Liquidity In India

by Envenkat: Mumbai

The Indian Liquidity story is one which has many parts; this research note comments on the parts which I myself follow.

a) S&P has now upgraded India's sovereign rating to BBB. Thus all three major agencies now have given a rating of Investment Grade to India. This decision has triggered a lot of international interest - Standard Chartered global CEO said there would no longer be a ceiling/ cap on Indian exposure, it would now be driven by Risk Management norms. I am sure many other banks/ capital pools will react in due course.

My feedback tells me that already over USD 5 bn has flow into India, thru banking channels. Hence the Indian rupee has already strengthened to INR 44/ USD, which represents a gain of around 2% in the last 15 days. Over the next few quarters this trend is likely to become even more pronounced.

b) Domestic banks have further raised their deposit and lending rates by 50bps, in response to the statements of the RBI Governor in his quarterly review of 31st January. Now we are getting to see quotations of 10% for 1-3 year deposits. This would make banking deposits competitive with Government savings products rates of 8%. Bank deposits are growing at over 21% y-o-y, primarily from wholesale (read as Corporate/ Institutional/ Foreign) investors.

The Bankex, which is an index of Banking stocks, has risen in 2007. Of course the direction is inline with the general stocks trend in India. In other words the Net Interest Margin squeeze which people were expecting has not been seen in the Dec31st quarterly results which were just declared.

Insurance Companies, especially the Life Insurance ones, have increased their first-premium collections by 160% in this fiscal. This is largely from the sale of Unit-linked insurance policies, and this is a reflection of the reach of the distribution network and the strong performance of the stock markets. This has been happening to the extent that IRDA, the regulatory body, has started wondering whether this a healthy sign, as the solvency requirements for UnitLinked policies are lower than that of term/ risk policies.

The 21%+ growth in bank deposits has been achieved despite the solid performance of the Insurance network.

The outlook for bank liquidity is tight, but not liquidity is not scarce. Rates are expected to remain firm, and the inverted yield curve (higher short-term rates than long-term) is expected to remain in place, at least till the fiscal year end ie March 31.

c) Government Revenues have been buoyant - with about 40% growth in direct taxes. This is driven in part by the 70% y-o-y growth in the corporate profits of the Sensex Companies. The Government borrowing program has not yet shown signs of additional spending/ borrowing in following the buoyant revenues.

d) Media attention has been largely focused on the high level of asset prices - especially in real estate. As I mentioned in my previous note on Housing, affordability concerns are emerging, but I don't think at a level which is affecting the pace of offtake as yet. One reason for this could be that the growing class of entrepreneurs are also becoming more confident as they have also made good income/profits in the recent past. AIM - London Listings/ mobilisations from QIP's into Real Estate funds/ vehicles are estimated at USD 3 bn+ in 2006. As per a Business World report, this sector is expected to attract USD 15bn Institutional funds by end 2007.

The high valuations which are to be found in the stock markets are not yet attracting undesired attention due to the good corporate performance and the volume of liquidity currently flowing thru to India. India has been ranked as most promising in the update to the Goldman Sachs BRICS report update of 2007. Gold has been appreciating too, and the offtake by India, which had slowed in mid 2006, has picked up in the recent months.

Despite the RBI's measures to 'regulate' flows towards sensitive sectors like real-estate and capital markets, asset prices continue to show firm trends. The investment stance of individuals and corporates is strong right now, hence I guess the asset-prices are staying where they are.

The monetary policy stance has continued to be hawkish, especially as inflation is nudging above the upper band of 5.5%, towards 6%. The Government has reduced import duties on cement, and a variety of other inputs, in response to the same. So RBI is trying do what it can to control inflation. However the liquidity which is circulating, is coming from many different directions, which is why I guess we have the inverted yield curve, and this is expected to remain so till the end of the current quarter. Of course the forthcoming Budget can change direction and have an impact on all this.