will government's massive surge in investment ... - Myiris.com

Apr-Jun 2013 Earnings Preview
Gathering strength in US economy leads to
fears of US FED tapering its monthly bond
purchases from next few months
US 10‐year bond yields rise sharply to
2.72%, a near 100bps (~64%) in just last
couple of months
Global markets have been swaying wildly over the past couple of months in trying to
decipher the exact contours of the US Fed’s tapering of its $ 85 monthly bond
purchases. In its last meeting held on June 19th, 2013, the Fed decided to continue
with its ultra-loose monetary stance. It committed to keep the Federal Funds rate at
0-0.25% atleast as long as the unemployment rate remains above 6.5%, projected 1-
yr and 2-yr forward inflation is lower than 2.5% (0.5% above Fed’s target inflation of
2%) and longer-term inflationary expectations remain well-anchored. It decided to
continue with its $85 bn monthly bond purchases. In his comments Mr. Bernanke
said that the Fed would begin tapering later this year, if the economic data
continued to improve. The committee saw ‘diminished’ risks to growth and the jobs
market and now forecasts jobless rate at 6.5% in 2014, a year sooner than previously
forecast. The forecast for CY13 inflation was lowered to 0.8-1.5% but it said that the
cooling would be temporary. It does not expect the first rate hike to occur until
2015. Even if the Fed decides to slow down monthly purchases by the end of CY13,
Mr. Bernanke reiterated that it would only mean slowing the pace of purchases.
However, with monthly bond purchases likely to stop from mid-CY14, the market
reacted violently and has already ramped up the yields on the 10-yr US bonds to
2.72%, a near 100 basis point (~64%) jump over the last couple of months.
Strengthening of US$, sharp spike in US
bond yields and capital gravitating towards
the US leaves leads to sharp fall in many
emerging market currencies and equities
June 2013 payrolls came at 195000, comfortably beating estimates and revisions to
data adding another 70000 to the total, markets have started building in a scenario
where tapering could start sooner rather than later. This has spurred a massive
outflow from emerging markets into the US. The US dollar has strengthened against
most other currencies and especially against the currencies of those countries that
have a large CAD. India along with Brazil, South Africa, Turkey, Mexico and Indonesia
has seen a sharp depreciation in their currencies.
With its large CAD, dependence on fickle FII
flows, large debt repayments in FY14, India
remains vulnerable to an external shock
Rupee has plunged 5.8% vis-a-vis US $ over the last one month amidst worries about
funding the $ 80-90 bn CAD expected in FY14 in the context of tumult expected in
global markets as a result of an expected re-alignment of risks in the event of US Fed
actually starting to taper sooner rather than later. India also needs to worry about
rollover or repayment of $ 172 bn of loans by FY14 (60% of forex reserves). In March
2008 before the global financial crisis, the corresponding figure stood at $ 54.7 bn
(17%of total forex reserves). The period has also seen India’s CAD widening from
2.5% of GDP in FY09 to 4.8% in FY13. During the heady days before the financial
crisis, corporate heavily borrowed overseas with 5-7 year maturity. A lot of those
loans are due for repayment. ECBs form 31% of India’s total external debt of $ 390
bn as on 31st March 2013. Of the $172bn repayable within next one year, ECBs form
44%. An avalanche of global liquidity had over the past few years made it easy for
corporates to roll over their obligations but with fears of capital gravitating to the
developed markets especially US and Japan over the next few years, it poses a grave
danger to their re-financing ability.
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