Professional Documents
Culture Documents
3
GST Overview
Multiplicity of indirect taxes replaced by three GST taxes – CGST, SGST and IGST
Subsumed under GST Not subsumed under GST
Central level
(Medicinal and Toilet Special Additional petroleum products
Preparations) Duty of Customs
4
GST Key features
Tax Slabs Goods Services
Exempted Basic food items such as fresh meat, eggs, milk, bread, salt, Hotel and lodges with tariff <Rs 1000, education,
etc healthcare
3% Gold, silver, diamonds, precious stones and other precious
metals etc
5% 14% of the goods - skimmed milk, frozen veg, tea, spices, Transport, small restaurants
coal, medicines, coffee, etc
12% 17% of the goods - processed food, cellphones, sewing Non AC hotels, fertilizers, air tickets, work contracts
machines, etc)
18% Capital goods, intermediate and industrial items and AC hotels, telecom, IT, financial services, branded
processed food) garments
28% Luxury items, sin and demerit goods such as aerated water, Cinema, betting clubs
pan masala, automobiles, etc
Cess 15% cess on cars (mid-size to SUVs and hybrids), Rs400
per tonne on coal lignite and peat, 60% to 290% on tobacco
products
Destination based tax: Tax will be applied where goods and services are consumed
Input tax credit: available on taxes paid on any supply of goods and services in the course of
business
Threshold limit: set at Rs20 Lakh (Rs10 Lack for special category states)
Administrative control over taxpayer: Turnover up to Rs 1.5 cr – 90% of the tax payers to
be assessed by states and remaining 10% by Centre. Turnover over Rs 1.5 cr- tax payers to be
equally allocated between Centre and states (50% each). Overlap will be avoided.
5
Moderate inflation impact
Item wise change in tax post GST Impact of GST tax rates on CPI by sub-categories
0.80 CPI Inflation impact: By sub categories
Out of 300 items in CPI basket, we find ~164 items will see no change in tax rate post
GST
67% of CPI basket taxed at zero rate under GST, similar to current tax system
Short-term impact: There could be upward pressures on account of higher
compliance cost and partial pass-through
Medium-term impact: CPI inflation is likely to move lower by ~25 bps due to GST,
over the medium term
Variance across states: Variance is expected across states due to differences in rural
CPI consumption basket (urban is similar). States which have lower food weight in
rural basket such as Kerala and Tamil Nadu are likely to see higher deviation.
6
GDP Impact:
To accrue in the medium term
Marginal impact on key consumption items Gains to be made through enhanced efficiencies
GST Avg. distance traveled by a truck (KMs per day) 1000
1000
Household consumption Share impact on
expenditure price India’s poor performance is due to 800
800 time wasted at toll plazas, check
food and beverages 30% 0.08%
posts, state borders etc accounting
Transport and communication 16% 0.28% for 40% of journey time (World
housing 12% 0.00% 600 Bank). Around 70% of freight traffic
is via roads
Clothing and foot wear 7% -0.85% 450
400
Health 4% 0.00% 400
Education 4% 0.00% 280
Financial Services 4% 3.0% 200
Fuel and light 3% -2.67%
Household goods and services 3% -0.03%
0
Restaurants and Hotels 2% -9.37% India World (avg.) Brazil US Australia
Please note: GST impact on price excludes input tax credit
Growth impact: Various studies estimate impact of GST on India’s GDP growth
between 0.5-4%, over the medium to long term (most assume a single tax structure).
Unified market: Under GST the entry barriers between states will be removed (such as
Octroi, entry tax, CST), removal of tax cascading and reduction in transportation cost
Expansion of formal economy: The wider tax base under GST and inbuilt compliance
promoting mechanism of input tax credit.
Providing level playing field for domestic manufacturing: CVD /SAD exemptions
which make imported products cheaper will be addressed under GST.
Boosting investments: Under GST capital goods are expected to become cheaper as
input tax credit are available for all taxes paid.
7
Sectoral Impact: Near-term impact
Mixed; Long-term positive for all
Sector Product Earlier Tax1 GST Near-term Impact
Edible oil 5% 5% Neutral
FMCG Toothpaste, soaps, hair oil 24% 18% Positive
Detergents 24% 28% Negative
AC 26% 28% Neutral
Paints 26% 28% Neutral
Consumer Durables Electrical fittings/fixtures 24% 12% Positive
Furniture 28% 28% Neutral
Wires/switches 18% 28% Negative
Cement 26% 28% Neutral
Construction Material Steel 18% 18% Neutral
Tiles 28% 28% Neutral
Pharmaceuticals 11% 12% Neutral
Healthcare
Hospitals 5% 0% Neutral
2-wheeler 28% 28% Neutral
Small Car 28% 28% Neutral
Auto Sedan 43% 43% Neutral
SUV 53% 43% Positive
CV 28% 28% Neutral
Finance/Insurance 15% 18% Negative
Luxury hotels 24% 28% Negative
Services Air travel-economy class 6% 5% Positive
Logistics 5% 5% Neutral
EPC/ Construction 18% 20% Positive
Note: 1. Excludes cascading effect of taxes which would take the overall incidence of tax higher. Some services have been allowed input tax credit in GST hence
will benefit overall 8
Fiscal impact: Overall revenue
neutral
50% of Own-tax revenues subsumed under GST* State’s with significant manufacturing sector also
Share of Own Tax revenues to be subsumed under GST have a robust services sector
60 Share of manufacturing in GSVA
Arunachal Pradesh Uttarakhand Share of services (ex Govt) in GSVA
20-25%
Bihar Haryana 50
Uttar Pradesh Maharashtra 40
50-60%
Chhattisgarh Andhra Pradesh
30
Punjab Tamil Nadu
Rajasthan Assam 20
40-50% Odisha Telangana 10
Madhya Pradesh Himachal Pradesh
Goa 60-75% J&K 0
Uttarakhand
HP
Odisha
Gujarat
Chhattisgarh
Tamil Nadu
Jharkhand
Karnataka
Haryana
Maharashtra
Goa
Gujarat Jharkhand
West Bengal Kerala
50-60% Karnataka 75%+ Manipur
*This includes sales tax collections on alcohol for States, but excludes excise collections on Alcohol
GST is expected to be revenue neutral overall in FY18 fiscal account. It would result in
some redistribution between Centre and States. In the medium-term it is expected to
improve tax buoyancy by promoting tax compliance and widening tax base.
Only a part of State’s Own-tax revenues will be subsumed under GST ranging from
40-75%, as certain taxes will be kept out of GST : petroleum, alcohol, stamp duty etc
Compensation cess to raise Rs500bn over 9 months in FY18, to meet revenue shorfall.
GST being a destination based tax will benefit consumption based states more than
manufacturing states. However, manufacturing states also have strong presence of
service sector and will stand to benefit under GST. 9
GST Preparedness and short-term
disruption
Finished goods inventories to sales ratio 30 Share of MSMEs in GDP
23 22.8
23.8 24.1 24.4 24.6
22.2 25
21.9 21.9
22
20
21
15
20
19.2 10
19 6.2 6.3 6.3 6.1
5
18
0
17 FY12 FY13 FY14 FY15
Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 MSME manufacturing MSME services
Number of companies registered with GSTN: Out of 8mn excise, service tax and VAT
assesses at present, 6.6mn have already migrated to the portal of GST Network
Rise in compliance cost: a company with operations in one state will need to file 37 returns a
year under GST vs. of 13 returns previously. The number of returns will be higher for
companies registered across states.
Inventories destocking: some short-term dip in production as companies try to clear-out their
pre-GST inventories as full input tax credit on existing stocks is not available.
Consumption postponement: Consumers might postpone expenditure on certain items
which are expected to get cheaper post GST.
MSMEs: Under GST, many MSMEs will be entering the indirect tax net for the first time as
the GST threshold level (Rs 20 lakhs) is lower than excise duty threshold (Rs1.5 cr). MSMEs
will need to adapt their invoicing approach.
10
Lessons from international
experience
Cross country GST/VAT rates Mixed experience on inflation impact
Implementation Initial
CPI Inflation YoY%
DMs Year standard rate Current rate
Australia 2000 10 10 t-1 t=0 t+1 t+2
Canada 1991 7 5
Australia 1.4% 4.5% 4.4% 3.0%
France 1954 20 20
Germany 1968 11 19 Canada 4.8% 5.6% 1.5% 1.9%
Italy 1973 12 22 China 14.7% 24.1% 17.1% 8.3%
Japan 1989 3 8
South Korea 1977 10 10 Germany 1.8% 1.5% 1.9% 3.5%
United Kingdom 1973 8 20 Japan 0.7% 2.3% 3.1% 3.3%
EMs
China 1994 17 17 Korea 15.3% 10.1% 14.5% 18.3%
India* 2017 15 15 Turkey 42.9% 50.0% 33.3% 35.0%
Mexico 1980 10 16
Russia 1991 28 18 T-1 one year before GST implementation
Saudi Arabia 2018 5 5 T=0 year GST was implemented
Turkey 1985 10 18
T+1, one year post GST implementation, T+2, two years post GST
Avg. of 12% and 18% standard rate
Growth impact: In the medium term avg. increase in growth is 0.7% in advanced
countries (Danforth et al, 2015). In the short-term some reduction is seen as
consumers readjust their consumption post GST implementation.
Inflation impact: The impact of GST is mixed depending on the type of GST / VAT
implemented. In the year of implementation inflation tends to pick-up, however in
the successive years, inflation tends to moderate.
Fiscal impact: VAT revenues to GDP ratio rose over the medium term .
11
Growth
12
Heat map: Nascent signs of
recovery
Economic Heat Map: Industrial Sector
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Feb-17 Mar-17 Apr-17 May-17
PMI Manufacturing 51.0 52.2 52.1 51.2 50.7 52.5 52.5 51.6
Core Industries 7.0 3.8 5.3 3.1 0.6 5.3 2.5
IIP 7.8 5.3 4.4 2.9 1.9 3.8 3.1
CV Production 16.4 -3.2 1.3 -0.7 -4.8 2.8 -28.8 -26.5
Excise Revenue 7.0 40.8 37.7 22 22.7 6.5 429.1
Proposed Investments -31.4 30.1 34.3 54.2 48.5 54.2 116.4
Economic Heat Map: Services Sector
PMI Services 51.7 52.9 49.3 50.2 50.3 51.5 50.2 52.2
Rail Freight -8.7 -8.1 -4.7 -0.3 -0.7 3.3 3.1 4.5
Sea Cargo 6.3 4.2 12.4 4.5 0.4 9.5 6.3 4.9
Tourism 11.2 13.7 14.8 14.9 11.7 15.2 27.8 20.9
Cellular Subscription 8.2 7.6 7.1 19.7 19.7 20.4 20.8
Service Tax Revenue 28.5 19 28.1 11.2 3.0 17 14.3
Economic Heat Map: Private Consumption
PV Sales 6.7 17.8 1.7 11.1 9.0 10.0 14.7 8.6
Air Travel 21 24.2 23.3 18.7 15.7 15 15.2 17.6
Personal Loans 19.1 18.9 15.2 14 12.0 17.1 14.8
Note: (1) Except PMIs, all others depict annualized growth, (2) Proposed investment show YoY growth in 12mma series
13
Q4FY17 corporate results: Improvement
in consumption driven sectors
Sector No. of Net Sales (% YoY) Operating Margin (%)
Cos.
# of cos Mar-17 Dec-16 Mar-16 Mar-17 Dec-16 Mar-16
Auto 15 7.5% 4.6% 17.7% 12.1% 12.0% 14.3% Durable goods
consumption recovers
Auto Ancillaries 70 8.3% 6.5% 3.3% 13.8% 13.4% 16.0%
Cement 29 6.5% 0.2% 5.5% 15.4% 15.1% 17.2%
Chemicals 205 3.6% -0.7% 1.5% 12.3% 12.7% 10.7%
Pharma 69 -0.2% 9.5% 4.5% 16.3% 22.2% 17.3%
Cap Goods 132 13.6% 10.1% 11.7% 11.8% 12.9% 13.3%
Steel 60 31.4% 36.5% -9.3% 17.9% 19.6% 12.4% Outliers due to
Other Metals 16 65.1% 38.8% -7.6% 37.4% 37.3% 23.8% favorable base effect
FMCG 85 11.0% 2.3% 3.3% 21.4% 21.3% 21.5%
Consumption recovers
Textiles 150 7.9% -0.1% 1.9% 12.5% 13.9% 14.2%
Power 15 0.0% -0.7% 6.2% 27.6% 24.3% 30.3%
Construction 36 -2.2% -2.1% 10.5% 10.9% 12.0% 12.1%
Cash intensive sectors
impacted
IT 92 5.8% 9.9% 14.6% 23.8% 25.0% 23.1%
Telecom 20 -12.3% -4.1% 9.1% 27.8% 24.8% 34.8% Impact of predatory
pricing by new entrant
Mining 20 33.6% 18.8% -15.9% 8.7% 37.0% 46.3%
Real Estate 43 2.2% 11.7% 40.7% 27.0% 29.6% 17.8% Cash intensive sectors
Aggregate 1,324 6.4% 5.8% 6.2% 18.0% 18.3% 18.4% impacted
Manufacturing 993 11.0% 8.1% 3.6% 14.8% 15.3% 13.8%
14
FY17 Growth slows to 7.1%
GDP and GVA breakdown Underlying weak momentum since FY17Q1
11%
Real Growth FY15 FY16 FY17
10%
GDP by Industry 7.2% 7.9% 6.6%
9%
Agriculture -0.2% 0.7% 4.9%
8%
Industry 7.5% 8.8% 5.6% 7%
Services 9.7% 9.7% 7.7% 6%
GDP by Expenditure 7.5% 8.0% 7.1% 5% 5.6%
Consumption 6.7% 5.7% 10.5% 4%
GVA ex. agri and govt services
Investment 3.4% 6.5% 2.4% 3% 3.8%
GVA YoY%
Exports 1.8% -5.3% 4.5% 2%
Mar-14
Dec-15
Jun-12
Dec-12
Mar-13
Dec-13
Dec-14
Mar-15
Mar-16
Dec-16
Mar-17
Jun-13
Jun-14
Jun-15
Jun-16
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Imports 0.9% -5.9% 2.3%
FY17 GDP growth slows to 7.1% vs. 8.0% in FY16, led by deceleration in investment.
Investment to GDP ratio slows to a series low of 29.5% in FY17. Consumption (private
and public) and net exports supportive to growth
FY17 GVA slows to 6.6% vs. 7.9% in FY16, led by deceleration in real estate, ‘trade,
hotels and transportation’ and manufacturing. Agri and government services
supportive to growth
Weakness in underlying core growth (GVA ex. agri. and services) momentum since
FY17Q1. Slows to series low in Q4FY17 at 3.8% vs. 5.9% in Q3FY17
Demonetization impact: Maximum impact of demonetization in Q4FY17 with
contraction in construction, slower manufacturing and real estate growth
15
Recovery getting entrenched in
Q1FY18 …
Recovery getting more entrenched as … … hard data tracking improvement in surveys
0.8 PMI manufacturing IIP manufacturing (YoY%) rhs
YBL Growth Index 56 9
0.6
55 8
With real estate and states govt exp included
0.4 7
54
0.2 6
53 5
0.0
-0.2 52 4
51 3
-0.4
2
-0.6 50
1
-0.8 49 0
-1.0 Deviation from long-term average 48 -1
Feb-16
Feb-17
Sep-15
Sep-16
Jul-15
Jun-16
Jul-16
Aug-15
Aug-16
Jun-15
Dec-15
Mar-16
Dec-16
Mar-17
Oct-15
Oct-16
May-15
Nov-15
May-16
Nov-16
May-17
Apr-15
Jan-16
Apr-16
Jan-17
Apr-17
Aug-15
Feb-16
Aug-16
Feb-17
May-15
Nov-15
May-16
Nov-16
May-17
Normalization in growth conditions: Our proprietary indicator – YBL Growth Index, is
showing a pick-up in growth conditions from March onwards. The indicator is now
near its long-term average, indicating normalization of growth conditions.
Recovery getting entrenched with hard data tracking improvement in surveys:
o Transportation: Pick-up in passenger transportation by both rail and air. Rise in
freight transportation indicated by railways and air. Lesser dip in CV sales (road).
o Construction: Rise in steel consumption and lesser dip in cement production.
o Manufacturing production has seen a gradual pick-up since March.
16
…As re-monetization nears completion
Re-monetization process nearing completion … … resulting in pick-up in consumer expenditure
18,000 20%
85% of pre- FMCG
17,000
demonetization
16,000
level 15%
15,000
14,000
13,000
12,000 10%
11,000
10,000
5%
9,000
Currency in circulation INR bn
Sales growth
8,000
Nov-16
Nov-16
Apr-17
Apr-17
May-17
Oct-16
Feb-17
Mar-17
Dec-16
Jun-17
Sep-16
Sep-16
Jan-17
Jan-17
0%
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Cash intensive sectors showing initial signs of recovery – real estate and construction
30% 20.0
Cement Production Steel consumption
Stamp duty revenues (YoY%)
20% 15.0
10.0
10%
5.0
0%
0.0
-10% -18%
-5.0
-20%
Initial signs of recovery as re-monetization -10.0 Cement production recovers
-30% progresses -24%
as real estate sector shows
-32% -15.0 YoY% initial signs of stabilization
-40%
-20.0
Nov-15
Nov-16
Jan-16
Mar-16
Apr-16
Jan-17
Mar-17
May-15
Dec-15
Aug-15
Feb-16
May-16
Dec-16
Aug-16
Feb-17
Sep-15
Sep-16
Jun-15
Oct-15
Jun-16
Oct-16
Jul-15
Jul-16
Oct-15
Oct-16
Apr-16
Apr-15
Apr-17
Feb-15
Aug-15
Dec-15
Feb-16
Aug-16
Dec-16
Feb-17
Jun-15
Jun-16
17
SW monsoon progress: begins on a
good note
IMD forecasts a bountiful monsoon for 2017 Spatial distribution static over last 2 weeks
% area received deficient rainfall
Rainfall (% Forecast
% area received normal to excess rainfall
Category of LPA) probability 100%
Deficient <90 7 90%
Below Normal 90-96 28 80%
Normal 96-104 50 70%
Above normal 104-110 13 60%
Excess >110 2 50%
40%
2016
30%
Regional forecast outcome
20%
North-west 96% 95%
10%
Central 100% 106%
0%
South Peninsula 99% 92%
2-Jun
3-Jun
4-Jun
6-Jun
7-Jun
9-Jun
5-Jun
10-Jun
11-Jun
12-Jun
13-Jun
14-Jun
15-Jun
16-Jun
17-Jun
18-Jun
19-Jun
20-Jun
21-Jun
22-Jun
23-Jun
24-Jun
26-Jun
N-E India 96% 89%
As per its second stage operational long-range forecast, IMD expects 2017 Southwest
monsoon to be normal at 98% of LPA versus its earlier estimate of 96%
Rainfall in months of July & August forecast at 96% & 99% of LPA respectively
Region-wise, Central India expected to see good rainfall at 100% of LPA (see table)
PROGRESS, so far (up to 26th June)
On a cumulative basis, rainfall has slipped into a deficit of 1%
After a good start, progress has eased successively over the last 2 weeks
However, spatial distribution has remained static over this period
Sowing of Kharif crops rose by 9%YoY (as of 23rd Jun-17), but pulses and Jute
recorded a decline in sowing vis-à-vis last year
18
FY18 growth estimate at 7.4%
Recovery to be led by consumption with a rise in urban and rural consumption
21 7.0% 6.9%
Urban wages: Listed companies employee expenditure YoY%
19 6.5%
17 6.0%
15
5.5%
13 12.7
5.0%
11
4.5%
9
7 4.0%
Rural wage YoY%
5 3.5%
Feb-15
Aug-15
Dec-15
Aug-16
Dec-16
Feb-16
Feb-17
Jun-15
Jun-16
Oct-15
Oct-16
Apr-15
Apr-16
Apr-17
Dec-15
Mar-17
Mar-13
Jun-13
Dec-13
Mar-14
Jun-14
Dec-14
Mar-15
Jun-15
Mar-16
Jun-16
Dec-16
Sep-13
Sep-14
Sep-15
Sep-16
We fine-tune FY18 GDP growth estimate to 7.4% from earlier range of 7.3% to 7.5% (vs. 7.1% in
FY17).
Growth to be driven by:
Consumption supported by 7th CPC, lower interest rates and recovery in rural
demand due to normal monsoon.
Investment cycle to be led by public sector both Centre and States. Subdued
private capex due to balance sheet stress and low capacity utilization
Export growth driven by global demand recovery and rise in commodity prices.
Reforms promoting ease of doing business. GST to accrue significant benefits in
the medium term. 19
Inflation
20
CPI Inflation: The moderation
continues
CPI Inflation: By broad categories Monthly momentum: Lower for food, across
6.5 Miscellaneous Fuel Housing categories
Clothing Pan, Tobacco Food and Beverages
5.5 Seasonal May-17
Food & Beverages: Sub-category %MoM momentum
4.5 Cereals and Products 0.36 0.23
3.5 Meat and Fish 1.15 0.65
Milk and Milk Product 1.07 0.51
2.5
Oils and Fats 0.51 -0.17
1.5 Fruits 0.78 -0.50
Vegetables 3.47 1.46
0.5
Pulses and Products 1.57 -1.85
-0.5 Sugar and Confectionery 0.51 0.25
Jul-15
Jul-16
Mar-16
Mar-17
May-16
May-17
Jan-16
Jan-17
Sep-15
Sep-16
Nov-16
Nov-15
3 0.0
2
-0.5
1
0 -1.0
-1
-1.5
-2
-3 -2.0
Jun-16
Jul-16
Mar-16
Mar-17
Dec-16
May-16
Oct-16
May-17
Jan-16
Jan-17
Feb-16
Feb-17
Sep-16
Apr-16
Apr-17
Aug-16
Nov-16
-2.5
Food Non Food Fuel Manufacturing
WPI inflation, as per the new series, eased further for the fourth consecutive
month to 2.17%YoY in May-17 to converge with CPI Inflation
From the beginning of the year, WPI inflation has continuously outpaced CPI
inflation by an average of ~130 bps. However, a faster pace of decline in wholesale
prices vis-à-vis retail prices bridged this gap in May-17
Replicating CPI internals, food and fuel prices drove WPI moderation
Lagged adjustment of crude oil prices (India crude basket was 4%MoM lower in
May) and INR appreciation have supported both inflation metrics
22
Inflation Outlook: Appears more
sanguine
CPI Inflation has surprised sharply on the Some of the factors that have been favorable
20 downside over Apr-May from an inflation perspective
Inflation surprise (in bps) Large favorable base effect
10
0
Feeble seasonal momentum in perishables
Jul-16
Mar-17
Dec-16
May-16
Oct-16
May-17
Jan-17
Feb-17
Sep-16
Apr-17
Aug-16
Nov-16
The average hike in MSPs for FY18 stands at 6.1%YoY compared to 4.8% in FY17
Among the crops, Paddy saw an increase 5.4%YoY and increase for Ragi at 10.1%
was the highest
Bonus of Rs 200/quintal has been announced for Pulses and in the range of Rs 100-
200/quintal for oilseeds
FY18 marks the fifth consecutive year of aggregate MSP hike being in low single-
digits. Contrast this with an average MSP hike of 17.1%YoY over FY08-13
We estimate that the direct impact of MSP hikes on CPI and WPI to be 47 bps and
20 bps respectively (vs 42 bps and 15 bps respectively in FY17)
24
7th Pay Commission – allowances hike
from 1st July
Impact on CPI-housing in past episodes of Pay Status of State Pay Commission
State Status of State Pay Commission
Commission hike in allowances Andhra Pradesh Due in 2019
Housing inflation - CPI IW (%MoM)
20 Cabinet has given approval to Commission
5th CPC recommendations for implementation of pay & pension
18 6th CPC
Bihar hikes in FY18
16 Chhattisgarh To be implemented in FY18
14 Gujarat Implemented and budgeted in FY17
Haryana Implemented and budgeted in FY17
12
HP Implemented and budgeted in FY17
10 Jharkhand Implemented in FY17, arrears to be paid in FY18-19
8 Karnataka State pay commission set up
Kerala Due in 2019
6 Madhya Pradesh To be implemented in FY18
4 Maharashtra Final decision on committee report awaited
Odisha Fitment committee report awaited, Budgeted in FY18
2
Rajasthan Decision pending, Partially budgeted for in FY18
0 West Bengal Committee report yet to be submitted
Jan-96
Jan-07
Sep-99
Sep-10
Apr-04
Aug-11
Aug-00
Nov-97
Nov-08
Jun-13
Jun-02
Jul-01
Jul-12
Mar-05
Dec-96
Dec-07
May-03
Oct-98
Oct-09
Feb-06
Mar-15
Mar-16
Mar-17
Mar-18
Jun-15
Jun-16
Jun-17
Dec-15
Dec-16
Dec-17
Sep-15
Sep-16
Sep-17
We expect CPI inflation to further ease below 2% in Jun-17
Thereafter, CPI inflation trajectory is expected to pick-up, albeit at a pace lower
than anticipated earlier
As such, we have revised down our FY18 CPI inflation estimate lower to 4.0% from
4.9% earlier
Upside risks from (1) 7th Pay Commission allowance payouts (2) GST related
upward price adjustments on account of compliance costs and partial pass-through
remain
26
Reforms
27
Monsoon Session of Parliament
Key Bills to be considered in the Monsoon Session of Parliament
Background Bill/Status
Grant OBC Commission similar The National Commission for
Constitutional status as enjoyed Backward Classes (Repeal) Bill,
by Commission for SC/ST 2017 (Passed in Lok Sabha)
Amendments to Central Excise Act
Renaming the Central Board 1944, Customs Act 1962, CGST Act,
of Excise and Customs (CBEC) etc.
Enable central government to fix
universal minimum wage Code on Wages Bill
Increase working overtime hours Factories (Amendment) Bill, 2016
up to 100 per quarter (Passed in Lok Sabha)
29
A hint of dilution of MPC’s
hawkish bias
Target CPI Actual CPI MPC Voting on the Resolution to keep Repo Rate
(%) (%) unchanged at 6.25% in Jun-17
Member Vote Inferred Stance
Jan-15 8.0 5.2
Chetan Ghate Yes Neutral (Hawkish)
Jan-16 6.0 5.7 Pami Dua Yes Neutral (Neutral)
Mar-17 5.0 3.8 Ravindra Dholakia Yes Dovish (Dovish)
Michael Patra** Yes Hawkish (Hawkish)
Mar-18 4.0 4.0* Viral Acharya** Yes Neutral (Neutral)
Urjit Patel** Yes Neutral (Neutral)
* RBI estimate for H2 FY18 avg. of 3.5-45%, revised lower from
5.0% (Apr-17) * Previous inferred stance in Apr-17 depicted in parenthesis
** Members representing the RBI
While the monetary policy stance continues to remain neutral, the hawkishness
introduced in Apr-17 policy review now seems to be getting diluted
• There has been a substantial downward revision in RBI’s inflation forecast for H2
FY18 to 3.5-4.5% from 5.0% provided earlier
• One MPC member voted for a 50 bps cut in the repo rate during Jun-17 policy
review
With average inflation likely to move towards 4.0% levels in FY18 from 4.5% in FY17,
we expect RBI to opt for a 25 bps rate cut in the upcoming policy review in Aug-17
30
It’s all about inflation
60 Target Regime: 6% 40 Market pricing of change in repo rate over the next 1Y (bps)
Target Regime: 5%
Surprise in CPI (Survey-Actual, bps)
40 Target Regime: 4% 20
20 0
0 -20
-20 -40
-40 -60
-60 -80
-80 -100
Feb-17
Nov-16
May-17
Mar-17
Jun-16
Jun-17
Dec-16
Oct-16
Jul-16
Jan-17
Sep-16
Aug-16
Apr-17
-250 -200 -150 -100 -50 0 50 100 150
Deviation in CPI from target (bps)
CPI inflation prints have undershot market expectations and target in 9 out of last 12
months
• Last twelve inflation prints have on an average undershot market expectations by
9 bps and target by 80 bps
This sizeable downside surprise has resulted in a shift in market expectations with
respect to future course of MPC action
• The market, which was earlier pricing in a status quo scenario until last month, is
now looking at a 25 bps rate cut over the 1Y horizon
31
High real rates and stable
currency…
5 Basis actual CPI 16
Real Rate (%) 1Y Implied Vols for Key EM Currencies (%)
Basis 1Y ahead expected CPI from RBI SPF
4 14
12
3
10
2
8
1
6
0 4
-1 2
0
-2
COP
CLP
KRW
TRY
MYR
IDR
MXN
ZAR
RON
CZK
RUB
BRL
PHP
THB
INR
SGD
PLN
HUF
Sep-15
Sep-16
Sep-14
Mar-14
Mar-15
Mar-17
Mar-16
Jun-14
Jun-15
Jun-16
Jun-17
Dec-13
Dec-14
Dec-16
Dec-15
India’s 1Y real T-Bill rate (basis actual inflation) has averaged over 4% in FY18 so far,
up from 2.0% in FY17
• Taking into account 1Y ahead inflation expectations, real rate has averaged at 1.9%
over the last three years
INR has gained more than 5% return on CYTD basis, making it one of the high
performers in EMFX
This performance is also backed by relatively low volatility
• As such (besides MYR), the short USDINR carry trade has generated a Sharpe
Ratio of 4.1 on CYTD basis, the best in EMFX
32
…finding appeal among foreign
investors, but
30 Share of Debt in FPI Investment (%)
FPI Debt Utilization Status (as of Jun 29, 2017)
25
Upper Limit Exhausted Free Limit
20 (USD bn) Limit (%) (USD bn)
5 Corporate
77.9 89.7 8.1
Bonds
0
Note: RBI Rupee Reference Rate of 64.47 used to convert INR limits into USD
Jun-08
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-07
Jun-09
The combination of attractive real interest rate and stable currency has found
significant foreign interest
The share of debt investment in total investments made by FPIs in India has crossed
27% for the first time
• On FYTD basis, FPIs have invested USD 9.9 bn so far, significantly higher than
the USD 1.7 bn investment in equities
The debt limits however are now close to getting exhausted (esp. for g-secs)
• This could limit the upside to the extent of incremental FPI debt inflows in the
coming months
33
Remonetization resulting in gradual
normalization in cash demand
20,000 2000
Stock of Currency in Circulation (INR bn) Monthly change in CiC (INR bn)
1800
Remonetization Demand
18,000 17,975 1600 Seasonality Demand
1400
16,000 15,325 1200
1000
14,000
800
12,000 600
400
10,000 200
8,980 0
8,000 -200
Jul-16
Jan-17
Feb-17
Apr-16
Aug-16
Apr-17
Sep-16
Nov-16
May-16
May-17
Mar-17
Jun-16
Jun-17
Dec-16
Oct-16
Feb-17
Mar-17
May-17
Jun-17
Jan-17
Apr-17
Cash/GDP ratio picked up to 8.8% in Mar-17 after bottoming out at 6.4% in Dec-16
The stock of CiC has reached INR 15.3 trillion (as of Jun 16) – representing 85% of the
pre demonetization stock
The degree of average weekly cash leakages has moderated from INR 364 bn in Q4
FY17 to INR 164 bn in Q1 FY18 so far
• Of the estimated cash leakage of INR 6.0 trillion over Q4 FY17 and Q1 FY18,
remonetization demand explains nearly 5.0 trillion (~84%) of the incremental
leakage, with the remaining ~16% explained on account of economic activity as
well as seasonality factors
34
Liquidity to remain comfortable for
next 4-quarters
4000 Systemic Liquidity (INR bn, qtr avg values)
3500
2500
2000
1500
1000
500
0
Q4 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19
Average liquidity in Q1 FY18 has barely budged despite INR 1.83 tn of cash leakage
due to extremely high government spending (INR 1.55 tn) and RBI intervention
(~INR 650 bn)
Assuming a near normalization of Cash/GDP ratio to ~11.3% by end Q2 FY18, we
expect systemic liquidity to move towards neutral by Q1 FY19
• Liquidity trajectory from H2 FY18 onwards will be predominantly governed by
nominal economic growth and seasonality factors
• Risk to this outlook stems from continued reserve accumulation from the RBI
in case of robust foreign inflows - this could push ahead the timeframe for
liquidity normalization 35
G-Sec Outlook
1. Incremental monetary policy support (25
bps cut expected in Aug-17)
2. Liquidity conditions to remain comfortable
through FY18
3. Fed hike to be gradual; strong USD spillover
risks contained so far
Taking into account the change in our monetary policy call, we revise lower our
forecast for 10Y g-sec yield to 6.40-6.90%
• Yields to harden somewhat in H2 FY18 after remaining range-bound in Q2 FY18
• Global commodity prices, Fed rate trajectory, INR valuation, etc. could provide
source of volatility
36
INR view
37
INR: Global risks evidently lower
14Jun17
22Jun17
06Jun17
06Dec16
23Dec16
15Dec16
02May17
11May17
19May17
29May17
02Jan17
10Jan17
18Jan17
27Jan17
06Mar17
15Mar17
23Mar17
06Feb17
23Feb17
14Feb17
12Apr17
21Apr17
03Apr17
18Nov16
28Nov16
Jan-16
Jan-17
Sep-16
Apr-17
Apr-16
Aug-16
Nov-16
Jun-16
Jun-17
Jul-16
Mar-16
Mar-17
May-16
Dec-16
May-17
Oct-16
Feb-16
Feb-17
Note: Volatility has been measured by simple standard deviation
After appreciating on the back of favorable global and domestic drivers including
(1) a softer dollar, (2) improving global sentiment, (3) better-than-expected
performance of the ruling government in state elections and (4) change in stance of
the RBI from accommodative to neutral; the INR seems to have settled in the 64-65
range
It bears mention that this range-bound behavior is the longest phase of stability in
the USDINR this year and the second longest after 2016
Stability in the currency has been a key positive for investors. 1-month volatility in
USDINR is currently tracking at 0.1, the lowest since May 2016.
39
FX intervention: RBI walks the talk
RBI’s pace of dollar buying has reduced RBI intervention in FX markets has been low
10 390 10 RBI Gross Spot Intervention (% of Interbank FX Turnover)
Change (Week-over-week; USD Bn; lhs)
9
8 FX Reserves (USD Bn)
370 8
6
7
350
4 6
2 330 5
0 4
310
3
-2
290 2
-4
1
-6 270 0
Jun-13
Jun-14
Jun-15
Jun-17
Jun-16
Dec-13
Dec-14
Dec-15
Dec-16
Oct-13
Oct-14
Oct-15
Oct-16
Feb-14
Feb-16
Feb-17
Feb-15
Apr-14
Apr-15
Apr-16
Apr-17
Aug-13
Aug-14
Aug-15
Aug-16
Sep-12
Sep-13
Sep-14
Sep-16
Sep-15
Mar-12
Mar-13
Mar-14
Mar-16
Mar-17
Mar-15
With respect to FX intervention, RBI has in the past specified that it intervenes to
minimize INR volatility rather than target a specific level.
This has been most apparent in recent INR moves, wherein the RBI has kept dollar
buying limited despite sharp INR appreciation.
Based on data available until April, the ratio of spot intervention in the FX market by
the RBI has reduced to 1.2, a sharp reduction from 5.1 in January.
Excess systemic liquidity may have also prevented heavy FX intervention. The RBI
has been intervening heavily in forward markets until April (USD 8 Bn), though this
too seems to have slowed in May (USD 2.7 Bn).
40
Has the REER turned less-effective?
INR performance vs. partner country FX Re-based REER suggests lower valuation pressure
0.4
RBI REER (FY12 base)
INR performance vs. major trade partner currencies…
110.0 108.1
BIS REER (FY12 base)
0
105.0
104.8
100.0
-0.4
95.0
-0.8 90.0
YES Bank Estimates
Lower denotes appreciation
85.0
Performance over the last 1-yr
Jul-14
Jul-16
Jul-15
Mar-15
Mar-16
Mar-17
Mar-14
May-14
May-15
May-16
Jan-14
Jan-15
Jan-17
Jan-16
Sep-14
Sep-15
Sep-16
Nov-15
Nov-16
Nov-14
-1.2
USD
BRL
NGN
GBP
IDR
RUB
TRY
AUD
PHP
AED
EUR
JPY
CAD
MYR
HKD
MXN
ZAR
SGD
KRW
CNY
CHF
THB
TWD
The rupee’s REER overvaluation has risen steadily from 10% 12-months ago, to ~19%
as of May-17 (based on RBI REER 36 currencies)
Rising INR overvaluation could be result of trade partner currencies depreciating
more than INR, either (1)intentionally due to loose monetary policy or competitive
devaluation) or (2)unintentionally (India’s relatively better macros)
Moreover, our estimates suggest REER overvaluation could be lower than perceived
when the REER is re-based to align with other India macro indicators such as GDP
RBI re-based REER (FY12=100) suggests lower INR overvaluation (~8%). The BIS
REER suggests an even lower overvaluation of 5%.
41
Why will unwinding of Fed’s balance
sheet have limited impact on INR?
5000 Fed's Balance 30
India’s stronger macros to limit impact on INR
In USD mn In % of GDP (RHS)
Sheet Size
4500
25
Situation Current
4000
in 2013 Situation
3500
20
3000 GDP (%) 5.9 7.1
2500 15
CPI (%) 9.7 4.0
2000
1500
10 Fiscal Deficit (% of GDP)* 4.4 3.2
1000
5 CAD (% of GDP) 5.0 0.7
500
0 0
Import Cover (Months)** 6.7 11.3
Basic BoP (% of GDP) -3.8 0.9
Mar-07
Mar-09
Mar-10
Mar-12
Mar-13
Mar-14
Mar-15
Mar-17
Mar-08
Mar-11
Mar-16
Note: Data represents 4Q MA with Jun-13 and Mar-17 as reference quarters
* Annual data, ** 2013 as of Jun-13 and current situation as of Mar-17
The FOMC has indicated the possibility of gradual unwinding of Fed’s balance sheet
(sometime in 2017), whose size has swelled to USD 4.5 tn (23.6% of GDP) from USD
0.9 tn (6.3% of GDP) just before the GFC
• Fed intends to start with an initial monthly unwind rate of USD 10 bn securities,
which will increase to USD 50 bn securities per month after 12-months
• At this rate, the Fed can reduce its balance sheet size by USD 300 bn and USD 600
bn respectively over the course of two years
While this can have some adverse spillover impact on rates and EMFX, for INR the
impact would be limited (unlike 2013) as all key macros have strengthened
considerably in comparison 42
Strong capital inflows could more-
than-compensate for rising CAD
FPI flows continue to surprise on the upside Strong FDI flows led by Telecom and Fintech
10 9.0
Portfolio Flows (Net, USD bn)
8
Debt Equity
6
4.7 3.8
4 2.5 2.7
-2
-4
-6
Jul-16
Jan-16
Jan-17
Feb-16
Feb-17
Apr-16
Aug-16
Apr-17
Sep-16
Nov-16
May-16
May-17
Mar-16
Mar-17
Jun-16
Jun-17
Dec-16
Oct-16
Capital flows into India are expected to recover in a broad-based manner in FY18
FPI inflows recovered in 1Q2017, surpassing EM trend in the month of March. Steady
inflows have continued in April-June, tracking at USD 11.2 Bn (FYTD).
With several upcoming IPOs over the next few months, FPI flows could continue
going ahead.
FDI is expected to touch historic highs in FY18 (YBL: USD 40 Bn). NRI deposits
coming back to trend after FY17 outflows would also be BoP supportive (YBL FY18:
USD 11 Bn). This is likely to compensate for rising current account deficit in FY18
(YBL: 1.2% of GDP).
43
Downside risks to our USDINR
forecasts
Basis persistent correction in the USD, our USDINR forecasts could see some downside risks
46
Contacts
YES BANK Limited
Registered & Corporate Office: Nehru Centre, 9th Floor, Discovery of India, Worli, Mumbai 400018
Tel: + 91 22 6669 9000; Fax: + 91 22 6669 9018
Northern Regional Corporate Office: 48 Nyaya Marg, Chanakyapuri, New Delhi 110 021
Tel: + 91 11 5556 9000; Fax: +91 11 5168 0144
Note: Data in this report has been sourced from CEIC, Bloomberg, GoI Budget Documents & Economic Survey, CGA, PPAC, IMD, RBI,
IMF, and YES BANK Limited
47
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About YES BANK
YES BANK, India’s fourth largest private sector Bank, is the outcome of the professional &
entrepreneurial commitment of its Founder Rana Kapoor and his top management team, to
establish a high quality, customer centric, service driven, private Indian Bank catering to the
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49