- Morgan Stanley: India - Flirting with QE
Since September 2008, India’s foreign exchange reserves have declined by US$34 billion. This, we believe, has resulted in a sharp deceleration in M1 growth to 12.7%Y as of March 13, 2009 from 19.4%Y in August 2008. Additionally, the choice of purchasing longer-term government securities and MSS bonds as a vehicle to inject liquidity should have the added advantage of capping and possibly reversing the sell-off in bonds since the start of the year, which persisted even after a 50bp cut in policy rates on March 4.
Both the net injection of liquidity to shore up M1 and the possible lowering of bond yields lead us to classify the RBI package as ‘active quantitative easing’ – outright purchases of assets with a view to increasing money supply and possibly easing financial conditions at the same time. This policy measure is in the same vein as the measures introduced by the Fed, BoE and the BoJ, but on a much smaller scale.
We believe that these liquidity injection measures initiated by the RBI, a likely further deceleration in banks loan growth and improvement in the government’s consolidated fiscal deficit (including off-budget subsidies), should result in the 10-year bonds declining to 6-6.25% over the next two months and further to 5.5% by end-2009.
PE firms invested $526 million across 36 deals in the quarter ended March 2009. According to Venture Intelligence study, the sum was much lower than in the same period last year.
While January-March 2008 saw 133 deals totalling $3.9 billion, the numbers for the same period of 2009 were lower than even those in the December 2008 quarter, which saw investments of $1.2 billion across 63 deals.
VC firms invested $44 million over just 9 deals during the period. This was lower than the $91 million invested across 18 deals in the December quarter and the $226 million across 33 deals in the year-ago period.
Centrum Broking forecasts a 13% decline in the earnings of the companies it tracks.
Motilal Oswal Financial Services Ltd sounds more bearish, even though in its earning preview report, it wrote “…we could be at the end of the earnings downgrade cycle”. It forecasts a 19.3% decline in the earnings of the companies it tracks, excluding oil firms.
Typically brokerages track between 100 and 150 top listed firms among the pack of BSE-500, which make up for at least 90% of India’s market capitalization.
Religare Hichens Harrison predicts a 9% decline in net profit for the 30 companies that make up the Sensex.