INDIA DAILY December 14, 2020 India 11-Dec 1-day 1-mo 3-mo Sensex 46,099 0.3 5.6 18.9 Nifty 13,514 0.3 5.7 18.1 Contents Global/Regional indices Dow Jones 30,046 0.2 1.9 7.3 Special Reports Nasdaq Composite 12,378 (0.2) 4.6 11.9 Economy FTSE 6,547 (0.8) 3.6 8.6 Economy: CY2021 outlook: turning the corner Nikkei 26,653 (0.4) 5.0 13.1 Hang Seng 26,506 0.4 1.3 7.6 Theme Report KOSPI 2,766 (0.1) 10.9 13.8 Internet Software & Services: India e-commerce: the race for leadership Value traded – India Daily Alerts Cash (NSE+BSE) 686 756 334 11,32 Derivatives (NSE) 18,034 36,464 Company alerts 2 Deri. open interest 4,767 4,891 3,849 TCS: Industry view from TCS' lens Cipla: Revlimid litigation settled ABB: Prospects of right-sizing costs to parent beyond royalty Forex/money market Change, basis points Economy alerts 11-Dec 1-day 1-mo 3-mo Economy: Positive surprise from IIP Rs/US$ 73.7 (1) (63) 31 10yr govt bond, % 6.1 - (7) (23) Net investment (US$ mn) 10-Dec MTD CYTD FIIs 477 3,290 19,396 (1,506 MFs (95) (4,929) ) Top movers Change, % Best performers 11-Dec 1-day 1-mo 3-mo SHTF in Equity 1,043 (0.6) 19.6 63.9 TATA in Equity 622 1.9 26.3 53.6 IIB in Equity 924 0.9 19.9 51.6 KMB in Equity 1,920 0.9 8.5 47.2 BJFIN in Equity 8,995 (0.4) 22.6 47.2 Worst performers UPLL in Equity 435 (0.8) 1.3 (15.7) RIL in Equity 2,006 (0.1) 0.2 (12.9) BPCL in Equity 397 (0.5) (3.7) (4.7) LPC in Equity 939 (0.4) 3.7 (3.0) BRIT in Equity 3,733 (0.2) 5.8 0.4 [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA [ Economy Macro DECEMBER 11, 2020 NEW RELEASE BSE-30: 46,099 CY2021 outlook: turning the corner. CY2021 will be marked with hopes for (1) early roll-out of the Covid-19 vaccine, (2) normalization of activities, and (3) unperturbed growth recovery. India will see a slow cyclical recovery along with inflation gradually easing though not enough to sustain the accommodative stance. Interest rates will likely harden with no rate cuts and persistent fiscal pressure. Key risks will be steering through any financial sector stress, reviving the weak investment cycle, and any adverse global liquidity issues. CY2021-22: hopes of turnaround years for macro QUICK NUMBERS Two issues will shape India’s macro situation in CY2021: (1) easy DM monetary policies and (2) vaccine rollout/mass availability. An easy global monetary policy will aid risk-on flows, while FY2022E GDP vaccine rollouts will aid in faster growth normalization. However, risks of higher commodity growth at 9.3%, prices (especially crude oil) could weigh on India’s inflation and external sector balance. We FY2021E at (-)8.6% expect a cyclical recovery in growth and a gradual adjustment in interest rates. Beyond FY2022E, growth will likely moderate as interest rates move higher, global tailwinds fade, and FY2022E CPI fiscal stress continues even as benefits from PLIs in manufacturing and labor reforms could start inflation at 4.7%; yielding nascent benefits. Exhibit 1 summarizes our key macro estimates for FY2021-23E. FY2021E at 6.4% Growth-inflation: cyclical recovery coupled with higher-than-comfortable inflation levels FY2022E GFD/GDP at 5.5%; FY2021E at The Indian economy is likely to see a gradual cyclical recovery barring the large base effects. 7.1% We estimate FY2022E real GDP growth at 9.3% (6.1% in FY2023E) after (-)8.6% in FY2021E. Services sector will likely outpace manufacturing sector in 2HFY22E. Investment cycle will FY2022E CAD/GDP remain a drag with the financial/ corporate sectors and the governments continuing to be at 0.4% of GDP; under pressure. We assume that supply related issues in inflation will normalize through surplus of 0.7% in 1HCY21, thereby, lowering food prices. While inflation is yet not driven by monetary causes, FY2021E it is certainly more broad-based and upside risks could emanate from demand side pressures given normalization in economic activity. However, base effects will keep inflation on a gradual glide path towards 4.8%. We estimate average FY2022E inflation at 4.7% (6.4% in FY2021E). Interest rates: to harden in FY2022 Most of RBI’s liquidity injection (which has driven market interest rates lower) has been through forex accretion in FY2021 and is likely to continue. With inflation expected to settle above 4%, we expect RBI to begin liquidity normalization from FY2022 onwards, even as repo rate may remain steady. Accordingly, market rates are expected to harden across the curve in FY2022, with the shorter end of the curve underperforming the far end. Fiscal consolidation is also unlikely to be sharp (FY2022E GFD/GDP at 5.5%) with gross borrowing only marginally lower Suvodeep Rakshit than FY2021E. We expect the 10-year yield to inch higher towards 6.25%-6.5% in 2HFY22 given RBI’s increasing constraints to support bond markets due to huge FX related liquidity. Upasna Bhardwaj INR: story of two halves Avijit Puri FX market outlook will broadly be determined by (1) secular USD weakness, (2) sustenance of easy DM monetary policies and (3) pace of vaccine rollout. While these are favorable for risk-on flows across EMs, the consequent growth recovery will provide a fillip to commodity prices capping some of the gains in INR. Meanwhile, moves in INR are likely to remain a function of RBI FX intervention. We, thus, expect INR to trade with an appreciating bias through 1HFY22 (72-75), with risks emanating in the latter part of the year (74-77), with sharp depreciation bias being stemmed given the enormous forex accretion. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. Economy India Exhibit 1: Summary of India's macro-fundamentals, March fiscal-year ends 2016 2017 2018 2019 2020 2021E 2022E 2023E Real GDP growth (%) 8.0 8.3 7.0 6.1 4.2 (8.6) 9.3 6.1 Nominal GDP growth (%) 10.5 11.8 11.1 11.0 7.2 (6.1) 13.8 10.1 CPI inflation (%, avg.) 4.9 4.5 3.6 3.4 4.8 6.4 4.7 4.9 Repo rate (%, eop) 6.75 6.25 6.00 6.25 4.40 4.00 4.00 4.50 Reverse repo rate (%, eop) 5.75 5.75 5.75 6.00 4.00 3.35 3.75 4.25 Central GFD/GDP (%) 3.9 3.5 3.5 3.4 4.6 7.1 5.5 5.0 Consolidated GFD/GDP (%) 7.0 7.0 5.9 5.8 7.6 11.9 9.0 8.0 3-M T-bill (%, eop) 7.13 5.78 6.09 6.14 4.24 3.05 3.80 4.50 10-year Gsec benchmark (%, eop) 7.47 6.68 7.40 7.35 6.14 5.85 6.50 7.00 Current account balance (% of GDP) (1.1) (0.6) (1.8) (2.1) (0.9) 0.7 (0.4) (1.0) Brent Crude ($/bbl, avg.) 47.5 49.0 57.6 70.0 60.9 40.0 45.0 50.0 USD-INR (avg.) 65.4 67.2 64.5 69.9 70.9 74.3 74.1 76.0 Source: Kotak Economics Research estimates Growth: gradual turnaround with few lingering long-term concerns India’s growth trajectory will move into positive in FY2022E. We estimate real GDP growth in FY2022E at 9.3% against (-)8.6% in FY2021E (Exhibit 2). Growth will be hinged on (1) revival in business and consumer sentiments based on the pace of the Covid-19 vaccine rollout, (2) revival of services sector, especially contact-based services, as the pace of manufacturing sector growth starts plateauing. It is important to note that prior to the pandemic, India’s consumption and investment growth had weakened considerably. During the pandemic, workers, mostly in the informal sector, would have seen income losses and the ability to take on additional leverage may be lower. However, with a large portion of the consumption being driven by the top of the consumer pyramid, consumption will likely hold up in FY2022E. Exhibit 2: We expect GDP growth at 9.3% in FY2022E and at 6.1% in FY2023E Real GVA and components growth, March fiscal-year ends, 2016-23E (%) 2016 2017 2018 2019 2020 2021E 2022E 2023E Real GVA 8.0 8.0 6.6 6.0 3.9 (8.2) 9.3 6.0 Agriculture and allied 0.6 6.8 5.9 2.4 4.0 3.4 3.5 2.9 Industry 9.6 7.7 6.3 4.9 0.9 (8.8) 13.3 5.4 Mining 10.1 9.8 4.9 (5.8) 3.1 (9.5) 11.3 4.1 Manufacturing 13.1 7.9 6.6 5.7 0.0 (6.8) 12.8 4.7 Electricity 4.7 10.0 11.2 8.2 4.1 3.4 6.3 6.9 Construction 3.6 5.9 5.0 6.1 1.3 (16.9) 17.9 7.0 Services 9.4 8.5 6.9 7.7 5.5 (10.9) 8.9 7.2 Trade, hotel, transport, communication 10.2 7.7 7.6 7.7 3.6 (18.9) 14.7 9.4 Financial, real estate, professional services 10.7 8.6 4.7 6.8 4.6 (4.9) 5.3 5.7 Public admin, defence, and others 6.1 9.3 9.9 9.4 10.0 (9.1) 7.8 6.7 Real GDP 8.0 8.3 7.0 6.1 4.2 (8.6) 9.3 6.1 Source: CEIC, Kotak Economics Research estimates Industrial versus services growth.