OUTLOOK 2019 - INDIA MACRO

KEYNOTE

• BJP might lose parliamentary majority in coming general elections 2019 , but coalition seems form government.

• We expect India to remain fastest growing giant in 2019-20

• Rise of the current account deficit, India’s external position still manageable

• CPI inflation to remain around 4.5%-5.5% in 2019-20, RBI to hike once more

• Strengthening the financial sector is another key challenge

USDINR Vs IND10YR YIELDS - 2006 - 2018

USDINR will perform much better in 2019, We expect Rupee will be around 4% - 8% against greenback, but gradual depreciation is on the card, Meanwhile USDINR is quite well-positioned to weather market turmoil & expect the Indian rupee to recover versus USD. In fact, we have already seen some recovery of the rupee in recent months, while bond yields have dropped back a bit as well.

FED IMPACT ON - DM/EM INTEREST RATE

2019-20, our projection is annual CPI inflation to remain around 4.5% - 5.5%, remaining within the RBI’s medium-term target of 4% +/- 2 %-points. In 2018 RBI hiked policy rate (Repo rate) by 50 bps (June and August), to 6.50%, in reaction to the rise in core inflation and rupee weakening. With headline inflation moving up again – and core inflation remaining elevated – we expect the RBI to hike once more in the course of 2019.

FOREX RESERVES 2000 - 2018

FX reserves dropped by over 10% since the peak reached in April 2018, they remain at comfortable levels covering around 6.5 months of imports, 3.5 times short-term external debt and over 70% of total external debt. On the fiscal front, the budget deficit is being reduced gradually, to around 3.5% of GDP (although the deficit reduction process has stalled). Public debt is gradually falling and currently just below 50% of GDP.

CURRENT ACCOUNT Vs OIL IMPORTS

In 2018 strong domestic demand and rising oil prices have driven the current account deficit up to an estimated 3% of GDP. Indian Government has taken measures to keep the deficit under control, such as raising policy rates and installing import restrictions. Also taking into account the recent sharp downside correction of oil prices, we expect the current account deficit to remain below 3% of GDP in the coming years, falling back to around 2% of GDP in 2020.