By Ashutosh Khajuria
Indian markets witnessed a lot of action during the fortnight gone by. The money market saw a normal rise in yields, which has become a usual end-of-the-uarter phenomenon.
Certificates of deposits (CDs) were issued at 15-25 bps higher than the fortnight prior to that. As the incremental credit-deposit ratio of commercial banks has been more than 130 per cent, subscription to CPs (commercial papers) was fewer and northwardly priced.
For the past few fortnights, growth in banks' loans and advances has far exceeded deposit growth. As per the weekly statistical statement of RBI for the week ended December 29, 2017, year-on-year deposit growth of ASCB (all scheduled commercial banks) has been a meagre 3.3 per cent while year-to-date (YTD till 8th Dec'17) growth has been only 1.3 per cent. The YoY loan growth had been a respectable 9.8 per cent.
During the fortnight ended December 8 (the latest fortnight for which the figures are available), deposits grew by Rs 55,500 crore against a credit growth of Rs 64,800 crore. Net systemic liquidity, including MSS (market stabilisation scheme) instruments due to mature in the last quarter of FY18, stood at Rs 60,000 crore. It may be noted that the YoY growth in forex reserve was of the order of $45 billion.
Forex intervention (USD and other FC purchases) during past one year alone would have resulted in liquidity infusion of nearly Rs 3 lakh crore. Hence, the current liquidity is an outcome of aggressive forex intervention rather than effect of demonetisation. Demonetisation-related liquidity generation has been fully absorbed by new currency issuances and incremental credit growth net of deposits growth.
For Indian market, the year 2017 was quite good. While the equity market closed at an all-time high, the USD-INR parity closed at 63.88, which shows nearly 5.5 per cent appreciation in the INR against the USD over the closing level of 2016. The interest rate market was an exception due to higher crude oil prices, expectation of fiscal slippage and northwardly movement of the inflation rate.
The benchmark Brent crude closed near the year's highest level at $66.50 a barrel. The benchmark 10- year sovereign yield closed at 7.32 per cent, a good 88 basis points higher than its close in the previous year. The market expects that the central government may not be able to meet its fiscal deficit target of 3.2 per cent of GDP due to lower revenue generation on tax revenue and non-tax revenue fronts.
RBI dividend to the government has been lower by about Rs 30,000 crore vis-a-vis the budgeted figure. Though the introduction of GST as 'one nation one tax' was a major step forward, in a large economy with a federal taxation structure, it was bound to have teething problems. Rationalisation of GST rates as a move to lower the number of slabs would certainly reduce the complexity and the resultant litigation, but its immediate fallout has been a drop in revenue generation since the middle of November.
Published data for the first eight months of the year (April- November) shows fiscal deficit at Rs 6.12 lakh crore, which is 112% of the annual budgeted figure. Announcement of additional market borrowing of Rs 50,000 crore through dated securities and another Rs 23,000 crore through incremental issuance of treasury bills corroborated the market expectation of the fiscal deficit target being missed by a big margin.
The amount of announced additional borrowing through dated securities and T-Bills suggests a fiscal slippage of up to 50 basis points of the projected GDP in FY18. While reviewing the fiscal deficit limits under FRBM (Fiscal Responsibility and Budget Management Act), NK Singh Committee had referred to an 'escape clause' wherein a slippage of up to 50 basis points is suggested on account of structural reforms having unmeasurable fiscal implications. GST implementation has been one such reform.
The only silver lining in revenue generation is seen in the non-tax category through disinvestment as the all time high budgeted amount of Rs 72,500 crore is likely to be achieved keeping in view the progress during in the first three quarters.
Assuming that the last quarter of the financial would witness some contraction in expenditure as capital expenditure was frontloaded to a greater extent, a fiscal slippage of 30 to 50 basis points could occur with the resultant fiscal deficit at 3.5 to 3.7 per cent of GDP.
The present levels of the yield curve are quite elevated and offer an opportunity to investors with spread between the policy rate (repo rate) and 10-year benchmark rate closing at 132 bps for the year.
A part of fresh allocations of foreign portfolio investor money in the debt segment for 2018 may find some avenue in Indian debt instruments. Consumer inflation is likely to start receding from February onwards, partly due to the base effect. The expected budgeted numbers for fiscal deficit for FY19 and hopefully, other major macro indicators, may bring cheers to rate traders. The benchmark yield is expected to correct to 7 per cent by the end of the financial year despite additional supply.
The rupee appreciated nearly 5.5 per cent against the US dollar during 2017. Assuming a nominal GDP growth (real growth plus inflation) of nearly 10 per cent and with the appreciation of the rupee against the dollar, the Indian economy probably would have grown at more than 15 per cent in 2017 in US dollar terms and may touch $2.5 trillion mark.
With the economy likely to gather further pace in 2018 after having left behind the temporary drags in the form of demonetisation and the initial teething problems of GST implementation, the attractive growth rate may invite more capital flows. The year 2017 ended with the highest ever forex reserves for the economy at more than $405 billion.
The augmentation of $45 billion in forex reserves in calendar 2017, (of which $35 billion has accrued since April'17 itself), suggests RBI had been intermittently intervening in the forex market to check the volatility in the USD-INR parity and partly to prevent appreciation of the domestic currency to support exports to some extent.
If the trend of capital inflows continues in search of higher yield backed by stable, if not an ever-appreciating currency and for visible capital gains on equity and debt investments, the dollar-rupee pair may trade between 63.50 and 64.50 during the last quarter of FY18.
On the other hand, Indian companies have issued all-time high foreign currency denominated bonds in calendar 2017 at $15.2 billion surpassing the earlier highest in 2014. Going by the spreads of as low as 169 bps over US treasuries, the lowest since 2007, the foreign currency-denominated debt issuances may continue with same vigour in 2018 as well.
Thus, forex capital inflows are expected to remain strong through foreign currency-denominated issuances as well as FPI investment in rupee-denominated capital market instruments. This is over and above the foreign direct investments (FDI) already running at all- time high levels year after year, chasing high growth and a large market.
(Ashutosh Khajuria is ED and CFO of Federal Bank. Views are his own)
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