Lehman Brothers
India: Diabolique
More resilient than before
Even in a US recession, India's growth is unlikely to fall below 7%. At 7 per cent GDP growth, 5 per cent inflation, small volume increase and proper execution could lead to an earnings growth of nearly 15 per cent in FY09 over FY08. This would be commensurate with a broad market PE of 16-17 that too without a flourish.
No US recession = Risk of overheating in India
Our house view is that the US economy will avoid a full-blown recession, but is in for an extended period of lackluster growth. Under this scenario, we expect India's exports and
overall economic activity to slow, but not collapse.
If the US Fed cuts rates by a further 100bp to 2.00% by June and averts a major recession, we expect India to attract massive capital inflows, leading to heavy FX intervention by the
RBI to avoid excessive rupee appreciation.
Even in a US recession, India's growth is unlikely to fall below 7%. At 7 per cent GDP growth, 5 per cent inflation, small volume increase and proper execution could lead to an earnings growth of nearly 15 per cent in FY09 over FY08. This would be commensurate with a broad market PE of 16-17 that too without a flourish.
No US recession = Risk of overheating in India
Our house view is that the US economy will avoid a full-blown recession, but is in for an extended period of lackluster growth. Under this scenario, we expect India's exports and
overall economic activity to slow, but not collapse.
If the US Fed cuts rates by a further 100bp to 2.00% by June and averts a major recession, we expect India to attract massive capital inflows, leading to heavy FX intervention by the
RBI to avoid excessive rupee appreciation.
Massive capital inflows would make it more difficult for the RBI to raise interest rates, as doing so risks attracting more capital inflows.
Hence our core view is that the RBI will keep interest rates unchanged, even though the inflation risks are skewed to the upside and the danger for India's economy is overheating.
Major US recession = Sub-8% GDP growth for India
In the event of a major US recession, besides a larger hit to Indian exports, there could be serious second-round effects, as firms scale back capex and jobs. The negative impact on
the economy from the financial and confidence channels would also be powerful.
Global risk aversion could rise, causing a reversal of capital inflows.
The 1982 and 2001 US recessions suggest that a 1pp drop in US GDP growth can shave 0.1-0.3pp off India's non-agriculture GDP growth. A recent Asian Development Bank study estimates that the same magnitude drop in US GDP growth would subtract 0.8pp from
Asia ex-Japan's growth.
Hence our core view is that the RBI will keep interest rates unchanged, even though the inflation risks are skewed to the upside and the danger for India's economy is overheating.
Major US recession = Sub-8% GDP growth for India
In the event of a major US recession, besides a larger hit to Indian exports, there could be serious second-round effects, as firms scale back capex and jobs. The negative impact on
the economy from the financial and confidence channels would also be powerful.
Global risk aversion could rise, causing a reversal of capital inflows.
The 1982 and 2001 US recessions suggest that a 1pp drop in US GDP growth can shave 0.1-0.3pp off India's non-agriculture GDP growth. A recent Asian Development Bank study estimates that the same magnitude drop in US GDP growth would subtract 0.8pp from
Asia ex-Japan's growth.
The size of the impact on India probably lies somewhere in between since India's economy is rapidly opening up to the world, but it is still among the least open in the region.
Therefore, if the US economy were to enter a full-blown recession, we would probably lower our 2008 GDP growth forecast for India to a little below 8% and expect the RBI to cut rates aggressively.
by MAVERICK
No comments:
Post a Comment