economic outlook. Consensus
has built around the expectation that global growth will accelerate going into
2014, which should push output gaps in a positive direction. But there is less
clarity on where they currently stand or how they are likely to evolve. That is
key to forecasting policy paths and market reactions, as it allows us to
anchor macro views when markets fluctuate. So we look here at output gaps
in 40 countries, representing more than 90% of global output.
The global economy still has plenty of ‘room to grow’
We find that the global economy has plenty of ‘room to grow’, especially in
DMs, but also in some EMs. Our estimates point to gaps of around -2.4%
for the world, -3.4% for DMs and -1.0% for EMs. These estimates account
for possibly weaker potential growth rates after the crisis. During the next
2-3 years, output gaps are likely to close in EMs as cyclical weakness
recedes, and go half-way towards closing in DMs. But starting levels and
expected closing speeds differ markedly across countries.
Rising inflation as output gaps improve, but not everywhere
Inflation is likely to rise in places where output gaps improve the most,
with exceptions related to idiosyncratic factors. But unless inflationary
pressures become extreme, it is difficult to justify scenarios where policy
tightens financial conditions prematurely or excessively. When the recent
bout of market turbulence abates, markets should begin to reflect the view
that the world’s ‘room to grow’ is larger than is sometimes perceived, and
adapt to a gradual rather than abrupt return to normalcy.

Rupee Through 60 -- Assessing the economic implications ::Credit Suisse

● For the first time ever the Indian Rupee has broken through 60
against the US Dollar. Given the decades-long trend depreciation
of the INR this was, in a sense, only a matter of time.
Nevertheless, the fact that the currency has dropped more than
10% in the last couple of months, while some are talking about an
imminent BOP crisis warrants attention.
● We estimate that if the rupee were to stabilise at the current level,
WPI inflation will be boosted by ½-¾ pp. This takes account of the
softening in USD-denominated commodity prices to date and
reinforces the view that the headline rate will bottom in September.
At the same time, the initial effects of the depreciation will be to
make the trade position worse, with beneficial volume effects of the
weaker currency taking 12–18 months to come through.
● Recent developments mean the chance of the RBI cutting at 30
July meeting are close to zero and indeed if the rupee continues
to plunge rate hikes will come onto the agenda.
● Finally, talk of a repeat of the 1991 BOP crisis are premature.
High fx reserves do at least buy the country plenty of time.

Don’t look for higher returns on emergency funds :: Business Line

We suggest you keep your emergency funds (the money that you set aside for medical emergency or to meet living expenses in case of loss of income) in a savings bank account.

But will you? Your preferred choice would be a short-term fixed deposit or a liquid fund, as they can earn higher return. There is nothing wrong with your choice, if you are aware of the associated risks. But many times, you might be suffering from a behavioural bias.

AVAILING DISCOUNTS

Suppose you can save Rs 250 on your grocery purchases of Rs 2,500. But you have to drive 5 km to the store that will accept your discount coupons. Will you avail the discount?

Chances are you will, unless the traffic is very dense or your favourite show is running on TV. Now, suppose you are offered Rs 250 discount on an LED TV that costs Rs 65,000. Will you drive 5 km to the store to avail the discount? Highly unlikely.

We typically look at the percentage saved and not the absolute savings. You save only 0.50 per cent on the TV compared to 10 per cent on the grocery purchases.

Now, your decision may not seem entirely rational, because percentages do not pay for your living expenses, absolute money does.

It is no different with your emergency fund. A fixed deposit with a bank will pay about 8 per cent whereas a savings bank account will fetch 5-6 per cent. Indeed, 2-3 percentage points higher return looks attractive.

But with this, you would have earned only about Rs 12,000 extra on your emergency fund of, say, Rs 4 lakh, before taxes and much less after taxes. And then, consider the associated hitches - you cannot withdraw your fixed deposit at an ATM. So, what will you do if you need emergency money?

INVESTMENT PORTFOLIO

In any case, have you checked your investment portfolio? Chances are you have more money in fixed deposits and less in equity.

And better yet, you forgot to renew one of your fixed deposits that matured 2 months ago! Have you calculated the returns that you gave up because of these decisions?

So, why then are you concerned about the lower returns on your emergency funds? When you created your portfolio, you had to consider several variables such as how much to save and your ability to take risk.

The risk of investing in equity was more apparent to you than the higher expected return it offered.

But with emergency funds, the choice is simply between two interest-bearing investments — savings account and fixed deposits or liquid funds. The loss in interest income is obvious, though not the associated risk.

Least-effort portfolio: Why assess your risk appetite? :: Business Line

You can side-step assessing your risk appetite and yet create an investment portfolio that will meet your desired objective.

Monthly: May 2013 – Domestic formulations IPM grows at 9.5% in May 2013:: Nomura

Summary
In this report, we provide detailed sales trends (AIOCD data) for the top 10
companies and the top 10 therapy areas in the India pharmaceuticals
market (IPM). We also include data for Dr Reddy’s and Glenmark, which
are not in the top 10 list, but are part of our coverage universe. Companies
that maintained growth above the IPM in May 2013 were Sun Pharma
(+20.3%), Cipla (+13.9%), Ranbaxy (20.3%), Zydus (24%), Lupin (13.7%),
Glenmark (14.1%) and Dr. Reddy’s (12.1%). Glaxo continued reflecting
decline in net sales at -5.7% for the month of May 2013, on supply
constraints, in our view.
Chronic therapies continue on a higher growth trajectory vs IPM. Cardiac,
anti-diabetic and Neuro CNS segments’ net sales for the month of May
2013 grew at 12.4%, 12.1% and 12.8%, respectively, vs. IPM growth of
9.5% y-y. Segments experiencing subdued growth are vitamins and
gynaecology, which grew at 6.5% and 6.1% y-y in May 2013 in terms of
net sales.