Record India Deficit May Limit Rate Cuts as Rupee Drops By Kartik Goyal - Jan 4, 2013

India’s record current-account deficit threatens to weigh on the rupee and curb the magnitude of interest-rate cuts forecast to begin this month in support of government policies seeking faster growth.
The shortfall swelled to $22.31 billion in the quarter ended Sept. 30, the widest in Reserve Bank of India data beginning 1949. The rupee is down 6.1 percent against the dollar in the past three months, fanning price gains that will limit Governor Duvvuri Subbarao to a 25 basis-point rate cut on Jan. 29, according to eight of 10 analysts in a Bloomberg News survey.
India has the biggest deficit among the largest emerging markets, stoked by the worst export slump since the 2009 global recession and gold imports that Finance Minister Palaniappan Chidambaram said are a “huge drain.” Trade and budget gaps have increased economic risks, the Reserve Bank said Dec. 28, even as the government tries to lure more foreign investment and limit subsidies as Asia’s No. 3 economy struggles.
“The widening current-account deficit indicates very severe macroeconomic threats,” said Rupa Rege Nitsure, an economist at Bank of Baroda (BOB) in Mumbai. “The central bank has less room to ease policy meaningfully.”
Subbarao has left borrowing costs at 8 percent since a 50 basis-point cut in April 2012, resisting Chidambaram’s calls in October for a further reduction.
Still, the central bank signaled in a statement of the Dec. 18 policy review that it may ease in 2013 as an inflation rate exceeding 7 percent cools. Two analysts in the Bloomberg survey predicted a 0.5 percentage-point cut in January.

Export Slide

The rupee weakened 1.1 percent, the most in two months, to 55.075 per dollar at the 5 p.m. close in Mumbai. The BSE India Sensitive Index (SENSEX) climbed 0.1 percent. Five-year interest rate swaps advanced to 7.16 percent, the highest in more than a week, while the one-year rate rose as high as 7.6 percent, indicating investors pared bets on the extent of cuts in borrowing costs.
The deficit in the current account, which tracks goods, services and investment income, reached 5.4 percent of gross domestic product in July-to-September from 3.9 percent in the previous quarter.
Exports slid for seven months through November. Gold imports accounted for more than two-thirds of the current- account gap on average in the last three years, the central bank said in its Financial Stability report last month. India also purchases about 80 percent of its crude oil from overseas.

Rupee Outlook

The rupee will weaken about 7 percent to 59 per dollar by year-end, according to Nomura Holdings Inc. Kotak Mahindra Bank Ltd. (KMB) predicts a drop to as low as 57 per dollar this quarter.
Prime Minister Manmohan Singh curbed fuel subsidies in September and opened industries including retail to more foreign investment, seeking to steady the currency, revive growth and avert a credit-rating downgrade that may disrupt capital inflows.
The current-account deficit may narrow as 2013 progresses, which, along with an acceleration in the economy, could “give the central bank room to ease policy” later in the year, said Sujan Hajra, a Mumbai-based economist at Anand Rathi Financial Services Ltd.
The nation may raise taxes on gold imports to tackle the shortfall, Chidambaram said two days ago as he called on citizens to curb demand for the metal. He is due to deliver the annual budget in February.

Remaining Vulnerable

For now, the rupee “will remain vulnerable” and the central bank’s “scope for aggressive easing is rather limited,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai.
The Finance Ministry predicts GDP growth of as little as 5.7 percent in the year to March 31, the least in a decade.
The Jan. 29 policy review is set to be the first with Urjit Patel as an RBI deputy governor. Banking Secretary D.K. Mittal said yesterday Patel has been appointed pending final checks.
A report today showed India’s service industries expanded at a faster pace in December. The purchasing managers’ index rose to 55.6 from 52.1 in November, HSBC Holdings Plc and Markit Economics said in a statement.
China’s services activity slowed in December, while Australia’s contracted for the 11th month, reports today showed. Elsewhere in Asia, Philippine inflation accelerated last month.
European services and factory output contracted more than initially estimated in December, adding to signs a recession in the region may extend into this year. Consumer prices in the euro area increased more than economists expected in December.
In the U.S., non-farm payrolls probably rose by 153,000 in December after a 146,000 gain in November while the unemployment rate held at 7.7 percent, according to Bloomberg surveys. Factory orders probably climbed in November. An index may indicate non-manufacturing output expanded at a slower pace last month.
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Record India Deficit May Limit Rate Cuts as Rupee Drops: Economy By Kartik Goyal - Jan 3, 2013

India’s record current-account deficit threatens to weigh on the rupee and curb the magnitude of interest-rate cuts forecast to begin this month in support of government policies seeking faster growth.
The shortfall swelled to $22.31 billion in the quarter ended Sept. 30, the widest in Reserve Bank of India data beginning 1949. The rupee is down 5 percent against the dollar in the past three months, fanning price gains that will limit Governor Duvvuri Subbarao to a 25 basis-point rate cut on Jan. 29, according to eight of 10 analysts in a Bloomberg News survey.
India has the biggest deficit among the largest emerging markets, stoked by the worst export slump since the 2009 global recession and gold imports that Finance Minister Palaniappan Chidambaram said are a “huge drain.” Trade and budget gaps have increased economic risks, the Reserve Bank said Dec. 28, even as the government tries to lure more foreign investment and limit subsidies as Asia’s No. 3 economy struggles.
“The widening current-account deficit indicates very severe macroeconomic threats,” said Rupa Rege Nitsure, an economist at Bank of Baroda (BOB) in Mumbai. “The central bank has less room to ease policy meaningfully.”
Subbarao has left borrowing costs at 8 percent since a 50 basis-point cut in April 2012, resisting Chidambaram’s calls in October for a further reduction.
Still, the central bank signaled in a statement of the Dec. 18 policy review that it may ease in 2013 as an inflation rate exceeding 7 percent cools. Two analysts in the Bloomberg survey predicted a 0.5 percentage-point cut in January.

Export Slide

The rupee weakened 0.2 percent to 54.49 per dollar at the close in Mumbai yesterday. The BSE India Sensitive Index (SENSEX) rose 0.3 percent. The yield on the 8.15 percent notes due June 2022 fell two basis points, or 0.02 percentage point, to 7.97 percent.
The deficit in the current account, which tracks goods, services and investment income, reached 5.4 percent of gross domestic product in July-to-September from 3.9 percent in the previous quarter.
Exports slid for seven months through November. Gold imports accounted for more than two-thirds of the current- account gap on average in the last three years, the central bank said in its Financial Stability report last month. India also purchases about 80 percent of its crude oil from overseas.
The rupee will weaken about 8 percent to 59 per dollar by year-end, according to Nomura Holdings Inc. Kotak Mahindra Bank Ltd. (KMB) predicts a drop to as low as 57 per dollar this quarter.

Inviting Investment

Prime Minister Manmohan Singh curbed fuel subsidies in September and opened industries including retail to more foreign investment, seeking to steady the currency, revive growth and avert a credit-rating downgrade that may disrupt capital inflows.
For now, the rupee “will remain vulnerable” and the central bank’s “scope for aggressive easing is rather limited,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai.
The Finance Ministry predicts GDP growth of as little as 5.7 percent in the year to March 31, the least in a decade.
The Jan. 29 policy review is set to be the first with Urjit Patel as an RBI deputy governor. Banking Secretary D.K. Mittal said yesterday Patel has been appointed pending final checks.
HSBC Holdings Plc and Markit Economics will release their purchasing managers’ index on India’s service industries for December today. China’s services activity slowed last month, while Australia’s contracted for the 11th month, reports today showed. Elsewhere in Asia, Philippine inflation accelerated last month.
Data to be published in Europe may confirm euro-area manufacturing and services output contracted in December, while inflation in the region slowed for a third month, according to Bloomberg surveys. German retail sales probably extended a four- month slump in November, a separate survey showed.
In the U.S., non-farm payrolls probably rose by 153,000 in December after a 146,000 gain in November while the unemployment rate held at 7.7 percent, according to Bloomberg surveys. Factory orders probably climbed in November while an index may indicate non-manufacturing output expanded at a slower pace last month, surveys showed.
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

India’s Nifty Futures Rise, Signaling Third Day of Stock Gains By Shikhar Balwani - Jan 2, 2013

Indian stock-index futures rose, signaling equities will extend a two-day rally that drove benchmark indexes to a two-year high.
SGX S&P CNX Nifty Index futures for January delivery climbed 0.4 percent to 6,064.5 at 9:56 a.m. in Singapore. The underlying S&P CNX Nifty (NIFTY) Index added 0.7 percent to 5,993.25 yesterday. The BSE India Sensitive Index (SENSEX), or Sensex, rose 0.7 percent to 19,714.24 yesterday. Both gauges closed at their highest levels since Jan. 6, 2011.
The Bank of New York Mellon India ADR Index of U.S.-traded shares jumped 2.3 percent as a U.S. manufacturing report added to optimism the global economic recovery will accelerate. India’s cash surplus of 1.3 trillion rupees ($24 billion) and efforts to clamp down on spending will help it keep to its borrowing target for the year to March, said a government official with knowledge of the matter.
Indian stocks gained yesterday after U.S. lawmakers approved a bill averting most of the tax increases and spending cuts threatening the recovery in the world’s biggest economy. The U.S. accounted for 11 percent of India’s exports in the six months to September 2011, trade ministry data show. An industry report yesterday showed American manufacturing expanded more than forecast in December.
The Sensex climbed 26 percent last year, fueled by fund flows and government steps to open the economy and boost economic growth. The rally has driven the Sensex’s valuation to 15.6 times estimated earnings, the highest level since March, data compiled by Bloomberg show. The MSCI Emerging Markets Index trades at a multiple of 12.4.
Prime Minister Manmohan Singh began a wave of policy announcements in September, raising diesel prices and allowing more foreign investment in the retail and airline industries to bolster an economy growing at the slowest pace in three years.
The measures propelled foreign inflows into local shares to a net $24.5 billion last year, the highest among 10 Asian markets tracked by Bloomberg, excluding China. Foreign funds were net buyers of Indian stocks on all but one day last month. They bought $149 million of shares on Jan. 1, data from the market regulator show.
To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

Urjit Patel Said to Be a Candidate for RBI Deputy Governor Post By Tushar Dhara and Unni Krishnan - Jan 1, 2013

India is considering economist Urjit Patel as one of three candidates for deputy governor at the nation’s central bank, a government official with direct knowledge of the matter said.
The other candidates are World Bank economist Kalpana Kochhar and Subir Gokarn, with a decision probable today, the official said, asking not to be identified before an announcement. Gokarn was one of four deputy governors and was in charge of the monetary policy department until his three-year term ended on Dec. 31 after a one-month extension.
Governor Duvvuri Subbarao has taken charge of that policy unit until further notice, the Reserve Bank of India said yesterday. The central bank has so far resisted calls from Finance Minister Palaniappan Chidambaram for cheaper credit, while signaling it may cut interest rates in coming months to help revive economic growth as inflation eases.
Patel is an adviser to the Boston Consulting Group, a non- resident senior fellow at the Brookings Institution, an ex- International Monetary Fund economist and a former adviser to the Reserve Bank, according to the Brookings website.
He didn’t answer questions when reached on his mobile phone and didn’t pick up subsequent calls. Gokarn didn’t answer calls to his office and home phones. Kochhar’s e-mail and phone number weren’t immediately available.
The economic and policy research and statistics units will also report directly to Subbarao following the reallocation of responsibilities, the central bank said in its statement.
The RBI said it expanded the portfolios of the three continuing deputy governors.
K.C. Chakrabarty will look after the Deposit Insurance and Credit Guarantee Corporation, the department promoting the use of Hindi in banking and finance, and the Right to Information Division. Anand Sinha was given the communication and risk monitoring divisions, and Harun Rashid Khan the financial markets department.
Subbarao has left the repurchase rate at 8 percent since a 50 basis-point cut in April. Inflation exceeding 7 percent for most of last year curbed his scope to lower the benchmark to spur Asia’s third-largest economy.
To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Stocks Beat Bonds, Commodities by Most Since 2009 on Stimulus By Inyoung Hwang, Rita Nazareth and Lu Wang - Jan 1, 2013

Unprecedented central bank stimulus sent global stocks to the biggest annual rally in three years, beating bonds, commodities and the dollar by the most since 2009 as shares surged from America to Germany and Venezuela.
The MSCI All-Country World Index of equities increased 16.9 percent in 2012 including dividends after climbing 2.3 percent in December. The Standard & Poor’s GSCI Total Return Index of 24 commodities rose 0.1 percent last year, while the U.S. Dollar Index (DXY) lost 0.5 percent. Bonds of all types returned 5.73 percent, on average, according to Bank of America Merrill Lynch’s Global Broad Market Index.
Stocks rebounded after posting the worst returns in 2011 as central bankers’ efforts to push investors into riskier assets and corporate earnings growth overshadowed the third year of Europe’s debt crisis. Shares overcame the slowest expansion in China in 13 years and a U.S. government debate over how to avoid more than $600 billion of spending cuts and tax increases.
“The massive global stimulus has been a big piece of it,” James Dunigan, who helps oversee $112 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. “That had a big impact on reducing the fears of a recession. There was also the support from the corporate earnings side. It was just a matter of time to have stocks outperforming.”

Bernanke, Draghi

U.S. Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Mario Draghi pledged bond purchases amid the slowest global economic growth since 2009. The world economy is estimated to have expanded 2.2 percent in 2012, according to the median estimate from economists surveyed by Bloomberg. Gross domestic product may increase 2.4 percent this year, the projections show.
Bernanke said in September that the U.S. central bank will buy mortgage securities until the labor market recovers. The ECB announced a plan that involved unlimited purchases of government debt to reduce borrowing costs in the euro region. Draghi, fighting to keep the currency union intact, has also cut the benchmark interest rate to a record low of 0.75 percent, while the People’s Bank of China lowered its rate to 6 percent.
The rally in global stocks followed a 6.9 percent slump in 2011. The MSCI global index, which tracks companies in 45 developed and emerging markets, trades for 15.4 times reported earnings, or about 26 percent below its historical average of 20.7, according to data compiled by Bloomberg from 1995.

Profit Gains

Analysts’ estimates show profit at companies in the MSCI All-Country gauge climbed 11 percent to $25.13 a share in 2012, according to data compiled by Bloomberg. That’s close to the record high of $25.30 in 2007. Analysts project earnings will continue to rise in 2013, increasing 12 percent, the data show.
Within developed markets, 23 out of 24 benchmark indexes advanced. Stocks in Europe rallied the most as cheap valuations for companies in Greece, Germany and Denmark lured investors. Equity measures in those countries climbed at least 27 percent. The price-earnings multiple of the Stoxx Europe 600 Index has surged more than 86 percent since hitting an almost three-year low in September 2011.
Spain’s IBEX 35 was the only developed market gauge to fall. Japan’s Nikkei 225 Stock Average surged 23 percent, the biggest rally since 2005, amid calls from the new government for more monetary easing.

Obama’s Re-election

The S&P 500 Index (SPX) climbed 13 percent last year, the most since 2009. The U.S. equity benchmark sank as much as 7.7 percent from its 2012 high in September as Obama’s re-election set up a budget showdown with the Republican-controlled House of Representatives. The S&P 500 ended 1.8 percent above the average estimate of 1,401 from 14 Wall Street strategists tracked by Bloomberg. It will rally 7.3 percent to 1,531 in 2013, the average of forecasts showed.
Financial companies in MSCI’s global index posted the biggest gain last year, returning 29 percent as a group, as companies such as Grupo Financiero Santander Mexico SAB de CV, Brussels-based KBC Groep NV and Bank of America Corp. surged at least 109 percent. In 2011, the group slumped more than twice as much as the MSCI All-Country World Index.
The MSCI Emerging Markets Index of stocks gained 18 percent last year including dividends, rebounding from an 18 percent loss in 2011.
Venezuela’s benchmark climbed 342 percent including dividends, the most in the world, as inflation, which rose about 18 percent year-over-year as of November, prompted investors to buy shares as a way to preserve the value of their savings. The deteriorating health of President Hugo Chavez, re-elected in October, fueled speculation that a regime change may reverse policies that drove away investors.

Commodity Markets

The S&P GSCI Total Return Index of commodities dropped 0.6 percent in December, paring its annual advance.
Gains last year were led by a 19 percent increase in wheat futures traded in Chicago, 17 percent in soybeans and 16 percent in Kansas City wheat. Arabica coffee in New York, cotton and raw sugar fell the most among the five members of the GSCI spot index that retreated.
Crop prices rose in 2012, with records in soybeans and corn, as U.S. farmers endured the most-severe drought since the 1930s Dust Bowl. Heat waves and dry weather also curbed output in Europe and Australia.

Coffee, Sugar

Agricultural commodities were also among the biggest decliners as a record coffee harvest in Brazil added to a global glut that drove arabica futures to a 37 percent retreat, the biggest drop since 2000. There were also supply surpluses in raw sugar after Brazilian output expanded; futures in New York slumped 16 percent.
Lead was the best-performing industrial metal among the members of the GSCI spot index, advancing 14 percent, as Morgan Stanley predicted the biggest shortage in seven years in 2013. Gold gained 7.1 percent in London, rising for a 12th consecutive year, the longest streak since at least 1920. Holdings through exchange-traded products rose 12 percent to 2,631 metric tons, more than the reserves of all but two central banks.
“If you look at returns for managers in the commodities space it has been challenging, but there have been opportunities,” said Colin O’Shea, the head of commodities at Hermes Investment Management Ltd. in London, which manages about $2.3 billion of raw-material assets. “What we’ve seen over the course of the last 12 months is a lack of a trend. There haven’t been significant trends for long periods of time, and that’s what’s made things difficult for some.”

‘Super Cycle’

Citigroup Inc. analysts said in a report in November that the “super cycle” of returns in commodities has ended, while their counterparts at Goldman Sachs Group Inc. and Morgan Stanley are forecasting higher prices. The S&P GSCI gauge has more than doubled since the end of 1998.
Brent crude futures advanced 3.5 percent last year, the smallest annual gain since prices collapsed in 2008, as threats to Middle Eastern supplies offset the drag on oil demand from Europe’s sovereign debt crisis. Prices posted a record annual average of $111.68 a barrel, buoyed by new international sanctions on Iran and the risk that conflict in Syria will spread. Brent rose as high as $128.40 on March 1, and fell to $88.49 on June 22.
“Although oil ended 2012 at almost the level as it began, the danger of a major supply disruption in the Middle East put a floor under the market,” said Christopher Bellew, a senior oil broker at Jefferies Bache Ltd. in London. “Oil came under pressure in the summer as Europe was gripped by recession, Chinese growth slowed, and Saudi Arabia made up for any supply shortage. But the price slump that some had expected did not materialize.”

Dollar, Euro

Intercontinental Exchange Inc.’s Dollar Index fell in December amid signs the U.S. economy is continuing to grow. The gauge will rise to a reading of 80.6 in the first quarter of 2013, from 79.8 at the end of December, according to the median of 11 analyst estimates compiled by Bloomberg.
The 17-nation euro rallied 1.8 percent against the dollar in 2012 and 7.4 percent since July 26, when Draghi assured markets that he would do “whatever it takes” to save the common currency.
“If I had to pick one event, it’s the stabilization that we’ve seen in the Europe, and a lot of that is Draghi’s pledge,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage, said Dec. 26 in a telephone interview. “The ECB has essentially committed to backstopping government borrowing and has been supportive of the euro.”

Bond Markets

Bank of America Merrill Lynch’s Global Broad Market Index was little changed in December after climbing for the previous five months. The gauge, tracking about 20,000 fixed-income securities with a market value of about $46 trillion, returned 5.73 percent last year as of Dec. 28. Average yields rose one basis point, or 0.01 percentage point, last month to 1.6 percent on Dec. 28. The yield fell to 1.57 percent on Dec. 6, the lowest level since at least 1996, from 2.24 percent at the end of 2011.
Global investment-grade corporate debt returned 0.35 percent including reinvested interest in December, a ninth consecutive monthly gain in the longest advance since 1998, a Bank of America Merrill Lynch index shows. The securities gained 10.9 percent in 2012 through Dec. 28, the most in three years. An index of high-yield bonds returned 1.78 percent last month as of Dec. 28 and gained 18.72 percent in 2012. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P.

Treasuries

U.S. Treasuries lost 0.35 percent in December, reducing the 2012 gain to 2.31 percent, the third straight annual advance. Yields on 10-year U.S. government debt are forecast to climb to 1.88 percent by the end of the second quarter, from 1.76 percent at the end of December, according to the median estimate of 81 economists surveyed by Bloomberg News.
Greek bonds were the best performers in December and for 2012 among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 30.5 percent and 97.4 percent. Portugal’s returned 3.4 percent and 57.1 percent, while Italy’s rose 0.5 percent and 20.8 percent.
“We’ve been reminded of the old saying, ‘Don’t fight the Fed,’” Andrew Slimmon, Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney, said by phone. His firm has $1.7 trillion in client assets. “This is exactly what happened in Europe. They’re much earlier in the accommodative process so the gain coming off from the bottom is going to be bigger.”
To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net
To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net