India Macro Scan

Impact of Oil
&
Macroeconomic Outlook Amidst Global Uncertainties

Mumbai
April, 2011
Oil on Boil: Impact on India
Relatively low importance of troubled
countries

30
Oil imports (mn tonnes) Arab League Index of Unrest
25 Qatar
Kuwait
20 UAE
Lebanon
Bahrain
15 Morocco
Tunisia
10 Jordan
Algeria
Saudi Arabia
5 Mauritania
Oman
0 Iraq
Syria
Nigeria

North America
South America

Angola

Oman

Yemen
UAE
Saudi Arabia

Kuwait
Iran

Asia

Eurasia

Egypt
Iraq

Qatar

Egypt
Libya
Yemen

0 20 40 60 80 100

Oil imports from Egypt and Libya form a minor portion of India’s oil import
bill

Risk of a contagion spreading to the Gulf countries remains as depicted by
Economist’s ‘Arab League Index of Unrest’

While Egypt was primarily a concern about transit, Libya's production
represents one third of the world's spare capacity and hence the possibility of
complete disruption in supply has spooked the oil market
OPEC’s reserve capacity adequate to
compensate Libya’s production loss
6 (mbpd) Spare capacity of OPEC members
UAE Saudi Arabia Qatar Libya Kuwait
5

Jun-10

Jul-10
Mar-10

May-10

Dec-10
Jan-10

Oct-10
Feb-10

Sep-10
Apr-10

Aug-10

Nov-10

OPEC collectively pumped 29.4 mbpd in January 2011 and has about 5 mbpd of
spare capacity of which Saudi Arabia accounts for 3.1 mbpd

Saudi Arabia’s reserve capacity is adequate to make up for the loss of
production in Libya

However, a simultaneous shutdown in production in multiple regions has the
potential of throwing the oil supply in a disarray, and push crude prices higher
on a sustained basis
Limited impact on economic growth

12 Non-Farm GDP (% YoY) -20

WPI Fuel Minerals (% YoY 6m lag, RHS, Inverted) -15
11
-10
10 -5

0
9
5
8
10

7 15

20
6
25

5 30
Sep-07

Sep-10
Jun-05

Mar-06

Jun-08

Mar-09

Jun-11
Dec-06

Dec-09

The impact of international crude oil prices gets diluted in case of India as
prices of diesel, kerosene, LPG continue to be heavily administered

Only petrol prices have seen government deregulation – although there is a
substantial lag with which prices are adjusted

If average oil price remains in the range USD 100-110 pb in FY12, then the
impact on non-farm GDP growth would be limited
High oil prices impact inflation with a lag

12 100
India Energy Consumption by Sub Sectors
80
10
60
8 Iron and Steel
40
Chemicals
6 20
Cement
4 0
Food and Tobacco
WPI (% YoY) -20 Aluminium
2
Brent (% YoY, RHS) -40 Pulp, Paper and Printing
0 Textile and Leather
-60

-2 -80 Other
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

ATF and naptha prices continue to be dominated by international pressures

However the pass through of international prices is not instant as items like
diesel, kerosene, and LPG continue to be administered (petrol prices were
deregulated by the government earlier this year)

With a lag of 3-6 months, WPI inflation generally responds with an increase of
0.4% for every 1% increase in oil prices (this includes the second round impact)

Pass through of crude prices to high energy consumption sectors such as Iron
& Steel, Cement, Chemicals is likely to weigh on core inflation
Fisc appears vulnerable to oil shock

FY09 FY10 FY11* FY12*

Average oil price (USD pb) 83 70 85 110
Total underrecoveries (` bn) 1042 461 950 1300
Financed by:
Upstream companies (` bn) 329 144 426 540
OMCs (` bn) 0 57 140 224
Government (` bn) 713 260 384 536

The government gave a subsidy of over ` 700 bn in FY09 when under

recoveries exceeded ` 1 trillion

Total under recoveries are expected to touch ` 1300 bn in FY12 if oil prices
average around USD 110 pb

The government has budgeted only ` 230 bn as petroleum subsidy for FY12

If average oil price rises by 25-30% in FY12, then petroleum subsidy could
overshoot the budgeted target by approximately ` 300 bn – this could potentially
add 0.3% to the fiscal deficit
Impact on INR to be limited…

FY11 FY12 900

Strategic Petroleum Reserves (mn barrels)

USD 83 USD 105 USD 110 USD 115 800 By 2020

700 To be added in 2011-12
Exports 242 290 290 290 Current
600
Non Oil 279 322 322 322 500

Oil 96 121 126 131 400

300
TB 133 153 158 163
200
Invisibles 87 100 100 100 100
Curnt a/c -46 -53 -58 -63 0

% of GDP -2.7 -2.7 -2.9 -3.2 US Japan China India

We expect concerns on current account deficit to be manageable as long as oil

price averages less than USD 110 pb

In the absence of significant strategic petroleum reserves, higher crude prices
on a sustained basis would translate into higher oil imports in value terms

A positive BoP surplus in FY12 should help in containing the adverse impact
of high oil price
…as oil exports have picked up

20 Oil production (USD bn) Oil exports (USD bn, RHS) 4.5 5.0
Ratio of oil imports to oil exports
18 4.0 4.5

16
3.5 4.0
14
3.0 3.5
12
2.5 3.0
10
2.0 2.5
8

1.5 2.0
6

4 1.0 1.5

Oct-07

Oct-08

Oct-09

Oct-10
Apr-07

Apr-08

Apr-09

Apr-10
Apr-07

Apr-08

Apr-09

Apr-10
Oct-07

Oct-08

Oct-09

Oct-10

India’s oil production and exports have seen a pick up over the last 6-months

Oil exports have increased vis-à-vis oil imports on a relative quantitative scale
– exports have likely touched USD 4 bn level on a monthly basis

While high oil price will have a negative effect on oil imports, it would at the
same time have a positive impact on oil exports
Remittances unlikely to be affected in a big
way
Source of Remittance Inflows into India Average Utilisation Pattern of Remittances sent to India

Family Maintenance
North America
Deposits in Banks
Gulf
Europe Investment in Property

South America Investment in Equity

East Asia Shares
Others
Africa
Others

India is the top remittance receiving country and has the 2nd largest emigrant
population in the world

While the Gulf region contributes close to 27% of the total remittance inflows,
it is considerably lower than North America’s share of 38%

Chances of the ongoing geopolitical crisis in the MENA region adversely
affecting remittance inflows is low

However, India could suffer from lumpiness in the inflows due to temporary
retrenchment of migrant workers and economic crisis in the Gulf countries
Rates likely to carry an upside bias

11 160
10Y bond yield (%)

10 5Y OIS (%) 140

Brent (USD pb, RHS)
9 120

8 100

7 80

6 60

5 Correlation of oil with 10Y yield = 72% 40

Correlation of oil with 5Y OIS = 71%
4 20
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

High oil price impacts both inflation and fiscal deficit (in case of limited or no
pass through)

High persisting inflation could imply tighter monetary policy while high fiscal
deficit could imply higher market borrowings

Under both the conditions, long term rates would carry an upward bias
Global Snapshot
Global themes

Private consumption continues to support the ongoing global economic recovery

Recovery remains unbalanced – while in most economies output is still below

potential, most of the emerging market economies are now facing the problem of
“overheating”

Sovereign concerns in the euro area continue to persist; need for fiscal consolidation
can potentially soften the recovery process in some of the European countries

Emerging market economies facing upside risks to inflation; in contrast inflationary

pressures in most of the developed economies continues to remain subdued

The increase in commodity prices due to a combination of the ongoing recovery in

global growth and geopolitical unrest in the MENA region would add to headline
inflationary pressures in the near term

Monetary policy tightening by the Asian central banks to continue in 2011; developed
country central banks to move slowly with caution

Intervention risks to remain in the FX markets with capital inflows amidst policy
tightening in Asia

The natural calamity in Japan to have limited impact on global growth and inflation
US: Housing and labor market yet to
recover
30 20 11 8

20 15 Spread with U-6 (%, RHS)

10
Unemployment Rate (%) 7
10 10 9
6
0 5 8

-10 0 7 5

-20 -5 6
4
-30 -10 5
New Home Sales (% YoY)
3
-40 Construction Spending (% YoY, RHS) -15 4

-50 -20 3 2

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11
Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Housing sector continues to remain weak despite reaching a likely bottom

during 2009-10

This has impaired consumers’ balance sheet through negative wealth effect

With real activity remaining weak, labor market conditions have also remained
fragile

Although the unemployment rate has fallen below 9%, the broader measure of
unemployment (U-6 rate) continues to remain at an elevated level
US: Inflation has picked up, but remains
subdued
6
CPI (% YoY)
5
Core CPI (% YoY)
4
3
2
1
0
-1
-2
-3
Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

CPI inflation reached a 10-month high of 2.2% in Feb-11

Core CPI inflation reached an 11-month high of 1.1% in Feb-11

With economic recovery still remaining soft, upward pressure on core inflation
is unlikely to sustain
Market expectations from Fed

80
Probability of a Fed hike implied by Fed Fund Futures (%)
70

60

50

40

30

20

10

0
2011

2011

2011

2011

2011

2011

2012

2012
Nov
Aug

Mar
Dec
Apr

Sep
Jun

Jan

Any Fed hike is virtually ruled out in April 2011

The probability of hike in the December 2011 FOMC meeting currently (as on
April 12th) stands below 50%
Global recovery in 2011 to be sustained,
moderation anticipated
IMF Forecasts (WEO, April 2011)
2009* 2010 2011 2012
GDP (% pa)
US -2.6 2.8 2.8 2.9
Eurozone -4.1 1.7 1.6 1.8
UK -4.9 1.3 1.7 2.3
Japan -6.3 3.9 1.4 2.1
China 9.2 10.3 9.6 9.5
CPI Inflation (% pa)
Advanced Economies 0.1 1.6 2.2 1.7
Emerging Economies 5.2 6.2 6.9 5.3

Growth in advanced economies is expected to moderate to 2.4% in 2011

from 3.0% in 2010

Inflation in advanced economies is expected to increase to 2.2% in 2011
from 1.6% in 2010
Global commodity themes

Commodity prices have picked up with the ongoing recovery in the global economy
• Gold price has touched an all time high
• Silver prices have already jumped up by 22% in 2011
• Aluminum prices are up by over 9% on a YTD basis

Recent geopolitical unrest in parts of Africa and Middle East have increased the tail risk
• Brent has increased by roughly 29% on a YTD basis

EM appetite for commodities should continue to put a floor to prices

The commodity rally stoked in the last few months on the back of QE-2 and an ailing
Dollar, should remain in flavor in H1-2011

A run up in commodity prices in 2011 could moderate the ongoing recovery process

Re-emergence of a risk event in European peripheral economies could mar the risk
appetite for commodities

China’s deliberate soft landing also runs a risk of weighing on demand and hence
global commodity prices
 India themes

Economic growth set for a moderation in FY12 to 8.3% – we expect the effect of growth
moderation to be amplified in H1 due to statistical base effect
• Rising core and fuel inflation to provide downside risk to growth

While consumption is expected to be the key driver of GDP growth in FY12, headwinds
for investment has emerged due to ongoing monetary tightening

Average WPI inflation expected to remain in the range 7.5-8.0% in FY12
• With global commodity prices remaining high, “ capacity constraints are helping
convert supply-side pressures into generalized inflation”

On the rate front, we expect RBI to continue tightening in FY12 and look for another 50
bps hike in both repo and reverse repo rates

The government has budgeted for an improvement in the fiscal deficit to 4.6% in FY12
from 5.3% in FY11. We expect subsidies to overshoot the budgeted target and increase
the fiscal deficit to 5.1% .

FII flows turned positive in Mar-11 (at USD 1.5 bn vis-à-vis USD -0.7 bn in Feb-11); Net
flows in Apr-11 have already exceeded USD 1.3 bn

We expect Rupee to weaken to 45.00 by Jun-11 and 46.50 by Dec-11 on the back of rising
oil prices, a stronger Dollar, and a mild moderation in domestic growth
India: Growth set for a mid-cycle moderation
GDP growth picks up, but signs of
moderation emerge
GDP by Sector
FY10 FY11
(In % YoY) Q1 Q2 Q3 Q1 Q2 Q3
GDP (at Factor Cost) 6.3 8.6 7.3 8.9 8.9 8.2
Agriculture 1.8 1.2 -1.6 2.5 4.4 8.9
Industry 2.9 6.3 10.0 11.7 8.9 5.7
Mining & Quarrying 6.9 6.6 5.2 8.4 7.9 6.0
Manufacturing 2.0 6.1 11.4 13.0 9.8 5.6
Electricity 6.2 7.5 4.5 6.2 3.4 6.4
Services 8.5 10.8 9.2 9.4 9.6 8.7
Construction 5.4 5.1 8.3 10.3 8.7 8.0
Trade, Hotels, Transport & Communication 5.5 8.2 10.8 11.0 12.1 9.4
Financing, Insurance, Real estate etc 11.5 10.9 8.5 7.9 8.2 11.2
Community, Social and Personal Services 13.0 19.4 7.6 7.8 7.4 4.8

After growing by 8.9% in H1 FY11, GDP growth moderated to 8.2% in Q3 FY11

Agriculture records the strongest performance in Q3 FY11 post the drought in
the previous fiscal year

Both industry and services growth moderated in Q3 FY11
Strong Agri growth reiterated by estimates
of crop production
Achievement of Production of Major Crops (mn tons)
Crop 2006-07 2007-08 2008-09 2009-10 2010-11**
Rice 93.35 96.69 99.18 89.09 94.11
Wheat 75.81 78.57 80.68 80.80 84.27*
Coarse Cereals 33.92 40.76 40.03 33.55 40.21
Pulses 14.20 14.76 14.57 14.66 17.29*
Foodgrains 217.28 230.78 234.47 218.11 235.88*
Oilseeds 24.29 29.76 27.72 24.88 30.25*
Sugarcane 355.52 348.19 285.03 292.30 340.55
Cotton # 22.63 25.88 22.28 24.22 33.92*
*Record high
** 3rd Advance Estimates
Source: Directorate of Economics and Statistics, Department of Agriculture and Cooperation

The record level of production of wheat, pulses, oil seeds and sugarcane in
FY11 reflects the likely possibility of agri GDP surprising us on the upside
FY12 growth to stay within trend

12
(% pa) Agriculture Industry Services GDP

10

0
FY08 FY09 FY10 FY11* FY12**
-2

After bottoming out at 6.8% in FY09, GDP growth is expected to rebound to

around 8.8% in FY11

We expect FY12 GDP growth to moderate to around 8.3% as impact of policy
tightening plays out completely

* CSO’s advance estimate; ** Our estimates

Consumption will remain the key driver of
growth in FY12

10 21
Private Consumption (% pa)
Investment (% pa)
9 Private Consumption Trend (% pa) 18
Investment Trend (% pa)
8 15

7 12

6 9

5 6

4 3

3 0

2 -3

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11
FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Domestic consumption has picked up and is likely to be the key driver of

growth in FY12

However, inflation and tight monetary policy could possibly keep investment
growth below the medium term trend
Gradual moderation reflected in IIP

Trends in Industrial Production (% YoY)

April-February
Weight Feb-10 Feb-11 FY10 FY11
IIP 15.1 3.6 10.0 7.8
Sectoral
Mining & Quarrying 10.5 11.0 0.6 9.6 6.5
Manufacturing 79.4 16.1 3.5 10.4 8.1
Electricity 10.2 7.3 6.7 5.8 5.4

Basic Goods 35.6 8.5 5.9 6.8 6.5

Capital Goods 9.3 46.7 -18.4 19.0 8.7
Intermediate Goods 26.5 15.9 8.4 13.6 9.1
Consumer Goods 28.7 6.3 11.1 5.9 7.5
Durables 5.4 29.1 23.4 23.8 21.8
Non-Durables 23.3 -0.8 6.1 0.3 1.9

IIP growth has so far remained healthy with Apr-Feb FY11 growth lying in
high single digits

Recent moderation is expected to continue for the next 4-5 months; IIP growth
to start rebounding in H2 FY12

Full year growth in FY11 expected around 7.7%
Capital goods to drag investments lower
amid greater volatility

50 (% YoY)
30
GDP-Investments
IIP-Capital Goods (3mma)
Capital Goods
40 25

Yearly Volatility
IIP-Capital Goods (12mma) IIP ex Capital Goods
20
30
15
20
10
10
5
0
0

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11 (Apr-Feb)
Feb)
-10

-20
Q1 FY06

Q3 FY06

Q1 FY07

Q3 FY07

Q1 FY08

Q3 FY08

Q1 FY09

Q3 FY09

Q1 FY10

Q3 FY10

Q1 FY11

Q3 FY11

Persistent weakness in capital goods poses downside risk to investment side of

the GDP

High input costs and policy tightening is tempering with demand conditions

Volatility in capital goods has increased four times in the last two years
Inflation to precede growth in policy focus
 Inflation continues to remain elevated

25 4 10
(% YoY)
20 3 8

15 2 6
10
1 4
5
0 2
0
-1 0
-5 WPI Core WPI (% 3M/3M)
-10 Food -2 -2
Core WPI (% YoY, RHS)
Fuel
-15 -3 -4

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11
Aug-06

Aug-07

Aug-08

Aug-09

Aug-10
Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

WPI inflation came at 8.31% in Feb-11 (compared to 8.23% in Jan-11) – lying

above RBI’s comfort level of 5.5%

WPI inflation likely to average around 9.3% in FY11, and end FY11 at 8.4%

On an average basis, core WPI inflation has remained at 5.5% in FY11 so far

Supply constraints and pricing power amid steady growth momentum can
provide some upside risk in the near term
 Food inflation has eased, but protein
inflation remains a concern

100 50
Vegetables Condiments & Spices Milk
(% YoY) (% YoY)
40 Eggs, Meat & Fish
80
Fruits
30
60
20
40
10

20
0

0 -10

-20 -20

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11
Sep-07

Sep-08

Sep-09

Sep-10
Mar-07

Mar-08

Mar-09

Mar-10

Mar-11
Sep-07

Sep-08

Sep-09

Sep-10

Primary food inflation continues to remain close to double digits

Although vegetable prices have corrected after the spike observed in Dec-Jan
FY11, fruit prices continue to remain elevated

High protein food items like milk, eggs, fish, meat, etc. have seen very high
inflation over the last 1-2 years
 Risk of inflation getting generalized?

20 14 16
(% YoY) WPI (% YoY)
3M Ahead Inflation Expectation (%, RHS)
16 12 1Y Ahead Inflation Expectation (%, RHS) 14
Core WPI
Non-Core WPI 10
12 12
8
8 10
6
4 8
4
0 6
2

-4 0 4
Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11
Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
Mar-07

Mar-08

Mar-09

Mar-10

High non-core inflation raises the risk of a pass through effect to core inflation

Crude oil price has risen by more than 30% since end Dec-10 – this raises the
risk of a hike in domestic retail prices

There is lack of clarity on deregulation of diesel and LPG prices as of now

RBI’s recent survey of households shows a worsening of inflation expectations
in Q4 FY11 over both a 3-month and 1-year horizon
Average inflation unlikely to come down
significantly in FY12
12
Estimated WPI trajectory
10

-2
Sep-09

Sep-10

Sep-11
Mar-09

Mar-10

Mar-11

Mar-12
Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Average WPI inflation is expected around 9.3% in FY11

Despite a slight moderation, inflation is once again expected to pick up in
FY12

We expect average WPI inflation to come around 7.5-8.0% in FY12 – higher
than RBI’s medium term target of 5.5%
Fuel inflation – with & w/o fuel price hike
Time line of Price Hikes
Effective Effective
Date price after % gain price after % gain
hike (Rs)* hike (Rs) 11
16/6/2004 35.71 5.9 22.74 4.6 Forecast
1/8/2004 36.81 3.1 24.16 6.2
10
5/11/2004 39.00 5.9 26.28 8.8
21/6/2005 40.49 6.6 28.45 7.6
9
7/9/2005 43.49 7.4 30.45 7.0
6/6/2006 47.51 9.2 32.47 6.6
15/2/2008 45.52 4.6 31.76 4.2 8
5/6/2008 50.56 11.0 34.80 9.4
2/7/2009 44.63 9.9 32.87 6.5 7 WPI inflation
WPI inflation with fuel hike
27/2/2010 47.43 6.3 35.47 7.9
Petrol Price Deregulation 6
26/6/2010 51.43 7.3 40.10 5.2

Jul-10

Jul-11
Jan-11

Jan-12
Sep-10

Nov-10

Sep-11

Nov-11
Mar-10

May-10

Mar-11

May-11

Mar-12
16/12/2010 55.87 5.6
15/1/2011 58.37 4.5
Jun-11 60.37 3.4 42.1 5.0

High crude prices and soaring subsidy burden are likely to push the
government to hike fuel prices, probably post the ongoing state elections

We believe that the June Syndrome (out of the last 10 price hikes before
deregulation in petrol prices last year, 5 have been rolled out in the month of
June) may strike once again this year

Incorporating a ` 2 hike in both petrol and diesel prices in month of June, WPI
inflation is likely to top 10% in the month of August
Liquidity deficit to move towards RBI’s comfort
level in Q1 FY12
Liquidity eases at the beginning of FY12
1,500 2
Net LAF (Rs bn) Call Rate (%, RHS, Inverted)

1,000
3
+1% NDTL (` bn)
500
4
0
5
-500

-1% NDTL (` bn) 6

-1,000

7
-1,500

-2,000 8

Feb-11
Jun-10

Dec-10
Oct-10
Apr-10

Aug-10

Apr-11

Liquidity turned surplus for a brief period in April

Year end government spending in FY11 and under maintenance of CRR
balances were primarily responsible for the temporary easing

With the commencement of the auction season and a pick up in autonomous
outflows, liquidity is expected to turn negative and move towards -1% of NDTL
by end May-11
Liquidity deficit to persist through
H1 FY12
2,500
Estimated month end liquidity (` bn)
2,000

1,500
CRR
1,000 Currency in Circulation
500 Non-Tax

0 Tax

-500 Auction

-1,000 Govt. Expenditure

Redemption
-1,500
Coupons
-2,000
Net Liquidity
-2,500
Jul-11
Apr-11

Aug-11

Sep-11
May-11

Jun-11

Liquidity deficit is likely to come below the 1% of NDTL level this month

However, the deficit is likely to increase towards the end of H1 FY12 and
expected to exceed the 1% of NDTL mark by end Sep-11
Bond yields likely to carry an upside risk
Jul-Aug likely to be the best time in
H1 FY12
700
G-Sec Supply in Dated Securities in H1 FY12 (INR bn) Gross Net
600
Share in gross borrowing (%): Dated securities
500
Tenors H1 FY11 H2 FY11 H1 FY12
400 Less than 5Y 13.4 16.3 0
300
5-9 Y 24.6 19.6 34.0-42.4
10-14 Y 38.0 36.6 40.0-48.4
200
15-19 Y 10.9 15.0 8.0-12.0
100 Above 20Y 13.0 12.4 9.6-14.4
0
Apr May Jun Jul Aug Sep

The government will borrow ` 2500 bn gross borrowing in H1 FY12 – this

would constitute 61% of the full year borrowing target

With redemption of ` 594 bn in H1 FY12, net borrowing will amount to ` 1908
bn – this would result in an average net borrowing size of ` 355 bn in Q1 FY12
and ` 280 bn in Q2 FY12
Upside risk to yields likely in FY12

5.5 10
G-Sec Supply Pressure (`` bn)
US 10Y Yield
H1 FY12 H2 FY12* H2 FY12** 5.0
India 10Y Yield (RHS) 9
Total Supply 2,350 2,030 2,430
4.5
Central Government 1,900 1,530 1,930
8
State Government 450 500 500 4.0
MSS 0 0 0
3.5 7
Special Bonds 0 0 0
3.0
6
Total Demand 1,993 2,302 2,313
2.5 Last 5Y correlation = 42%
Banks 1,043 1,552 1,563
Last 1Y correlation = 3% 5
Insurance Cos. 500 450 450 2.0
Others 450 300 300
RBI 0 0 0 1.5 4

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11
Supply-Demand Gap 357 -272 117

Excess supply situation to persist in FY12 – can potentially increase by ` 500 bn

on the back of a rise in subsidy payments

SLR @ 24% could pose a risk under these circumstances

With another 50 bps expected policy hike from the RBI in FY12, the yield on
the 10Y g-sec likely to move towards 8.30% in the next 6-months

End of QE2 program by the Fed in Jun-11 could provide an upside risk
Rupee likely to weaken in the near to medium term
Fundamentals still in favor, but impact
could diminish in FY12
10
Average yearly change in USDINR (%)
8

-2

-4

-6
High Growth/ High Growth/ Low Growth/ Low Growth/
High Inflation Low Inflation High Inflation Low Inflation

Higher than average growth has been supportive of Rupee

With an expectation of moderation in economic growth and inflation
remaining at elevated level, downside risks to Rupee likely to gain traction

Global risk sentiment and commodity prices to provide cues
BoP to remain in surplus in FY12

Highlights of India's Balance of Payments (USD bn)

FY07 FY08 FY09 FY10 FY11* FY12*
Trade Balance -61.8 -91.5 -119.5 -118.4 -133.0 -158.0
Invisibles 52.2 75.7 91.6 80.0 87.0 100.0
Current Account -9.6 -15.7 -27.9 -38.4 -46.0 -58.0
(as % of GDP) -1.0 -1.3 -2.3 -2.8 -2.7 -2.9

FDI 7.7 15.9 19.8 18.8 9.0 20.0

Portfolio 7.1 27.4 -14.0 32.4 33.0 25.0
Loans 24.5 40.7 8.3 13.3 28.0 30.0
Others 6.0 22.6 -7.3 -11.0 -7.0 0.0
Capital Account 45.2 106.6 6.8 53.4 63.0 75.0
(as % of GDP) 4.8 8.6 0.6 3.9 3.7 3.8

Overall BoP** 36.6 92.2 -20.1 13.4 16.0 17.0

(as % of GDP)** 3.9 7.4 -1.7 1.0 0.9 0.9

BoP surplus to remain within USD 15-20 bn range in both FY11 and FY12

We expect USDINR around 45.00 by Jun-11 and 46.50 by Dec-11 – high oil
price, stronger Dollar, and a moderation in domestic growth would keep Rupee
under pressure

* Our estimates with GDP of USD 1725 bn and USD 1991 bn in FY11 and FY12 respectively; ** Includes errors & omissions
Summary
US recovery to continue gradually; Fed to remain on hold
through 2011
• QE2 expected to end in Jun-11; Dollar to regain strength in H2

India growth to moderate to 8.3% in FY12 with inflation

remaining a concern; expect RBI to hike another 50 bps
• Fiscal management would be challenging in FY12; tough for the government
to maintain 4.6% deficit with firm commodity prices
• FY12 net market borrowing of ` 3.4 trillion carries an upside risk to the tune
of ` 500 bn
• With SLR now reduced to 24%, bond yields likely to carry an upside risk;
expect 10Y g-sec yield to move towards 8.30% over the next 6-months
• Liquidity deficit likely to stabilize around ` 500-600 bn by end May-11
• BoP surplus of approximately USD 17 bn to be supportive of Rupee in FY12
• However, the combination of high inflation and an expected moderation in
growth would provide a downside risk to Rupee
• Global growth and commodity prices remain the key risk for both domestic
interest rates and currency
Thank You
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

CONTACT DETAILS
Shubhada M. Rao, Chief Economist Vivek Kumar, Senior Economist Yuvika Oberoi, Economist
+91 22 6669 9198 +91 22 6669 9059 +91 22 6620 9032
shubhada.rao@yesbank.in vivek.kumar1@yesbank.in yuvika.oberoi@yesbank.in

About YES BANK

YES BANK, India’s new age private sector Bank, is the outcome of the professional commitment of top management team, to
establish a high quality, customer centric, service driven, private Indian Bank catering to the “Future Industries of India”.
India”. YES
BANK has adopted international best practices, the highest standards of service quality and operational excellence, and offers
comprehensive banking and financial solutions to all its valued customers.
customers. A key strength and differentiating feature of YES
BANK is its knowledge driven approach to banking and an unprecedented customer experience for its retail and wealth
management clients
clients..
YES BANK is steadily building Corporate and Institutional Banking, Financial Markets, Investment Banking, Corporate
Finance, Business (SME) and Transactional Banking, Retail Banking and Wealth Management business lines across the
country.. YES BANK has institutionalized YES International Banking that offers a complete suite of international banking
country
products and services, driven by state
state--of
of--the-
the-art technology, which includes Debt, Trade Finance, Corporate Finance,
Investment Banking and Business Advisory Services, Treasury and Global Indian Banking.
Banking. The Bank’s constant endeavor is to
provide a delightful banking experience expressed with simplicity, empathy and totality.
totality.
Disclaimer
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

Disclaimer
No representation or warranty, express or implied is made as to, and no reliance should be placed on, the fairness, accuracy,
completeness or correctness of such information or opinions contained herein.
herein. The information contained in this presentation
is only current as of its date.
date. Certain statements made in this presentation may not be based on historical information or facts
and may be “forward looking statements", and future developments and the competitive and regulatory environment
environment.. Actual
results may differ materially from these forward
forward--looking statements due to a number of factors, including future changes or
developments in the Company’s business, its competitive environment and political, economic, legal and social conditions in
India.. This communication is for general information purpose only, without regard to specific objectives, financial situations
India
and needs of any particular person
person.. This presentation does not constitute an offer or invitation to purchase or subscribe for
any shares in the Company and neither any part of it shall form the basis of or be relied upon in connection with any contract
or commitment whatsoever.
whatsoever. The Company may alter, modify or otherwise change in any manner the content of this
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