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    Rs 600 billion revenue deficit, oil price spike can undo the goods in economy

    Synopsis

    It is important to note that the recent fiscal and monetary reforms have been duly recognised.

    ET CONTRIBUTORS
    By Ashutosh Khajuria

    The past fortnight has been quite eventful in the context of its medium-term impact on the currency and interest markets in India. Moody’s upgraded India’s credit rating from Baa3 to Baa2 with stable outlook.

    The immediate impact has been observed in the renewed interest in the capital markets where the indices have recovered their earlier losses that had crept in due to profit booking, economic recovery in developed markets leading to minor flight of capital and sudden rise in crude oil prices. NIFTY closed at 10390 by the week end.

    The crude oil prices have risen by 34% y-o-y as in the middle of November from $48 per barrel in Nov’16 to $64 by Nov’17. The oil price was as low as about $52 per bbl till about 2 months ago. This had led to a sharp rise in yields across the curve with 10 year benchmark GSec quoting above 7%.

    The latest weekly statistical supplement data of RBI as on November 17, 2017 suggests forex reserves continue to be around $400 billion, which has been an all time high level historically.

    With rating upgrade by Moody’s preceded by the recent improvement in India’s “Ease of doing Business” ranking by 30 notches in one shot have given rise to high expectations of capital flows in to India in short to medium term.

    On the other hand, foreign trade data for Oct’17 has been the most adverse in the last 3 years with a trade deficit of more than USD 14 billions and negative y-o-y growth in exports in particular. The current account deficit is expected to exceed 2% of GDP and will continue to be funded by capital account surpluses.

    On the systemic liquidity front, the cumulative amount of OMOs conducted by RBI to absorb the surplus liquidity, has been Rs 900 billion in the current financial year so far.

    An equivalent amount of cash management bills (CMBs) are due for redemption in the last quarter of the financial year. In case the credit growth picks up in Q-4, the liquidity would touch the neutral levels in a shorter time without resorting further on the OMO sales. This premise gets strengthened with cancellation of OMO of Rs 100 billion on 17th November after notification.

    It is important to note that the recent fiscal and monetary reforms have been duly recognised and endorsed by Moody’s while upgrading India’s rating, first time in nearly 14 years. These measures include GST implementation, move to digital economy post demonetisation, direct benefit transfers through UID, stable to declining public debt and last but not the least recapitalisation of public sector banks which still hold more than two- thirds of banking assets despite recent stresses and about 70% of bank deposits.

    The improved monetary policy framework is quite contemporary and with legislative approval of target inflation of 4% with in a band of 2% to 6% brings in the desired stability in interest rate expectations. Though S&P has not upgraded India’s rating and has maintained its long term rating for India at BBB- and short term at A3 with Stable outlook, it has taken note of the positive developments on the reforms side. The status quo has been maintained due to the risks emerging on the fiscal deficit front and the rise in global oil prices which India imports to the extent of 80% of its consumption.

    Indian macroeconomic indicators bear some near term risks. The fiscal math appears to face a big challenge with expected shortfall in revenues by more than Rs 600 billion, mainly contributed by lower than budgeted dividend by RBI, excise duty cut on oil products and the recent GST rationalisation in the peak rate segment. Inflation trajectory may look northwards due to adverse base effect and higher crude oil prices, if not anything else.

    As the real interest rates have risen fairly high, the benchmark G Sec yield is expected to trade in a range of 6.75 per cent to 7.10 per cent in the near term. In case a new 10-year security is issued in Q4 of the year, the yield may correct by 10- 15 bps further, particularly if the government succeeds in maintaining the fiscal deficit at the budgeted levels by controlling expenditure and the benefits of GST also start accruing with increased revenues and better reporting.

    USD- INR parity may trade in a range of 64.50 to 65.50 during the remaining part of this year.

    (The author is ED and CFO of Federal Bank. Views are his own)



    ( Originally published on Nov 24, 2017 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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