48 - IEW March 2014

Deutsche Bank
Research

Asia

Economics

Date
21 March 2014

India Economics Weekly

Dealing with taper tantrum, part 2

________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Taimur Baig, Ph.D
Chief Economist
(+65) 64238681
taimur.baig@db.com

Kaushik Das
Economist
(+91) 22 7158 4909
kaushik.das@db.com

Dealing with taper tantrum, part 2. This week's FOMC meeting nudged the
central dynamic of 2014 back into focus, which is monetary policy
normalization in the US. Mixed data due to harsh weather and concern about
China had pushed this issue to the back-burner for a while, but all it took was a
slight change in Fed Chairwoman Yellen's tone about when rates could begin
to rise to make it the issue of the moment again. US Federal Reserve's broadly
positive view on the economy has a number of implications for flows, asset
prices, and financial stability in Asia. One can debate about the pace,
magnitude, and timing of taper and rates normalization (which, it is
increasingly apparent, will be tied not just to growth and job creation, but to
quality of growth and employment as well), but the fact of the matter is that
rates have only one way to go, barring some major negative shock to global
growth or sentiments.
India, in our view, is in a much better position to deal with this scenario. Policy
actions have reduced the economys external account deficits and reliance of
short term external flows, fiscal consolidation has continued (even though at
the expense of growth supportive public investment), and inflation respite is
palpable. Financial markets have rallied considerably in anticipation of an
economic reform friendly election outcome, foreign investor interest has
surged, rupee has been remarkably strong, and latest data suggest an
economic recovery is in the making.
We are however not going to get carried away in this wave of political
optimism. Election cycles have come and gone over the past decade or two,
with the markets rallying exuberantly in the lead-up or aftermath of decisive
electoral results. These rallies have almost inevitably fizzled though as the
reality of running a large, complex, and noisy democracy set in. Our optimism
rests instead on the fact that tough measures (fuel price hike, tight monetary
and fiscal policy, FDI liberalization) have been taken over the past 18 months
that will hold India on strong footing regardless of the election outcome.
Key forecasts
Financial year (ending 31 March) FY11 FY12 FY13 FY14F FY15F
Real GDP (YoY %) 8.9 6.7 4.5 4.7 5.5
Central Govt. fiscal deficit, % of GDP -4.9 -5.8 -4.9 -4.6 -4.5
Consolidated fiscal deficit, % of GDP -7.5 -7.7 -7.2 -7.0 -7.0
WPI (YoY%) avg 9.6 9.0 7.4 6.0 4.0
CPI* (YoY%) avg 10.5 8.4 10.2 9.5 6.1
Current account balance, % of GDP -2.7 -4.2 -4.7 -2.0 -2.5

Calendar year 2010 2011 2012 2013F 2014F
Trade balance, % of GDP -8.2 -9.0 -11.0 -8.4 -8.8
Current account balance, % of GDP -3.3 -3.4 -5.0 -2.6 -2.5
INR/USD, eop 44.8 53.3 54.8 61.9 61.0
Source: CEIC, Deutsche Bank forecast. Note: FY11, FY12 CPI data pertain to CPI (IW).
Publications on India 2014
FY14/15 budget is an exercise in optimism 17-Feb
CPI target will keep rates high for long 7-Feb
State of Indias state finances 30-Jan
RBI's path towards (soft) inflation targeting 22-Jan

2013

Economy and markets around elections 02-May
Mumbai and Delhi Trip Notes 20-Nov
More measures to stabilize the rupee 15-Aug
Whatever it takes to defend the rupee 13-Aug
Growth outlook darkens 06-Aug
India: Battling Vulnerability 05-Jul
Rupee worries likely to dissipate 07-Jun
How low can inflation go? 02-May
Impact of lower gold and oil price 17-Apr
Chartbook Re-starting the engine 01-Mar
A realistic budget but not a game changer 28-Feb
Indias cash transfer plan 24-Jan
Fuel price decision fuzzy but significant 18-Jan
Can the rupee turn a corner? 14-Jan

21 March 2014
India Economics Weekly: Dealing with taper tantrum, part 2

Page 2 Deutsche Bank AG/Hong Kong

Data monitor
Key macro variables monthly trend
Real sector (% yoy)
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
Industrial production
2.5 0.6 3.5 1.5 -2.5 -1.9 2.6 0.4 2.7 -1.2 -1.3 -0.2 0.1
Mining and quarrying
-1.8 -7.7 -2.1 -3.5 -5.9 -4.6 -3.0 -0.9 3.6 -2.9 1.7 0.7 0.7
Manufacturing
2.7 2.1 4.3 1.8 -3.2 -1.7 3.0 -0.2 1.4 -1.3 -2.7 -1.2 -0.7
Electricity
6.4 -3.2 3.5 4.2 6.2 0.0 5.3 7.2 12.9 1.3 6.3 7.5 6.5
Capital goods
-2.5 9.1 9.6 -0.3 -3.7 -6.6 15.9 -2.0 -6.6 2.5 -0.1 -2.5 -4.2
Consumer goods
2.5 0.8 1.8 1.7 -6.6 -1.5 -0.7 -0.9 1.0 -5.0 -8.9 -4.7 -0.6
Core infrastructure production
8.3 -2.4 3.2 2.3 2.3 0.1 3.1 3.7 8.0 -0.6 1.7 2.1 1.6
Auto sales
4.0 -3.2 -6.5 -1.7 -1.9 -4.3 -1.3 7.5 12.4 12.2 1.6 0.5 4.3 5.3
Manufacturing PMI
53.2 54.2 52.0 51.0 50.1 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5
Services PMI
57.5 54.2 51.4 50.7 53.6 51.7 47.9 47.6 44.6 47.1 47.2 46.7 48.3 48.8
Monetary sector (%yoy)

WPI inflation
7.3 7.3 5.7 4.8 4.6 5.2 5.9 7.0 7.0 7.2 7.5 6.4 5.0 4.7
Primary articles
11.4 10.5 7.4 5.1 5.7 8.8 9.7 13.6 14.0 14.6 15.3 10.8 6.8 6.3
of which: Food
12.3 12.0 8.6 6.1 8.2 10.3 12.3 19.2 18.7 18.3 19.7 13.7 8.8 8.1
Fuel & power
9.3 10.6 7.8 8.3 7.3 7.5 11.4 12.7 11.7 10.5 11.1 10.9 10.0 8.7
Manufactured products
4.9 4.8 4.3 3.7 3.3 2.9 2.6 2.3 2.4 2.8 2.9 3.0 2.8 2.8
Core WPI inflation
4.2 4.0 3.7 3.0 2.6 2.2 2.3 2.3 2.5 2.9 3.0 3.3 3.0 3.1
CPI inflation
10.8 10.9 10.4 9.4 9.3 9.9 9.6 9.5 9.8 10.2 11.2 9.9 8.8 8.1
Core CPI inflation
8.2 8.4 8.5 8.3 7.7 7.7 8.0 8.2 8.4 8.0 8.0 8.1 8.1 7.9
M3 (broad money supply)
13.0 12.7 13.8 12.8 13.4 12.7 12.4 12.0 12.9 13.6 15.1 14.9 14.5 14.5
Credit to commercial sector
16.0 16.3 14.2 14.5 15.1 13.3 14.4 16.3 16.9 15.7 13.7 14.1 14.1 13.7
Aggregate deposits
13.1 12.7 17.4 13.0 14.5 13.8 13.4 12.2 10.4 14.2 16.1 15.8 15.7 15.9
External sector (% yoy)

Exports
1.2 2.3 5.9 2.0 -0.7 -4.8 10.6 13.5 11.9 13.4 2.4 1.9 3.8 -3.7
Imports
6.3 2.8 -3.4 10.0 6.0 -0.6 -6.3 -1.2 -18.6 -14.4 -16.8 -15.3 -18.1 -17.1
Trade Balance (USD bn)
-20.0 -15.5 -10.4 -17.7 -20.1 -12.2 -12.5 -10.6 -6.4 -10.6 -9.9 -10.5 -9.9 -8.1
FX Reserves (USD bn)
295.5 290.9 292.1 293.9 287.9 282.5 277.6 275.5 277.2 281.5 290.7 293.9 291.1 294.4
INR/USD
53.3 53.8 54.4 54.2 56.5 59.7 61.1 66.6 62.8 61.4 62.4 61.9 62.5 62.1

GDP and Balance of Payments quarterly trend
National accounts, % yoy Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013
Real GDP (production side) 6.6 6.1 5.1 4.5 4.6 4.4 4.8 4.4 4.8 4.7
Agriculture 4.8 6.7 2.0 1.8 1.8 0.8 1.4 2.7 4.6 3.6
Industry 6.3 4.4 1.0 -0.6 0.1 2.0 2.0 -0.9 1.5 -1.2
Services 7.0 6.4 7.0 6.7 6.5 6.1 6.3 6.3 5.8 6.7
Balance of Payments, $ bn
Exports 79.6 71.4 80.2 75.0 72.6 74.2 84.8 73.9 81.2 79.8
Imports 124.1 120.1 131.7 118.9 120.4 132.6 130.4 124.4 114.6 113.0
Trade balance -44.5 -48.7 -51.5 -43.9 -47.8 -58.4 -45.6 -50.5 -33.3 -33.2
Net invisibles 25.6 28.8 29.8 26.8 26.7 26.6 27.5 28.7 28.1 29.1
Current account -18.9 -20.0 -21.8 -17.1 -21.1 -31.8 -18.2 -21.8 -5.2 -4.1
Capital account 19.6 7.7 16.6 16.5 20.8 31.5 20.6 20.6 -4.8 23.8
o/w: FDI 6.5 5.0 1.4 3.8 8.2 2.1 5.7 6.5 8.1 6.1
Portfolio investment -1.2 1.9 13.9 -1.9 7.7 9.8 11.3 -0.2 -6.6 2.4
BoP Balance 0.3 -12.8 -5.7 0.5 -0.2 0.8 2.7 -0.4 -10.4 19.1
Source: CEIC, Bloomberg Finance LP, RBI, CSO, various ministries of Government of India, Deutsche Bank
21 March 2014

Deutsche Bank AG/Hong Kong Page 3

Commentary
In a better position to deal with global market volatility
This week's FOMC meeting nudged the central dynamic of 2014 back into
focus, which is monetary policy normalization in the US. Mixed data due to
harsh weather and concern about China had pushed this issue to the back-
burner for a while, but all it took was a slight change in Fed Chairwoman
Yellen's tone about when rates could begin to rise to make it the issue of the
moment again. US Federal Reserve's broadly positive view on the economy
has a number of implications for flows, asset prices, and financial stability in
Asia.

So here we go again, notwithstanding some lingering questions about the
quality of the US recovery, concerns about China and Russia, and little
manifestation of demand pull inflation globally, we are sure that tapering will
continue through the rest of the year, interest rates will rise, flows will be more
discriminating, and Asian FX will be under pressure, at least for a while. One
can debate about the pace, magnitude, and timing of taper and rates
normalization (which, it is increasingly apparent, will be tied not just to growth
and job creation, but to quality of growth and employment as well), but the
fact of the matter is that rates have only one way to go, barring some major
negative shock to global growth or sentiments.
India, in our view, is in a much better position to deal with this scenario. Policy
actions have reduced the economys external account deficits and reliance of
short term external flows, fiscal consolidation has continued (even though at
the expense of growth supportive public investment), and inflation respite is
palpable. Financial markets have rallied considerably in anticipation of an
economic reform friendly election outcome, foreign investor interest has
surged, rupee has been remarkably strong, and latest data suggest an
economic recovery is in the making.
We are however not going to get carried away in this wave of political
optimism. Election cycles have come and gone over the past decade or two,
with the markets rallying exuberantly in the lead-up or aftermath of decisive
electoral results. These rallies have almost inevitably fizzled though as the
reality of running a large, complex, and noisy democracy set in. No amount of
electoral triumph will change civil society's opposition to expansion of mining
or fast acquisition of land to proceed with large scale infrastructure
development. Similarly, getting the support from local governments, headed
by opposition parties in many cases, will remain as challenging after the
elections as it has been before. Many projects have been delayed due to
judicial oversight into corrupt practices in bidding, allocation of contracts, and
financing. Courts are not going to go quiet in these areas just because a new
term is beginning in the political cycle.
Our optimism rests instead on the fact that tough measures (fuel price hike,
tight monetary and fiscal policy, FDI liberalization) have been taken over the
past 18 months that will hold India on strong footing regardless of the election
outcome. We are encouraged by prospects of the economy; we just dont
have a strong view on which party can deliver more than the other.
21 March 2014


Dealing with taper tantrum, part 2
Economy is weak but less fragile
As discussed in the commentary section, EM economies in general and India in
particular will likely come under renewed pressure as the market tries to
position against the likelihood of a quicker-than-expected pace of monetary
policy normalization in the US. India has of course given investors plenty of
domestic developments to ponder in recent months, both with a string of
constructive macro data (especially on inflation and trade deficit) and an
election seemingly headed toward a pro-market outcome. Below we go over
the latest developments.

Growth

Real GDP growth has remained sub-5% for more than a year now, and will
likely remain so in the Jan-March quarter. Still, there is some room for
optimism as the economy seems to have put deceleration behind it. High
frequency macro indicators such as the manufacturing and services PMI
suggest a bottom in activities. Indeed, economic momentum has improved
since mid-2013, although the level of activity is clearly well below the comfort
level of policy makers and India's aspirational population.
Real GDP and non-farm sector GDP growth

PMI indicating that the economy has bottomed
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2013
Real GDP Non-farm sector
% yoy

40
45
50
55
60
65
2007 2008 2009 2010 2011 2012 2013 2014
Manufacturing PMI
Services PMI
Composite PMI
3mma

Source: CEIC, Deutsche Bank

Source: Haver Analytics, Deutsche Bank
The latest findings of the Manpower Employment Outlook Survey are
promising for future growth prospects. According to this survey (in which
5,302 employers are surveyed across India), hiring activity is expected to
improve in the 2Q of 2014 (April-June), rebounding from a sharp dip in the
present quarter. Survey results show that net employment outlook rose to
+45% in 2Q14 (a positive number indicates employers intention to increase
hiring), from +29% in 1Q14 and +30% in 2Q13, led by improvement in hiring
intentions across sectors.
This augurs well for overall growth outlook in the coming quarters, given the
broad directional similarity between employment outlook and GDP growth that
has held in the past. Between services and manufacturing, the bigger
improvement is expected in the services related sectors, which is good news,
given that services contribute over 65% to Indias overall GDP.
21 March 2014


Net employment outlook vs. real GDP growth

Employment outlook and composite PMI

2
4
6
8
10
12
15
25
35
45
55
Overall Net Emp. Outlook, lhs
Real GDP, rhs
%
%yoy

40
45
50
55
60
65
70
16
24
32
40
48
56
2007 2008 2009 2010 2011 2012 2013 2014
Net Emp. Outlook (t-1), lhs
Composite PMI, rhs
% 3mma

Source: CEIC, Manpower Group, Deutsche Bank

Source: Manpower Group, Haver Analytics, Deutsche Bank
Inflation and monetary policy
Indias CPI inflation has eased somewhat in recent months (to 8.1% in
February from 11.2% in Nov13), led by normalization of vegetable prices
(which had spiked up sharply in the latter half of 2013). WPI inflation has also
fallen below 5% in February, from 7.5% in November13. Recent hailstorms in
certain parts of the country could adversely affect the food price dynamic but
we dont see this being significant enough to reverse the improvement seen in
the last few months. We also expect further price declines on energy and
metals, reflecting global developments and the rupee's recent appreciation.
Additionally, a favorable base effect kicks in during the second half of 2014.
Taking these factors into account, we forecast CPI inflation to ease to 5-6% by
the end of the third quarter of this calendar year. Core inflation should also
moderate below 7% in 2H, especially if economic growth remains subdued.
With this backdrop, the Reserve Bank of India will have no hesitation to remain
on a prolonged pause, perhaps even entertain some policy easing toward the
end of the year (DB forecast: 50bps rate cut in 2014).
Inflation has moderated in the last few months

CPI inflation and repo rate forecast
0
4
8
12
16
2007 2008 2009 2010 2011 2012 2013 2014
CPI (IW) WPI inflation
CPI new
% yoy

7.0
7.5
8.0
8.5
9.0
0
2
4
6
8
10
12
2012 2013 2014 2015
CPI, lhs Forecast, lhs
Repo, rhs Forecast, rhs
% % yoy


Balance of Payments and Rupee
In the first 9 months of FY14 (April-Dec13), Indias current account deficit was
USD31.1bn (2.3% of GDP), significantly lower than the corresponding period of
FY13 (USD69.8bn). Based on the recent trade deficit trend (about USD8-9bn
per month), it is clear that current account deficit will be in the USD5-5.5bn
range in Jan-March14 as well, which should lead to a full year outturn of
USD36.6bn (2% of GDP).
21 March 2014


This will constitute a USD51bn narrowing of CAD in one year, or about 2.7% of
GDP worth correction from FY13. About half of the USD51bn improvement in
CAD is due to lower gold imports, which should be around USD28bn in FY14
versus USD54bn in FY13. In % of GDP terms, this constitutes a 1.5%
downward adjustment, according to our estimate.
In FY15, we expect the current account deficit to be higher than this year
(USD50.5bn vs. USD36.6bn), on the back of stronger imports growth (10%yoy
in FY15 vs. -5.3%yoy likely in FY14). As restrictions on gold imports ease and
economic momentum picks up, imports growth will turn positive and raise the
trade and current account deficit. But we dont expect gold imports to increase
as sharply as in FY12 and FY13, to lead to renewed concerns on the CAD front.
Funding a current account deficit of USD50bn (2.5% of GDP) should not be a
problem as long as there is no negative fallout of the upcoming general
election in April-May. Consequently, we remain constructive on the rupee,
though we dont see the rupee breaching 61 on a sustained basis, as we
expect the RBI to intervene and buy Dollars below those levels (DB forecast:
INR/USD to end-Dec14 at 61).
BOP dynamic has improved considerably in FY14

Gold imports have come off sharply in FY14

0
1
2
3
4
5
FY09 FY10 FY11 FY12 FY13 FY14F FY15F
Current account deficit
Capital account surplus
% of GDP

1.0
1.5
2.0
2.5
3.0
3.5
0
10
20
30
40
50
60
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F
Gold imports, USDbn (lhs)
Gold imports, % of GDP (rhs)
USD bn
% of GDP



Rupee has appreciated in 2014, led by FII inflows

FX reserves position has improved
42
46
50
54
58
62
66
70 -6
-4
-2
0
2
4
6
2011 2012 2013 2014
Net FII: equity
Net FII: debt
USD/INR (inverted), rhs
USD bn

200
220
240
260
280
300
320
340
2008 2009 2010 2011 2012 2013 2014
Gross official reserves
Reserves (forward adj and excl
gold/SDR/IMF desposit)
USD bn


Source: IMF, RBI, Deutsche Bank

21 March 2014


Fiscal deficit and debt
As per revised estimates, Indias FY13/14 central government fiscal deficit
stood at 4.6% of GDP, marking an improvement over the FY12/13 outturn
(4.9% of GDP). Despite various slippages, the government managed to achieve
a lower than budgeted fiscal outturn mainly through expenditure compression.
As per the estimates, capital expenditure would be held back by 0.7% of GDP
(INR749bn) in FY14, a strategy which the authorities had adopted even in FY13.
The interim budget has set a 4.1% of GDP fiscal deficit target for FY15, in line
with the medium-term fiscal framework. The 50bps improvement is premised
on higher revenue collection (0.2% of GDP), and simultaneous expenditure
compression (0.3% of GDP).
The revenue side estimates look overly optimistic (gross tax revenue, personal
income tax and indirect tax receipts are projected to rise 19%yoy, 26.8%yoy
and 18.8%yoy respectively) and we see risks of slippages there. Consequently
we expect the FY15 fiscal deficit to be 4.5% of GDP, higher than the budget
estimate.
Irrespective of the political outcome, we expect the drive on fiscal
consolidation to continue. Subsidy rationalization, disinvestments and tax
reforms will continue to be on the priority list of the next government, as
without these, it will be difficult to bring the fiscal deficit down to the FY17
target of 3% of GDP.
Fiscal consolidation continuing, but at a gradual pace

Market borrowings remain high, putting pressure on
long term yields
0
1
2
3
4
5
6
7
Central Govt. fiscal deficit (% of GDP)
% of GDP

5
6
7
8
9
0
2
4
6
8
Central Govt. fiscal deficit (% of GDP)
Gross market borrowing (INR trn)
10 year gov. bond yield (avg.), rhs
% of GDP,
or INR trn
%

Source: Budget documents, Deutsche Bank

Source: Budget documents, Bloomberg Finance LLP, RBI, Deutsche Bank
There are some pockets of concern though. The governments gross market
borrowing is expected to be large in the next couple of years, given sizable
redemptions, which could pose to be a challenge for the debt market, in the
absence of support from RBI through OMO operations.
The RBIs monetary policy stance could also complicate Indias debt dynamic.
If the RBI strives to keep real rates positive, by targeting CPI inflation, it would
affect the governments debt dynamic, putting an end to the trend of recent
years when the debt/GDP ratio kept declining even without fiscal adjustment.
As lower inflation reduces nominal GDP growth rate and higher real rates hurt
the debt dynamic, the authorities would have to either embrace a faster pace
of fiscal consolidation (which is difficult under current circumstances) or would
have to accept a slower improvement to the debt/GDP profile going forward.
21 March 2014


Data, forecast and charts

National accounts: production and expenditure side GDP
% yoy FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E
Real GDP 8.9 6.7 4.5 4.7 5.5
Agriculture 8.6 5.0 1.4 3.4 2.3
Industry 8.3 6.7 0.9 -0.1 3.0
Services 9.2 7.1 6.2 6.3 6.8
Expenditure side GDP
Consumption exp. 8.0 8.5 4.9 3.0 4.7
Private 8.4 8.9 4.7 2.6 4.8
Government 6.2 6.3 5.8 5.0 4.3
Investment 13.0 9.9 0.8 -0.2 5.3
Exports 22.7 12.2 5.2 8.7 13.0
Imports 17.1 19.6 6.8 0.5 9.3
Source: CSO, CEIC, Deutsche Bank forecasts
Fiscal operations
% of GDP FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E
Central government balance -4.8 -5.8 -4.9 -4.6 -4.5
Government revenue 10.6 8.9 9.1 9.4 9.0
Government expenditure 15.4 14.7 14.0 14.0 13.5
Central primary balance -1.8 -2.7 -1.8 -1.3 -1.3
Consolidated deficit -7.5 -7.7 -7.2 -7.0 -7.0
Memo
Central -4.8 -5.8 -4.9 -4.6 -4.5
State -2.7 -1.9 -2.3 -2.4 -2.5
Oil 0.0 0.0 0.0 0.0 0.0
Fertilizer 0.0 0.0 0.0 0.0 0.0

Debt/GDP 69.8 67.4 67.1 66.7 66.3
Source: Controller General of Accounts, Government of India, Deutsche Bank
Balance of Payments
USD bn FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E
1. Exports 250.6 309.8 306.6 323.1 349.1
2. Imports 381.1 499.5 502.2 475.8 525.3
3. Trade Balance (1-2) -130.6 -189.7 -195.7 -152.7 -176.3
% of GDP -7.8 -10.1 -10.6 -8.3 -8.7
4. Invisibles, net 84.6 111.5 107.8 116.0 125.8
% of GDP 5.0 6.0 5.8 6.3 6.2
5. Current a/c Balance (3+4) -45.9 -78.2 -87.8 -36.6 -50.5
% of GDP -2.7 -4.2 -4.7 -2.0 -2.5
6. Capital Account Balance 62.0 67.8 85.2 51.7 54.7
% of GDP 3.7 3.6 4.6 2.8 2.7
7. Overall BOP (5+6) 16.1 -10.4 -2.7 15.1 4.2
Source: CEIC, RBI, Deutsche Bank forecasts

21 March 2014


Real GDP grew by 4.7%yoy in Oct-Dec13 the fifth
successive quarter of sub-5% growth

Industrial sector growth remains weak but likely to have
bottomed in this cycle
-4
0
4
8
12
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2013
Real GDP, lhs
Non-farm sector, rhs
Agriculture, rhs
% yoy % yoy

-10
-4
2
8
14
20
45
50
55
60
65
2007 2008 2009 2010 2011 2012 2013 2014
Manufacturing PMI, lhs
IP
Core infra growth
% yoy,
3mma
3mma

Source: CEIC, CSO, Deutsche Bank

Source: CEIC, Bloomberg Finance LP, Deutsche Bank
A sharp correction in food prices have led to substantial
decline in headline inflation

Credit growth remains weak

-2
2
6
10
14
18
22
2007 2008 2009 2010 2011 2012 2013 2014
CPI WPI food WPI inflation
% yoy

10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014
Deposits Credit M3 % yoy,
3mma

Source: CEIC, RBI, Deutsche Bank. Note: IW denotes industrial workers

Source: CEIC, RBI, Deutsche Bank
RBI has imposed a daily limit on the allocation of funds
under the LAF to 0.5% of NDTL of each bank

We expect rate cuts in the latter half of the year after a
prolonged pause
-1,500
-1,000
-500
0
500
1,000
1,500
2009 2010 2011 2012 2013 2014
Net LAF
INR bn

7.0
7.5
8.0
8.5
9.0
0
2
4
6
8
10
12
2012 2013 2014 2015
CPI, lhs Forecast, lhs
Repo, rhs Forecast, rhs
%
% yoy

Source: Bloomberg Finance LP, Deutsche Bank


21 March 2014


Large deficits remain features of the central and general
government

Considerable vulnerability to a rise in the real interest rate
and low GDP growth
-12
-10
-8
-6
-4
-2
0
FY05 FY07 FY09 FY11 FY13 FY15F
Central govt. Consolidated
% of GDP

30
40
50
60
70
80
90
2004 2006 2008 2010 2012 2014 2016 2018 2020
Baseline public sector debt 1/
Real interest rate is at baseline + 1 s.d.
Real GDP growth is at baseline - 1 s.d.
% of GDP

Source: CEIC, Budget documents, Deutsche Bank

Source: Government of India, Deutsche Bank. 1/ Combined Central and State level debt. Interest rate
shock entails real interest rate on public debt rising to 2.5%. Growth shock entails real GDP growing by
5%.
The rupee has stabilized after depreciating sharply
between MayAugust of 2013

Rupees movement is closely interlinked with the sum of
trade deficit and net portfolio flows
38
42
46
50
54
58
62
66
70 85
90
95
100
105
110
115
120
2009 2010 2011 2012 2013 2014
REER (6 currency, trade based, lhs)
INR/USD (inverted, rhs)

-8%
-4%
0%
4%
8%
12% -20
-15
-10
-5
0
2007 2008 2009 2010 2011 2012 2013 2014
(trade balance + net portfolio), lhs
INR/USD (inverted), rhs
USD bn
% ch,
mom


FII debt investments have turned positive since Dec, after
recording large outflows between May-Nov 2013

Current account deficit has narrowed sharply in FY14, led
by lower gold imports and a pickup in exports
42
46
50
54
58
62
66
70 -6
-4
-2
0
2
4
6
2011 2012 2013 2014
Net FII: equity
Net FII: debt
USD/INR (inverted), rhs
USD bn

0
1
2
3
4
5
FY09 FY10 FY11 FY12 FY13 FY14F FY15F
Current account deficit
Capital account surplus
% of GDP



21 March 2014

Appendix 1

Important Disclosures

Additional information available upon request

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The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Taimur Baig/Kaushik Das

21 March 2014


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David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee

Guy Ashton
Global Chief Operating Officer
Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Richard Smith and Steve Pollard
Co-Global Heads
Equity Research

Michael Spencer
Regional Head
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Regional Head
Deutsche Bank Research, Germany
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