Global growth, inflation and trade data continue to remain weak. Major economies are witnessing weak growth, particularly in Europe and China. US data, particularly employment data is still decent. There was some forward movement in US-China trade talks contributing to the risk-on rally in global equities with S&P 500 Index (SPX) making new highs.
Major Central banks remain in dovish mode. Federal Open Market Committee (FOMC) delivered the third 25 bps rate cut bringing the Fed Fund Target Range to 1.50%-1.75%. However, the tenor was neutral, hinting at a pause for now. China continues to support growth with moderate monetary and fiscal stimulus. Global equity markets remain strong both in EMs and DMs and commodities are also witnessing some strength. DM yields inched up, while EM yields remain soft. EM currencies are showing some rebound in sync with uptick in CNY following progress in US-China trade talks.
India growth picture remained bleak, with most high frequency indicators worsening further in September suggesting a worse GDP print in 2Q compared to an already low 5% growth print in 1QFY20. New financing to the economy also remained weak suggesting continued risk-off sentiments. Most high frequency indicators continue to suggest continued weakness in growth led by continued weakness in auto sales. New financing in the economy, EXIM data, freight data, Purchasing Managers' Index (PMI) and fuel consumption continues to remain soft. Index of Industrial Production (IIP) and core sector growth was particularly dismal, but there was some pick-up in foreign tourist arrival. Despite recent steps announced by government, monetary easing and decent income from RBI, there are headwinds to a quick growth revival. We believe that FY20 growth is likely to stay low at ~5.5%, partially boosted by the favorable base effect.
Fiscal maths of Government of India is under stress with tax collection faltering significantly compared to budgeted. Moreover, the trend of tax collections has worsened in the last three month. Growth in corporate and indirect tax is close to zero, while income tax growth is also in single digits, significantly below budgeted numbers. Together with lower taxation, we are also witnessing pick-up in expenditure as government tries to fight the economic slowdown. Government will have to soon choose between allowing fiscal slippage (our base case) and expenditure cuts which will have negative fallout on already weak growth.
EXIM data for September continued to show weakness in both exports and imports front with exports and imports growth at -6.6% and -13.8%, respectively. Non-Oil Non-Gold (NONG) imports stood at -8.9% y-y, reflecting weakness in demand. NONG has been in negative zone since the last 8 months. Trade deficit remained benign at US$ 10.9bn, which is one probable reason, along with strong FDI inflows for the steady accretion in RBI forex reserves.
Overall BoP account remains comfortable. If crude remains at current levels and global risk environment doesn’t deteriorate, we should be looking at FY20 BoP surplus in the range of ~US$ 30 bn. In our base case, trade balance should remain comfortable and FDI flows should stay healthy, especially given the talks of strategic divestments. The risk is of significant growth scare in economy triggering capital outflows. Note that 1H CY19 BoP surplus has been 28.2 bn.
September, headline inflation increased to RBI’s target level at 3.99%, highest since July 2018, led by jump in food inflation, even as core inflation moderated further to the lowest since July 2017.While so far the inflation number has been benign we are witnessing an upside pressure in food inflation led by vegetables, which is likely to result in next few readings going up.
Over the past few months, the RBI has taken various measures to ease liquidity and spur lending to NFBCs. Some of the recent ones were the increase in single NBFC exposure limit from 15% to 20% of a bank’s Tier 1 capital, and increasing the rural household income limit for MFI borrowers to 1.25 lakh/annum from 1 lakh/annum, and also from 1.6lakh/annum to 2 lakh/annum for urban MFI borrowers. The sectoral risk aversion and liquidity shock for the NBFCs has now begun to subside for the credit-worthy names. However, NBFCs which have significant real estate/structured finance exposure or have perceived governance issues continue to find it challenging to raise fresh monies. Some entities which run levered balance sheets could continue facing funding issues till equity capital is raised. HFCs continue to be amongst the most impacted due to rising cost of funds. With lagged NPAs of the sector inching up, the sector is likely to remain under pressure in the short term.
MFIs continue to have a good run with asset quality holding up, and since they have assets of shorter tenure, they weren’t faced with much of the ALM issue which has plagued most of the NBFC sector. These entities have also been helped by Priority Sector Lending (PSL) securitization, giving the large MFIs ready liquidity.
The power sector is presently witnessing slowdown/stress in line with the macro economic slowdown and contraction in the infrastructure industries output. Power demand growth declined to 4.4% on a year-on-year (YoY) basis in H1 FY2020 from 6.0% reported in H1FY 2019 and thermal power plant load factor (PLF) declined to 57.7% in H1 FY2020 from 59.5%, reported in H12019 because of the slowdown in electricity demand growth and healthy growth in generation from other sources. Power tariff on Indian Energy Exchange (IEX) witnessed a decline to Rs. 2.77 per unit in September 2019 from Rs. 3.3-3.4 per unit over April - August 2019. Domestic coal production by Coal India Limited (CIL) witnessed a decline of 6.0% in the first six months of FY2020 on a YoY basis due to extended monsoon season and the labour issues resulting in reduction in coal supply by 7% to power sector and increased reliance on imported coal. However, the impact of imported coal on the profitability is not significantly negative since imported coal price has come down by about 35% in Sep/Oct 2019 as compared to July/August 2018.
Although government is taking various steps to improve the sector dynamics including implementation of payment security mechanism [w.e.f. August 2019] and resolution of stresses power sector, implementation of new tariff policy [which is expected to include measures to penalise load shedding, phasing out of cross subsidies, unbundling of distribution companies into supply and wire business, etc], the progress of the implementation remains mixed. With respect to the stressed thermal projects, the resolution of these assets remains slow with only about 10% of the 40 GW stressed capacity has achieved resolution, mainly through acquisition by a new sponsor. The balance capacity is under various stages of resolution, including through Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).
The Supreme Court’s recent decision to include non-telecom revenue for the calculation of Adjusted Gross Revenue (AGR) led to sharp increase in the additional liability for various Telecom Players by ~ Rs. 92,600 Crore. Cellular Operators Association of India (COAI) urged the newly constituted panel of secretaries to prescribe immediate relief measures to address the AGR issue first, given the "urgency of situation".
Update on IBC
Matters under IBC have shown decent progress in the September quarter. As compared to a mere 14% recovery rate by the financial creditors vis-Ã -vis their claimed amount in the previous quarter, the financial creditors recovered around 34% of their claimed amounts in the September quarter as per the latest Insolvency and Bankruptcy Board of India (IBBI) report. 7 out of the 12 large account related cases under IBC have been closed vide a resolution and 2 have been sent for liquidation. However, a major issue is being contested before the Supreme Court regarding the treatment of Unsecured Financial Creditors and Operational Creditors for distribution of funds under a resolution plan which has resulted in the resolution of Essar Steel getting delayed. The hearings are ongoing and Supreme Court is likely to settle the law on this issue during the current quarter.
Source: CEIC, Bloomberg, RBI, IBBI
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