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8/3/2019 India Economics - CS (Full Report)
1/13
ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
India: How big an interestrate risk to growth?
Emerging Markets Economics Asia
With the RBI ratcheting up the pace of rate hikes recently, we address two
key questions in this report:
1. Are rates tight or loose? Many are beginning to worry that the 475bps
effective hike in nominal policy rates might lead to a big hit on growth.
In contrast, some look at a still negative real policy rate and conclude
that interest rates are still too stimulative. How does one reconcile the
two arguments?
2. Assuming the hikes in interest rates are indeed contractionary, how
adverse an impact will these have on GDP growth? What are thechances that GDP growth slips to below 7%?
Even though interest rates in real terms dont look high, we continue to expect
GDP growth to slow to 7.5% in both 2011 and 2012, with risks to the downside.
This is because (1) we find that changes in nominal interest rates do seem to
matter, and (2) interest rates have increased at a much faster pace this time
than in the previous cycle (of 2006).
On the brighter side even with the extra 50bps in policy rate hikes that we
now expect, we believe full-year growth should not slip too much below 7%.
Thats because household consumption - 57% of GDP looks relatively less
rate sensitive: a) Indias household consumption is not that leveraged, and b)
negative wealth effects for households should also be small. Investment
spending is likely to be hit by higher rates. However debt-sustainability in thecorporate sector, as far as we can make out from debt-equity ratios, should not
become a serious issue.
Exhibit 1: Real benchmark lending rate (PLR) for banks* - positive;but not above the historical trend levelyet
-2
0
2
4
6
8
10
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
'Real' bank PLR
Current
* Benchmark Prime Lending Rate (PLR) for State Bank of India. Forecast assumes another 50bps hike in the PLR and amoderation in our inflation measure (see page 4) to 7% by March 2012 from 9% now.Source: Credit Suisse, CEIC
02 August 2011
Economics Research
http://www.credit-suisse.com/researchandanalytics
Research Analysts
Devika Mehndiratta
+65 6212 3483
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India: How big an interest rate risk to growth? 2
I: Interest rates too high or too low?Many clients are seemingly beginning to worry about what could be a meaningful hit on
growth from the 475bps1 of effective hikes in the policy rate. In contrast, others appear to
be looking at the popular rules-of-thumb used to judge the tightness of interest rates, and
are wondering if interest rates might still be too low and not the other way round.
From a growth perspective, are current interest rates restrictive orstimulative?
The popularly used rules-of-thumb:
1) Nominal interest rates are much lower than nominal GDP growth are interest
rates too stimulative?Interest rates, whether you look at the policy repo rate at 8.0%, the
10-year government bond yield at 8.45%, mortgage rates at about 10.50% or banks
benchmark lending rate at 14.25%2
- all are below nominal GDP growth, which stood at
18% in 1Q 2011.
But interestingly, nominal interest rates in India have never really exceeded nominal
GDP growth at least since 2003! So, if we were to follow the line of reasoning that
interest rates below (above) nominal GDP growth are stimulative (contractionary), then
wed have to conclude that interest rates in India have been stimulative for at least thelast six years. There are several data issues of relevance here which should we be
using? Some look at policy rates, others might look at bond yields and so on. Ideally one
would like to consider an economy-wide average cost of funds but in the absence of such
a series, we look at the floating rate charged by the countrys largest mortgage lender
HDFC Ltd (Exhibit 2), as well as banks benchmark prime lending rate (PLR) in Exhibit 3.
Exhibit 2: Interest rates (mortgage) and GDP growth Exhibit 3: Interest rates (PLR) and GDP growth
%, % yoy %, % yoy
5
7
9
11
13
15
17
19
21
2005 2006 2007 2008 2009 2010 2011*
Mortgage rate*
Nominal GDP growth
5
7
9
11
13
15
17
19
21
1996 1998 2000 2002 2004 2006 2008 2010
Nominal banks' benchmark lending
rate (PLR)*
Nominal GDP growth
*Floating rate charged by HDFC Ltd., the countrys largest mortgage provider; end-yearrates; latest for 2011 Source: Credit Suisse, CEIC
* SBIs benchmark prime lending rate (PLR); end year rates; latest for 2011. Source: CreditSuisse, the BLOOMBERG PROFESSIONAL service, CEIC
1While the policy repo rates have been hiked by about 375bps, the effective hike is larger since the
interbank call rate moved from the bottom of the policy rate corridor to the top end i.e, another additional100bps2
There is no published series for corporate lending rates. What we use here is the benchmark PrimeLending Rate (PLR). This is slowly getting replaced by a new benchmark called the 'base rate' but we usethe PLR instead since, unlike for the 'base rate', we have historical data for the PLR. It is worth bearing inmind that the PLR indicates the upper range of lending rates. Much of actual lending takes place at ratesbelow the PLR.
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India: How big an interest rate risk to growth? 3
In contrast, nominal lending rates were mostly restrictive (rates were higher than
nominal GDP growth) prior to 2003. We have mortgage rates data going back only until
2005, therefore, to go back further in time, we look at the State Bank of Indias (largest
bank in India) benchmark Prime Lending Rate (PLR)1. This interest rate versus nominal
GDP growth quick-check seems to suggest that bank lending rates have been notably
more stimulative in India post 2003.
This phenomenon (of having years withinterest rates below nominal GDP
growth) is not peculiar to India. The
spread, however, certainly seems larger
there. We look at peers, such as
Indonesia and Korea, and find that interest
rates have often been below nominal GDP
growth (in approximately six of the last ten
years). But the extent by which lending
rates are lower than nominal GDP growth
is larger in India (average 3pp) than in the
other two (0.9pp in Korea and 1.9 in
Indonesia), Exhibit 4.
2) Lets turn to the second commonly-
used quick-check for judging the
appropriateness of the level of interest
rates real interest rates.
Real rates are not really negative as
some argue. In our discussions with
clients, some are quite alarmed when they
look at the difference between Indias policy rate (the repo rate is currently at 8%) and the
inflation rate (latest WPI inflation reading is 9.4% yoy). Their conclusion is that real interest
rates are still in negative territory by a large magnitude (-140bp) and that monetary policy
is thus extremely stimulative. But we think it is important to (1) also look at other interest
rates in the economy because clearly one would get different results depending on which
interest rate one uses. Households would be influenced more by mortgage and deposit
rates, corporates by both bond yields and commercial bank lending rates, etc. Here, while
corporate bond yields are about zero in real terms (the five-year AAA corporate bond yield
is currently at 9.42%), mortgage rates (at 10.50%) and rates charged by banks for projects
such as roads, etc. (anecdotally at around 11% or more) are positive. (2) Instead of
looking at the real interest rate level at just one point in time, its more useful to see where
it is today compared with its trend/average level over a longer period of time.
Estimating real rates is of course no easy task but particularly so in India due to
the lack of a reliable measure of not just inflation expectations, but inflation itself.
First of all, there is the question of which interest rate to use. Then on inflation, some use
actual inflation and some inflation expectations. In India, as most of us know, the widely
used measure of inflation (Wholesale Price, or the WPI) is fraught with issues but in the
absence of a good CPI measure, policymakers and markets all focus on this. Forestimating real rates in this report, we attempt to use inflationary expectations. Here, the
central bank has started providing results from a quarterly households expectation survey
but it does not go back prior to 2006. Hence instead of using RBIs index for households
inflationary expectations, we use the average of WPI and CPI as an indicator of
households year-ahead inflationary expectations for the entire period since we find this to
be a reasonable proxy for the latter. We also checked if the RBIs household inflationary
expectations series might be correlated with say a longer-term moving average of inflation
(WPI or CPI), but that wasnt the case (more on this in Appendix 1).
Exhibit 4: Nominal GDP growth minusnominal lending rates
%
0.0
1.0
2.0
3.0
4.0
India Indonesia Korea
Average 2000-2010
Latest*
* 1) 1Q GDP growth minus latest lending rate. 2) SBI PLR for India,lending rate for large corporations for Korea and lending rate as per theIMF for Indonesia Source: Credit Suisse, CEIC
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India: How big an interest rate risk to growth? 4
Exhibit 5: Real benchmark lending rate (PLR) for banks* - positive; but notabove the historical trend levelyet
%
-2
0
2
4
6
8
10
Mar-
00
Mar-
01
Mar-
02
Mar-
03
Mar-
04
Mar-
05
Mar-
06
Mar-
07
Mar-
08
Mar-
09
Mar-
10
Mar-
11
Mar-
12
'Real' bank PLR
Current
* Benchmark Prime Lending Rate (PLR) for State Bank of India. Forecast assumes another 50bps hike in the lending rate and our inflationexpectation measure (see appendix1 ) moderating to 7% by March 2012 from 9% now.Source: Credit Suisse, CEIC
Exhibit 6: Real deposit rates and corporate bond yields bit below historicaltrend levels
%
-6
-4
-2
0
2
4
6
Jan-02
Sep-02
May-03
Jan-04
Sep-04
May-05
Jan-06
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Oct-10
Jun-11
Real bank deposit rates*
Real corporate bond yield
* 1 year deposit rate and 5-year bond yield. Nominal rate minus average of WPI and CPI inflation.Source: Credit Suisse, CEIC
Most real interest rates are in positive territory (not negative as many assume). It is
worth noting though, that these have only just returned to historical trend levels
and not higher. We look at real benchmark bank lending rates, bank deposit rates and
corporate bond yields (Exhibits 5 and 6). By themselves, these suggest that interest rates
are not as restrictive as some of us might believe. Indeed, in Exhibit 5 above, we seethat bank lending rates in real terms have moved up, but are back to only historical trend
levels (the dashed line).
Real bank lending rates are likely to move higher and back to the previous peak
only in 2012 (Exhibit 5). This is assuming that the nominal benchmark prime lending rate
moves up another 50bps from current levels, and assuming that our measure of
inflationary expectations moderates in line with the moderation that we expect in both WPI
and CPI inflation post December this year.
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India: How big an interest rate risk to growth? 5
To summarise we have looked at two rules-of-thumb often used by observers for
judging the tightness of interest rates - 1) nominal interest rates versus nominal
GDP growth and 2) real interest rates. The first of these quick-checks suggests that
despite the effectively 475bps increase in policy rates in this cycle, most interest rates
appear still very stimulative since these are much lower than the nominal rate at which the
economy is growing. And not just that, it also suggests that this has been the case since
2003! The second rule-of-thumb suggests a more mixed picture real bank lending rates
are positive and back to average trend levels whereas real corporate bond yields andbank deposit rates are close to zero and below historical trend levels. All in all, if we were
to draw a conclusion based on these two quick checks, we would say that neither of these
two suggests that the current level of interest rates is particularly restrictive from a growth
perspective.
An obvious question pops up: Since neither of these rules-of-thumb seems to
suggest that interest rates are restrictive, why are we expecting the rate hikes so
far to lead to a slowdown in growth at all? The reasons are as follows:
1. We find that changes in nominal lending rates also matter. In fact, according to our
regression exercise for GDP3 growth, we found nominal rates to have a greater impact
on growth than real rates (India: Livin on a prayer, 19 Nov 2010), with every 1pp
increase in the nominal bank PLR reducing our measure of private sector GDP growth
by 0.4pp within a year, and a further 1pp in the second year. Other variables that were
statistically significant as explanatory variables were: world trade, the real effective
exchange rate (REER) and oil prices.
Exhibit 7: Nominal rate and pvt. sector GDP growth Exhibit 8: Real rates and pvt. sector GDP growth% yoy %, inverted scale % yoy %, inverted scale
2
4
6
8
10
12
14
1993 1997 2001 2005 2009
10
12
14
16
18
20
Private sector GDP growth
Bank lending rate, forward by 1-yr, RHS, invertedscale
2012F2012F2
4
6
8
10
12
14
1993 1997 2001 2005 2009
2
4
6
8
10
Private sector GDP growth
'Real' Bank lending rate, forwardby 1-yr, RHS, inverted scale
2012F
* SBIs benchmark Prime Lending Rate (PLR). Financial year averages. Source: CreditSuisse, CEIC
* SBIs benchmark Prime Lending Rate (PLR). Financial year averages. Source: CreditSuisse, CEIC
In nominal terms, bank lending rates4
appear to be at their highest level since 1998 and
are up about 250bps from the recent low in 3Q 2010 (Exhibit 9). Its worth bearing in mindthat were focusing more on the trend of this benchmark prime lending rate (PLR) over
time and were not reading too much into its standalone value at any particular point of
time (latest reading is 14%) because a big chunk of bank lending happens at rates lower
than the published PLR.
3Private sector GDP measured as GDP ex agriculture and ex government and social services.
4See footnote 2 on page 2.
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India: How big an interest rate risk to growth? 6
Exhibit 9: In nominal terms, lending rates are at all-time highs since 2002%
8.4
14.3
5
6
7
8
9
10
1112
13
14
15
Jan-0
2
Aug-0
2
Apr-03
Dec-0
3
Jul-04
Mar-05
Oct-05
Jun-0
6
Feb-0
7
Sep-0
7
May-0
8
Jan-0
9
Aug-0
9
Apr-10
Dec-1
0
Jul-11
Banks' 1 yr deposit rate
Banks' benchmark lending rate (PLR)*
* PLR Is the State Bank of Indias benchmark Prime Lending Rate. This benchmark is now slowly being replaced with a new benchmarkcalled the base rate. A decent chunk of lending takes place at rates lower than this PLR. Source: Credit Suisse, CEIC
How come bank lending rates are at all-time highs when the policy repo rate is
100bps below the previous peak? This mainly reflects the fact that while policy rates
were slashed in 2009 right back to the lows of 2004, bank deposit rates (and hence
lending rates) proved to be sticky downwards and remained a good 150bps above the
2004 lows. This is possibly because banks wanted to avoid lowering deposit rates too
much more in 2010, as that could have meant exceptionally large negative real deposit
rates (Exhibit 6) and partly this could be due to banks choosing to operate with larger
spreads now (between lending and deposit rates).
Why is it that nominalrates appear to have more of an impact on growth than real
rates?
Theres probably some money illusion at work where at least some economic agents
(corporates or households) are more influenced by nominal variables and dontnecessarily think in real terms as much as is theoretically assumed. Indeed one very
rarely hears even the central bank of the country (RBI) talk about real interest rates in
its formal discussions on the economy.
Another plausible reason could be that actual real interest rates might be behaving
differently from our own approximation. This is in turn could be because actual inflation
expectations might be behaving differently than that depicted by our proxy for inflation
expectations (which in turn weve constructed in a way so as to capture the trend in
RBIs survey measure of household expectations).
2. Thepace at which interest rates have been hiked this time is a lot quicker than the
previous tightening cycle of 2006. Its not just the level of the interest rate that matters
but also how quickly rates are cut/raised. An increase in rates delivered over a shorter
period of time would presumably be more of a shock to households and corporatessince theres less time to adjust. Here its worth noting that as far as bank lending rates
are concerned, the pace of increase in rates has been much swifter this time than in the
2006 tightening cycle (Exhibit 10).
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India: How big an interest rate risk to growth? 7
Exhibit 10: Bank lending rates have risen at almost double the pace this timecompared with the previous tightening cycle
Time period Bank PLR*
Start Now/End Start Now/End pp hike Over no. of months
Current cycle Sep-10 July-11 11.75 14.25 2.50 11
Previous cycle Jan-06 Aug-08 10.25 13.75 3.50 30
* SBIs benchmark Prime Lending Rate (PLR) Source: Credit Suisse, CEIC
3. Talking about the change in nominal interest rates, its worth noting that while
most discussions centre around the levelof real rates, the change in these goes
unnoticed. So while Exhibit 5 highlighted that the current level of the real benchmark
prime lending rate is only at the historical trend level and not above, it is worth noting
that it has moved up a good 580bps since the low in March 2010.
Stepping away from interest rates for a minute
In this report, were focusing on the impact on growth from higher interest rates. Needless
to say, however, how tight or loose overall monetary conditions are will depend not just on
interest rates but on other factors such as the real effective exchange rate (REER). The
REER as measured by the RBI indicates that the rupee was up an average 13% yoy in
2010 (April 2010 to March 2011). Given the lags with which a real appreciation usuallyimpacts growth, some headwinds from this are likely to be at play this year.
To summarise the popular rules of thumb: nominal rates compared with nominal GDP
growth and real interest rates suggest that interest rates in India are probably still
stimulative and its only in early 2012 (assuming inflation falls 200bps by then and RBI
hikes another 50bps), that interest rates in real terms are likely to move back to the
previous peak. We still maintain, however, that rate hikes are likely to be a key factor
slowing growth in 2011 because a) Our regression analysis for GDP growth suggests that
changes in nominal rates have mattered more than real rates and b) interest rates have
gone up at a much faster pace this time (2010 to date) compared with the previous cycle
that was 2005-2009 (Exhibit 10).
II: What chance sub-7% growth?In our judgement, the rate tightening so far is likely to slow growth to 7.5% in both
2011 and 2012 from 8.6% in 2010, even though rates might not look that restrictive
as per the popular rules-of-thumb. Moreover, we believe that risks to our growth
forecasts are to the downside. But how much to the downside? What are the
chances that these rate hikes slam growth even harder to well below 7%?
Heres the relatively happy news. We think the chances are low. Admittedly, this is
not an easy question to answer particularly because data availability for investment and
consumption is far from ideal in India, which in turn makes it difficult to assess interest rate
sensitivity. Many Indian observers tend to casually box together both private consumption
and investment as being equally sensitive to interest rates. We analyse some important
aspects of Indias corporate and household sector, which leave us with optimism that the
country will outbid a hard landing despite what we consider a fastpaced and meaningfulhike in policy rates.
Household consumption (57% of GDP) is unlikely to be particularly hard hit. Thats
because:
I. Household consumption is not that leveraged retail bank loans are only about 8%
of GDP
II. Negative wealth-effects of interest rates should be low given that households put
only about 6% on average of their incremental savings in equities
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India: How big an interest rate risk to growth? 8
III. Most studies find the impact of real interest rates on the private savings rate to be
ambiguous5
Fixed investments (30% of GDP) are likely to bear much of the brunt from higher interest
rates, in our view. It would be incorrect to assume that availability of lower cost foreign
borrowings may notably help lessen the adverse impact from higher domestic rates. On
the brighter side, as far as debt-equity ratios tell us anything, debt-sustainability looks
unlikely to become a serious issueLets look at these points a bit more in detail.
Consumption
For all the talk of a boom in retail/household sector bank lending, it is worth noting
that bank loans to households as a percentage of GDP have actually fallen
marginally over the last five years. Bank lending to the household sector remains
relatively small in India compared to the region (Exhibit 11), suggesting that private
consumption (57% of GDP) continues to be relatively less leveraged in India. There are, of
course, pockets of household spending that are credit dependent - automobiles and
housing being the key ones6. In addition to bank loans and informal moneylenders, one
would imagine that Micro-finance Institutions (MFIs) are another key source of finance for
rural households but interestingly outstanding loans of MFIs as a % of GDP are quite small,at under 0.5% of GDP.
Exhibit 11: Bank loans to the household/retail sector India the outlier
% of GDP
0
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009 2010
IndonChinaIndiaThailand
Source: Credit Suisse, CEIC
Any indirect wealth-effects of interest rates on consumer demand (through
equity/bond investments) are likely to be small. To the extent that households invest in
equities, higher interest rates could depress the value of these investments and hence
households net worth, creating a negative wealth effect. According to RBI data, however,
households put only about 6% of their incremental savings in equity (peak 12.5% in 2007);
in contrast, almost half is put in to bank deposits7.
5i). Savings behaviour in India - Co-integration and causality evidence, The Singapore Economic Review,
February 2010. ii). Determinants and long-term projections of saving rates in developing Asia, ADB workingpapers, October 2010.6
Bank loans do not take in to account unorganised lending in the rural sector by moneylenders but sincewe are ultimately interested in analysing the impact of higher rates on household demand, it should be okayto exclude this from our analysis given that interest rates charged by unorganised rural money lenders areunlikely to be heavily influenced by RBI action on policy rates.7
Average for the period 2005 to 2008; 2008 is the latest year for which data are available.
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India: How big an interest rate risk to growth? 9
Investments
Its the corporate sector alone that has pushed up the overall bank loans to GDP
ratio in recent years (Exhibit 12). And here too, 40% of the increase was led by
infrastructure.
Exhibit 12: The increase in the loan/GDP ratio in the last five years has been
triggered by the corporate sector alone% GDP
38
47
31
25
109
28
38
0
10
20
30
40
50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total loans* % GDP
Corporate loans ex infra % GDP
Hhld loans % GDP
Corporate loans % GDP
* These are what RBI terms as non-food credit. Source: Credit Suisse, CEIC
Two questions with regard to the corporate sector arise:
1) How vulnerable is investment spending to the hike in interest rates? Much of this
should be determined by how dependent corporate India is on domestic debt versus
other instruments of financing.
2) Has this sharp rise in bank lending to corporates led to debt-sustainability issues?
1) How dependent is investment
spending on debt (and hence on
interest rates)? In most years, internal
resources have accounted for a sizeable
chunk of financing according to data for
over 3000 public limited companies
collated by the RBI. In the 2000s (2000 to
20098), on average, internal sources such
as reserves and depreciation provisions
accounted for a larger chunk of financing
(40% of total) than debt 20% of total
financing needs (Exhibit 13). It can be
argued that this is more or less in line withthe pattern in other peer countries.
More importantly, are corporates
increasingly relying more on external
debt over the last few years? If yes,
higher domestic interest rates need not
bite as much as we consider. We think
this is important because if indeed there is evidence that corporates successfully manage
82009-10 (Year ending March 2010) is the latest year for which data are available.
Exhibit 13: Financing sources
% of total
0
10
20
30
40
50
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Financing through debt, % of total
Financing through internal accruals, % oftotal
Source: Credit Suisse, RBI
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to diversify away from higher cost domestic debt to lower cost external debt, then higher
domestic interest rates need not have that significant an impact on their investment
decisions. Anecdotally, this indeed seems to be the case for some large corporates. But
our estimates below suggest that this does not hold true for the corporate sector as a
whole. Looking at the flow of credit to the corporate sector, we find that even in 2007,
when domestic interest rates were close to the peak and foreign capital inflows were
strong, domestic credit (bank loans and bonds) continued to dominate as it accounted for
close to 70% of the corporate sectors total credit intake (Exhibit 14).
Exhibit 14: Corporate sector borrowings domestic borrowing still dominates
INR trn % total
Borrowings by the corporate sector* 2006 2010 Avg 2006 to
2010
2006 2010 Avg 2006 to
2010
Domestic 3.2 5.8 4.2 74 84 81
Bank loans 3.2 5.3 3.9 73 76 75
Corporate bonds 0.1 0.5 0.3 2 8 6
External 1.1 1.1 1.0 26 16 19
External Commercial Borrowings (ECBs), net 0.7 0.5 0.5 17 8 11
Short-term credit, net 0.3 0.5 0.3 7 7 6
Foreign currency denominated bonds 0.1 0.1 0.1 2 2 3Total 4.3 7.0 5.2 100 100 100
* 1. We have compiled this by identifying key sources of debt. 2. Bank borrowings are estimated as change in outstanding non-food bank loansex retail loans. Borrowings through ECBs and short-term credit are estimates in net terms i.e, gross inflows minus repayments Source: CreditSuisse, CEIC , RBI, the BLOOMBERG PROFESSIONAL service
2) At least as far as debt-equity ratios suggest, corporate sector debt-sustainability
looks okay. Needless to say, higher interest costs are likely to squeeze profitability, which
is also under pressure from other input costs. But are there signs of debt having risen to
unsustainable levels? We look at debt/equity ratios for a sample of 255 listed companies
having available balance sheet data for the year-ending March 2011. We find that while
corporates have taken on debt quite aggressively over the last decade, the equity base too
has kept pace so that gross debt/equity ratios have actually come off over the long term from
about 0.64 in 2002 to 0.52 now (Exhibit 15). Given that there was no sustainability crisis in
2008 (when debt-equity ratios were somewhat higher than at present, interest rates hadreached a peak and the economy was subject to the Lehman shock), we would imagine that
from a sustainability point of view, things should be okay in 2011/2012. This is at an
aggregate level specific sectors such as real estate look more vulnerable, however.
Exhibit 15: Debt/equity ratio* -
Median for a sample of 240 listed companies
0.2
0.3
0.4
0.5
0.6
0.7
2002
2003
2004
2005
2006
2007
2008
2009
2010
Debt/equity ratio
Net debt/equity ratio
* Net debt = gross debt cash holdings. Years are financial years ending in March, e.g., 2010 is year-ending March 2011.Source: Credit Suisse, CMIE
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Appendix 1BOX: RBIs survey measure of household inflation expectations - determinants
The RBI now publishes a quarterly survey of households inflation expectations.
Unfortunately however, the series only starts in 2006 and for our analysis of the trend in
real interest rates, we really need to go back further. As a result, we checked if the RBIseries for households inflation expectations displays some connection with actual current
inflation readings of the CPI or the more popularly used WPI (Wholesale Price Index). If it
does, we can use that as an alternative. For instance, since expectations are often
considered to be adaptive, do we find evidence that households inflation expectations
closely track, for example, the six-month or one-year moving average of the WPI or CPI
(Exhibit 19)? We find a simple average of WPI and CPI inflation readings provides the
best proxy for households inflationary expectations as surveyed by the RBI, (Exhibit 18)
except for the last year, where RBIs survey expectations have remained sticky more in
line with WPI inflation rather than CPI inflation.
Exhibit 16: RBIs hhld expectationsand WPI
Exhibit 17: RBIs hhld expectationsand CPI
% yoy % yoy
0
4
8
12
16
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Jun-1
0
Dec-1
0
Jun-1
1
Hhld inflation expect'n, yr ahead
WPI
0
4
8
12
16
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Jun-1
0
Dec-1
0
Jun-1
1
Hhld inflation expect'n, yr ahead
CPI*
Source: Credit Suisse, CEIC, RBI * CPI for industrial workers Source: Credit Suisse, CEIC, RBI
Exhibit 18: RBIs hhld expectationsand avg WPI & CPI
Exhibit 19: RBIs hhld expectationsand 1-yr moving avg of WPI+CPI
% yoy
0
4
8
12
16
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Jun-1
0
Dec-1
0
Jun-1
1
Hhld inflation expect'n, yr ahead
Avg of WPI and CPI
0
4
8
12
16
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Jun-1
0
Dec-1
0
Jun-1
1
Hhld inflation expect'n, yr ahead
1 yr moving avg of avg WPI+CPI
Source: Credit Suisse, CEIC, RBI Source: Credit Suisse, CEIC, RBI
8/3/2019 India Economics - CS (Full Report)
12/13
EMERGING MARKETS ECONOMICS AND FIXED INCOME STRATEGY
Kasper BartholdyHead of Strategy and Economics
+44 20 7883 [email protected]
Eric Miller, Managing DirectorGlobal Head of Fixed Income and Economic Research
+1 212 538 [email protected]
LATIN AMERICA ECONOMICS
Alonso Cervera
Head of Non-BrazilLatin America Economics+52 55 5283 [email protected], Chile
Carola Sandy
+1 212 325 [email protected]
Argentina, Peru, Colombia
Casey Reckman
+1 212 325 [email protected], Panama, El Salvador
Lorraine White
+1 212 538 [email protected] Analyst
Nilson Teixeira
Head of Brazil Economics+55 11 3841 [email protected]
Iana Ferrao
+55 11 3841 [email protected]
Leonardo Fonseca
+55 11 3841 [email protected]
Daniel Lavarda
+55 11 3841 [email protected]
Tales Rabelo
+55 11 3841 [email protected]
EASTERN EUROPE, MIDDLE EAST & AFRICA ECONOMICS
Berna Bayazitoglu
Head of EMEA Economics+44 20 7883 [email protected]
Sergei Voloboev
+44 20 7888 [email protected], Ukraine, Kazakhstan
Carlos Teixeira
+27 11 012 [email protected] Africa, Nigeria
Gergely Hudecz
+44 20 7883 [email protected] Republic, Hungary, Poland
Natig Mustafayev
+44 20 7888 [email protected]
Alexey Pogorelov
+7 495 967 [email protected], Ukraine, Kazakhstan
NON-JAPAN ASIA ECONOMICS
Dong Tao
Head of Non-Japan Asia Economics+852 2101 [email protected], Korea
Christiaan Tuntono
+852 2101 [email protected] Kong, Taiwan
Robert Prior-Wandesforde
+65 6212 [email protected], Indonesia
Devika Mehndiratta
+65 6212 [email protected], Philippines
Santitarn Sathirathai
+65 6212 [email protected], Vietnam
Kun Lung Wu
+65 6212 [email protected], Singapore
STRATEGY
Igor Arsenin
Head of Latin America Strategy+1 212 325 [email protected]
Paul Fage
Head of EMEA Strategy+44 20 7883 [email protected]
Ashish Agrawal
Asia Strategy+65 6212 [email protected]
Daniel Chodos
+1 212 325 [email protected] Local Markets Strategy
Helen Parsons, CFA
+1 212 538 [email protected]
Saad Siddiqui
+44 20 7888 [email protected]
Ray Farris
Head of FX Strategy+65 6212 [email protected]
Daniel Katzive
+1 212 538 [email protected] Strategy
8/3/2019 India Economics - CS (Full Report)
13/13
Disclosure Appendix
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