Rate Cut Underpins Bullish Macro Strategy
BMI View: The Reserve Bank of India (RBI)'s decision to re-start monetary easing in January is in line with our constructive macroeconomic outlook for the country in the coming quarters. Coupled with a reinvigorated reform drive, signs of fiscal prudence, and a more supportive global backdrop, we are happy to remain above consensus on economic growth, and expect credit-dependent sectors such as infrastructure and autos to enjoy the fruits of an improving investment story. We also maintain our bullish call on the Indian rupee, both in absolute and relative terms.
In line with our expectations, the Reserve Bank of India resumed explicit monetary easing for the first time in nine months, cutting the benchmark repo rate by 25 basis points (bps) to 7.75% in its January policy meeting. Moreover, the central bank cut the cash reserve requirement ratio (that is, the share of deposits that commercial banks must hold as cash) to a record low of 4.00%. As we have argued, a retreat in headline inflationary pressures provided policymakers with some bandwidth with which to loosen rates. Wholesale price inflation, the main index used for policymaking purposes, fell to 7.18% year-on-year (y-o-y), the slowest pace in two years. On a 3mma month-on-month annualised basis, meanwhile, headline Indian price growth has actually turned negative for the first time since the height of the global recession in Q209.
|RBI Finally Delivers|
|India - Wholesale Price Inflation & Interest Rates, %|
Macro Strategy Playing Out…
Our expectations for the onset of monetary easing were one of a number of positive factors underpinning our above-consensus outlook on India's economy in the coming quarters. We are forecasting real GDP growth of 6.1% and 6.7% in FY2013/14 (April-March) and FY2014/15, versus Bloomberg consensus of 5.5% and 6.5%, respectively. Other positive factors include a reinvigorated reform drive, which kicked off in earnest in September 2012 with the liberalisation of the multi-brand retail sector and has continued at an impressive pace since. We have also seen signs of increasing fiscal discipline, with recent efforts by New Delhi to cut diesel and tax subsidies. Coupled with the natural replenishment of inventories and a more supportive global backdrop, we believe that India is ripe for a significant recovery in investment activity and, in particular, the capex cycle.
|India - Real GDP Growth, %|
…Industry Strategy To Follow Suit
Monetary easing and a more conducive investment climate are likely to help re-ignite growth in credit-dependent sectors, with infrastructure and autos the stand-out examples. Our infra team is forecasting a return to form for the sector as a whole in FY2013/14, helped by the government's efforts to expedite project approvals and massive long-term growth potential ( see 'Stronger Growth Ahead, Bounded By Business Environment', November 5 2012). On the autos side, meanwhile, we are particularly enthused by the outlook for the commercial vehicle (CV) segment, with our anticipation of renewed capital outlay likely to stoke demand for CV sales. We are penciling in 8% volume sales growth to 880,000 units in the coming fiscal year ( 'Auto Sales Poised For Rebound In FY2013/14', January 22 2013).
|India - Ratio Of Asia Dollar Index Over Indian Rupee|
Staying Bullish The Rupee
We maintain a bullish view on the Indian rupee in both absolute and relative terms over the coming quarters, as the macroeconomic recovery picks up pace and bearish sentiment starts to unwind. The following chart shows the performance of the Asia Dollar Index versus the INR, with the ratio looking like it has carved out a major top. Our bullish INR call has yielded 8% on a total return basis since entry to our Asia asset class strategy back on August 8 2012 - the best currency performer across the Asia FX universe - and we continue to see scope for major gains ahead.