Domestic demand recovery is imperative for FY10E (Jul-Jun) but impediments to this outcome have started to gain traction lately.
1QFY10 trade deficit, remittances and CPI point to gradual macro recovery. However concerns on external support, energy deficit and rising oil prices pose a risk to continued sequential macro improvement and asset prices.
While the saving-investment gap improved to 5.3% of GDP in FY09; note that this was due to 6.5% decline in real gross capital formation.
External support (FoDP and Kerry Lugar bill) and (2) contraction of the domestic resource gap are key for a benign macro and monetary environment to materialize.
Our thesis of a 200bp cut in policy rate by Dec-09 now looks likely to be stretched into 2HFY10 amid mounting risks with possible 100bp cut in the near term.
KASB Securities and Economics Research
15th October 2009