india economics - cs (full report)

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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER

IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

India: How big an interestrate risk to growth?

Emerging Markets Economics Asia

With the RBI ratcheting up the pace of rate hikes recently, we address two

key questions in this report:

1. Are rates tight or loose? Many are beginning to worry that the 475bps

effective hike in nominal policy rates might lead to a big hit on growth.

In contrast, some look at a still negative real policy rate and conclude

that interest rates are still too stimulative. How does one reconcile the

two arguments?

2. Assuming the hikes in interest rates are indeed contractionary, how

adverse an impact will these have on GDP growth? What are thechances that GDP growth slips to below 7%?

Even though interest rates in real terms dont look high, we continue to expect

GDP growth to slow to 7.5% in both 2011 and 2012, with risks to the downside.

This is because (1) we find that changes in nominal interest rates do seem to

matter, and (2) interest rates have increased at a much faster pace this time

than in the previous cycle (of 2006).

On the brighter side even with the extra 50bps in policy rate hikes that we

now expect, we believe full-year growth should not slip too much below 7%.

Thats because household consumption - 57% of GDP looks relatively less

rate sensitive: a) Indias household consumption is not that leveraged, and b)

negative wealth effects for households should also be small. Investment

spending is likely to be hit by higher rates. However debt-sustainability in thecorporate sector, as far as we can make out from debt-equity ratios, should not

become a serious issue.

Exhibit 1: Real benchmark lending rate (PLR) for banks* - positive;but not above the historical trend levelyet

-2

0

2

4

6

8

10

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

'Real' bank PLR

Current

* Benchmark Prime Lending Rate (PLR) for State Bank of India. Forecast assumes another 50bps hike in the PLR and amoderation in our inflation measure (see page 4) to 7% by March 2012 from 9% now.Source: Credit Suisse, CEIC

02 August 2011

Economics Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Devika Mehndiratta

+65 6212 3483

[email protected]


2/13

02 August 2011

India: How big an interest rate risk to growth? 2

I: Interest rates too high or too low?Many clients are seemingly beginning to worry about what could be a meaningful hit on

growth from the 475bps1 of effective hikes in the policy rate. In contrast, others appear to

be looking at the popular rules-of-thumb used to judge the tightness of interest rates, and

are wondering if interest rates might still be too low and not the other way round.

From a growth perspective, are current interest rates restrictive orstimulative?

The popularly used rules-of-thumb:

1) Nominal interest rates are much lower than nominal GDP growth are interest

rates too stimulative?Interest rates, whether you look at the policy repo rate at 8.0%, the

10-year government bond yield at 8.45%, mortgage rates at about 10.50% or banks

benchmark lending rate at 14.25%2

- all are below nominal GDP growth, which stood at

18% in 1Q 2011.

But interestingly, nominal interest rates in India have never really exceeded nominal

GDP growth at least since 2003! So, if we were to follow the line of reasoning that

interest rates below (above) nominal GDP growth are stimulative (contractionary), then

wed have to conclude that interest rates in India have been stimulative for at least thelast six years. There are several data issues of relevance here which should we be

using? Some look at policy rates, others might look at bond yields and so on. Ideally one

would like to consider an economy-wide average cost of funds but in the absence of such

a series, we look at the floating rate charged by the countrys largest mortgage lender

HDFC Ltd (Exhibit 2), as well as banks benchmark prime lending rate (PLR) in Exhibit 3.

Exhibit 2: Interest rates (mortgage) and GDP growth Exhibit 3: Interest rates (PLR) and GDP growth

%, % yoy %, % yoy

5

7

9

11

13

15

17

19

21

2005 2006 2007 2008 2009 2010 2011*

Mortgage rate*

Nominal GDP growth

5

7

9

11

13

15

17

19

21

1996 1998 2000 2002 2004 2006 2008 2010

Nominal banks' benchmark lending

rate (PLR)*

Nominal GDP growth

*Floating rate charged by HDFC Ltd., the countrys largest mortgage provider; end-yearrates; latest for 2011 Source: Credit Suisse, CEIC

* SBIs benchmark prime lending rate (PLR); end year rates; latest for 2011. Source: CreditSuisse, the BLOOMBERG PROFESSIONAL service, CEIC

1While the policy repo rates have been hiked by about 375bps, the effective hike is larger since the

interbank call rate moved from the bottom of the policy rate corridor to the top end i.e, another additional100bps2

There is no published series for corporate lending rates. What we use here is the benchmark PrimeLending Rate (PLR). This is slowly getting replaced by a new benchmark called the 'base rate' but we usethe PLR instead since, unlike for the 'base rate', we have historical data for the PLR. It is worth bearing inmind that the PLR indicates the upper range of lending rates. Much of actual lending takes place at ratesbelow the PLR.


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02 August 2011


In contrast, nominal lending rates were mostly restrictive (rates were higher than

nominal GDP growth) prior to 2003. We have mortgage rates data going back only until

2005, therefore, to go back further in time, we look at the State Bank of Indias (largest

bank in India) benchmark Prime Lending Rate (PLR)1. This interest rate versus nominal

GDP growth quick-check seems to suggest that bank lending rates have been notably

more stimulative in India post 2003.

This phenomenon (of having years withinterest rates below nominal GDP

growth) is not peculiar to India. The

spread, however, certainly seems larger

there. We look at peers, such as

Indonesia and Korea, and find that interest

rates have often been below nominal GDP

growth (in approximately six of the last ten

years). But the extent by which lending

rates are lower than nominal GDP growth

is larger in India (average 3pp) than in the

other two (0.9pp in Korea and 1.9 in

Indonesia), Exhibit 4.

2) Lets turn to the second commonly-

used quick-check for judging the

appropriateness of the level of interest

rates real interest rates.

Real rates are not really negative as

some argue. In our discussions with

clients, some are quite alarmed when they

look at the difference between Indias policy rate (the repo rate is currently at 8%) and the

inflation rate (latest WPI inflation reading is 9.4% yoy). Their conclusion is that real interest

rates are still in negative territory by a large magnitude (-140bp) and that monetary policy

is thus extremely stimulative. But we think it is important to (1) also look at other interest

rates in the economy because clearly one would get different results depending on which

interest rate one uses. Households would be influenced more by mortgage and deposit

rates, corporates by both bond yields and commercial bank lending rates, etc. Here, while

corporate bond yields are about zero in real terms (the five-year AAA corporate bond yield

is currently at 9.42%), mortgage rates (at 10.50%) and rates charged by banks for projects

such as roads, etc. (anecdotally at around 11% or more) are positive. (2) Instead of

looking at the real interest rate level at just one point in time, its more useful to see where

it is today compared with its trend/average level over a longer period of time.

Estimating real rates is of course no easy task but particularly so in India due to

the lack of a reliable measure of not just inflation expectations, but inflation itself.

First of all, there is the question of which interest rate to use. Then on inflation, some use

actual inflation and some inflation expectations. In India, as most of us know, the widely

used measure of inflation (Wholesale Price, or the WPI) is fraught with issues but in the

absence of a good CPI measure, policymakers and markets all focus on this. Forestimating real rates in this report, we attempt to use inflationary expectations. Here, the

central bank has started providing results from a quarterly households expectation survey

but it does not go back prior to 2006. Hence instead of using RBIs index for households

inflationary expectations, we use the average of WPI and CPI as an indicator of

households year-ahead inflationary expectations for the entire period since we find this to

be a reasonable proxy for the latter. We also checked if the RBIs household inflationary

expectations series might be correlated with say a longer-term moving average of inflation

(WPI or CPI), but that wasnt the case (more on this in Appendix 1).

Exhibit 4: Nominal GDP growth minusnominal lending rates

%

0.0

1.0

2.0

3.0

4.0

India Indonesia Korea

Average 2000-2010

Latest*

* 1) 1Q GDP growth minus latest lending rate. 2) SBI PLR for India,lending rate for large corporations for Korea and lending rate as per theIMF for Indonesia Source: Credit Suisse, CEIC


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02 August 2011


Exhibit 5: Real benchmark lending rate (PLR) for banks* - positive; but notabove the historical trend levelyet

%

-2

0

2

4

6

8

10

Mar-

00

Mar-

01

Mar-

02

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

'Real' bank PLR

Current

* Benchmark Prime Lending Rate (PLR) for State Bank of India. Forecast assumes another 50bps hike in the lending rate and our inflationexpectation measure (see appendix1 ) moderating to 7% by March 2012 from 9% now.Source: Credit Suisse, CEIC

Exhibit 6: Real deposit rates and corporate bond yields bit below historicaltrend levels

%

-6

-4

-2

0

2

4

6

Jan-02

Sep-02

May-03

Jan-04

Sep-04

May-05

Jan-06

Sep-06

May-07

Jan-08

Sep-08

May-09

Jan-10

Oct-10

Jun-11

Real bank deposit rates*

Real corporate bond yield

* 1 year deposit rate and 5-year bond yield. Nominal rate minus average of WPI and CPI inflation.Source: Credit Suisse, CEIC

Most real interest rates are in positive territory (not negative as many assume). It is

worth noting though, that these have only just returned to historical trend levels

and not higher. We look at real benchmark bank lending rates, bank deposit rates and

corporate bond yields (Exhibits 5 and 6). By themselves, these suggest that interest rates

are not as restrictive as some of us might believe. Indeed, in Exhibit 5 above, we seethat bank lending rates in real terms have moved up, but are back to only historical trend

levels (the dashed line).

Real bank lending rates are likely to move higher and back to the previous peak

only in 2012 (Exhibit 5). This is assuming that the nominal benchmark prime lending rate

moves up another 50bps from current levels, and assuming that our measure of

inflationary expectations moderates in line with the moderation that we expect in both WPI

and CPI inflation post December this year.


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02 August 2011


To summarise we have looked at two rules-of-thumb often used by observers for

judging the tightness of interest rates - 1) nominal interest rates versus nominal

GDP growth and 2) real interest rates. The first of these quick-checks suggests that

despite the effectively 475bps increase in policy rates in this cycle, most interest rates

appear still very stimulative since these are much lower than the nominal rate at which the

economy is growing. And not just that, it also suggests that this has been the case since

2003! The second rule-of-thumb suggests a more mixed picture real bank lending rates

are positive and back to average trend levels whereas real corporate bond yields andbank deposit rates are close to zero and below historical trend levels. All in all, if we were

to draw a conclusion based on these two quick checks, we would say that neither of these

two suggests that the current level of interest rates is particularly restrictive from a growth

perspective.

An obvious question pops up: Since neither of these rules-of-thumb seems to

suggest that interest rates are restrictive, why are we expecting the rate hikes so

far to lead to a slowdown in growth at all? The reasons are as follows:

1. We find that changes in nominal lending rates also matter. In fact, according to our

regression exercise for GDP3 growth, we found nominal rates to have a greater impact

on growth than real rates (India: Livin on a prayer, 19 Nov 2010), with every 1pp

increase in the nominal bank PLR reducing our measure of private sector GDP growth

by 0.4pp within a year, and a further 1pp in the second year. Other variables that were

statistically significant as explanatory variables were: world trade, the real effective

exchange rate (REER) and oil prices.

Exhibit 7: Nominal rate and pvt. sector GDP growth Exhibit 8: Real rates and pvt. sector GDP growth% yoy %, inverted scale % yoy %, inverted scale

2

4

6

8

10

12

14

1993 1997 2001 2005 2009

10

12

14

16

18

20

Private sector GDP growth

Bank lending rate, forward by 1-yr, RHS, invertedscale

2012F2012F2

4

6

8

10

12

14

1993 1997 2001 2005 2009

2

4

6

8

10

Private sector GDP growth

'Real' Bank lending rate, forwardby 1-yr, RHS, inverted scale

2012F

* SBIs benchmark Prime Lending Rate (PLR). Financial year averages. Source: CreditSuisse, CEIC

* SBIs benchmark Prime Lending Rate (PLR). Financial year averages. Source: CreditSuisse, CEIC

In nominal terms, bank lending rates4

appear to be at their highest level since 1998 and

are up about 250bps from the recent low in 3Q 2010 (Exhibit 9). Its worth bearing in mindthat were focusing more on the trend of this benchmark prime lending rate (PLR) over

time and were not reading too much into its standalone value at any particular point of

time (latest reading is 14%) because a big chunk of bank lending happens at rates lower

than the published PLR.

3Private sector GDP measured as GDP ex agriculture and ex government and social services.

4See footnote 2 on page 2.


6/13

02 August 2011


Exhibit 9: In nominal terms, lending rates are at all-time highs since 2002%

8.4

14.3

5

6

7

8

9

10

1112

13

14

15

Jan-0

2

Aug-0

2

Apr-03

Dec-0

3

Jul-04

Mar-05

Oct-05

Jun-0

6

Feb-0

7

Sep-0

7

May-0

8

Jan-0

9

Aug-0

9

Apr-10

Dec-1

0

Jul-11

Banks' 1 yr deposit rate

Banks' benchmark lending rate (PLR)*

* PLR Is the State Bank of Indias benchmark Prime Lending Rate. This benchmark is now slowly being replaced with a new benchmarkcalled the base rate. A decent chunk of lending takes place at rates lower than this PLR. Source: Credit Suisse, CEIC

How come bank lending rates are at all-time highs when the policy repo rate is

100bps below the previous peak? This mainly reflects the fact that while policy rates

were slashed in 2009 right back to the lows of 2004, bank deposit rates (and hence

lending rates) proved to be sticky downwards and remained a good 150bps above the

2004 lows. This is possibly because banks wanted to avoid lowering deposit rates too

much more in 2010, as that could have meant exceptionally large negative real deposit

rates (Exhibit 6) and partly this could be due to banks choosing to operate with larger

spreads now (between lending and deposit rates).

Why is it that nominalrates appear to have more of an impact on growth than real

rates?

Theres probably some money illusion at work where at least some economic agents

(corporates or households) are more influenced by nominal variables and dontnecessarily think in real terms as much as is theoretically assumed. Indeed one very

rarely hears even the central bank of the country (RBI) talk about real interest rates in

its formal discussions on the economy.

Another plausible reason could be that actual real interest rates might be behaving

differently from our own approximation. This is in turn could be because actual inflation

expectations might be behaving differently than that depicted by our proxy for inflation

expectations (which in turn weve constructed in a way so as to capture the trend in

RBIs survey measure of household expectations).

2. Thepace at which interest rates have been hiked this time is a lot quicker than the

previous tightening cycle of 2006. Its not just the level of the interest rate that matters

but also how quickly rates are cut/raised. An increase in rates delivered over a shorter

period of time would presumably be more of a shock to households and corporatessince theres less time to adjust. Here its worth noting that as far as bank lending rates

are concerned, the pace of increase in rates has been much swifter this time than in the

2006 tightening cycle (Exhibit 10).


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02 August 2011


Exhibit 10: Bank lending rates have risen at almost double the pace this timecompared with the previous tightening cycle

Time period Bank PLR*

Start Now/End Start Now/End pp hike Over no. of months

Current cycle Sep-10 July-11 11.75 14.25 2.50 11

Previous cycle Jan-06 Aug-08 10.25 13.75 3.50 30

* SBIs benchmark Prime Lending Rate (PLR) Source: Credit Suisse, CEIC

3. Talking about the change in nominal interest rates, its worth noting that while

most discussions centre around the levelof real rates, the change in these goes

unnoticed. So while Exhibit 5 highlighted that the current level of the real benchmark

prime lending rate is only at the historical trend level and not above, it is worth noting

that it has moved up a good 580bps since the low in March 2010.

Stepping away from interest rates for a minute

In this report, were focusing on the impact on growth from higher interest rates. Needless

to say, however, how tight or loose overall monetary conditions are will depend not just on

interest rates but on other factors such as the real effective exchange rate (REER). The

REER as measured by the RBI indicates that the rupee was up an average 13% yoy in

2010 (April 2010 to March 2011). Given the lags with which a real appreciation usuallyimpacts growth, some headwinds from this are likely to be at play this year.

To summarise the popular rules of thumb: nominal rates compared with nominal GDP

growth and real interest rates suggest that interest rates in India are probably still

stimulative and its only in early 2012 (assuming inflation falls 200bps by then and RBI

hikes another 50bps), that interest rates in real terms are likely to move back to the

previous peak. We still maintain, however, that rate hikes are likely to be a key factor

slowing growth in 2011 because a) Our regression analysis for GDP growth suggests that

changes in nominal rates have mattered more than real rates and b) interest rates have

gone up at a much faster pace this time (2010 to date) compared with the previous cycle

that was 2005-2009 (Exhibit 10).

II: What chance sub-7% growth?In our judgement, the rate tightening so far is likely to slow growth to 7.5% in both

2011 and 2012 from 8.6% in 2010, even though rates might not look that restrictive

as per the popular rules-of-thumb. Moreover, we believe that risks to our growth

forecasts are to the downside. But how much to the downside? What are the

chances that these rate hikes slam growth even harder to well below 7%?

Heres the relatively happy news. We think the chances are low. Admittedly, this is

not an easy question to answer particularly because data availability for investment and

consumption is far from ideal in India, which in turn makes it difficult to assess interest rate

sensitivity. Many Indian observers tend to casually box together both private consumption

and investment as being equally sensitive to interest rates. We analyse some important

aspects of Indias corporate and household sector, which leave us with optimism that the

country will outbid a hard landing despite what we consider a fastpaced and meaningfulhike in policy rates.

Household consumption (57% of GDP) is unlikely to be particularly hard hit. Thats

because:

I. Household consumption is not that leveraged retail bank loans are only about 8%

of GDP

II. Negative wealth-effects of interest rates should be low given that households put

only about 6% on average of their incremental savings in equities


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02 August 2011


III. Most studies find the impact of real interest rates on the private savings rate to be

ambiguous5

Fixed investments (30% of GDP) are likely to bear much of the brunt from higher interest

rates, in our view. It would be incorrect to assume that availability of lower cost foreign

borrowings may notably help lessen the adverse impact from higher domestic rates. On

the brighter side, as far as debt-equity ratios tell us anything, debt-sustainability looks

unlikely to become a serious issueLets look at these points a bit more in detail.

Consumption

For all the talk of a boom in retail/household sector bank lending, it is worth noting

that bank loans to households as a percentage of GDP have actually fallen

marginally over the last five years. Bank lending to the household sector remains

relatively small in India compared to the region (Exhibit 11), suggesting that private

consumption (57% of GDP) continues to be relatively less leveraged in India. There are, of

course, pockets of household spending that are credit dependent - automobiles and

housing being the key ones6. In addition to bank loans and informal moneylenders, one

would imagine that Micro-finance Institutions (MFIs) are another key source of finance for

rural households but interestingly outstanding loans of MFIs as a % of GDP are quite small,at under 0.5% of GDP.

Exhibit 11: Bank loans to the household/retail sector India the outlier

% of GDP

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009 2010

IndonChinaIndiaThailand

Source: Credit Suisse, CEIC

Any indirect wealth-effects of interest rates on consumer demand (through

equity/bond investments) are likely to be small. To the extent that households invest in

equities, higher interest rates could depress the value of these investments and hence

households net worth, creating a negative wealth effect. According to RBI data, however,

households put only about 6% of their incremental savings in equity (peak 12.5% in 2007);

in contrast, almost half is put in to bank deposits7.

5i). Savings behaviour in India - Co-integration and causality evidence, The Singapore Economic Review,

February 2010. ii). Determinants and long-term projections of saving rates in developing Asia, ADB workingpapers, October 2010.6

Bank loans do not take in to account unorganised lending in the rural sector by moneylenders but sincewe are ultimately interested in analysing the impact of higher rates on household demand, it should be okayto exclude this from our analysis given that interest rates charged by unorganised rural money lenders areunlikely to be heavily influenced by RBI action on policy rates.7

Average for the period 2005 to 2008; 2008 is the latest year for which data are available.


9/13

02 August 2011


Investments

Its the corporate sector alone that has pushed up the overall bank loans to GDP

ratio in recent years (Exhibit 12). And here too, 40% of the increase was led by

infrastructure.

Exhibit 12: The increase in the loan/GDP ratio in the last five years has been

triggered by the corporate sector alone% GDP

38

47

31

25

109

28

38

0

10

20

30

40

50

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total loans* % GDP

Corporate loans ex infra % GDP

Hhld loans % GDP

Corporate loans % GDP

* These are what RBI terms as non-food credit. Source: Credit Suisse, CEIC

Two questions with regard to the corporate sector arise:

1) How vulnerable is investment spending to the hike in interest rates? Much of this

should be determined by how dependent corporate India is on domestic debt versus

other instruments of financing.

2) Has this sharp rise in bank lending to corporates led to debt-sustainability issues?

1) How dependent is investment

spending on debt (and hence on

interest rates)? In most years, internal

resources have accounted for a sizeable

chunk of financing according to data for

over 3000 public limited companies

collated by the RBI. In the 2000s (2000 to

20098), on average, internal sources such

as reserves and depreciation provisions

accounted for a larger chunk of financing

(40% of total) than debt 20% of total

financing needs (Exhibit 13). It can be

argued that this is more or less in line withthe pattern in other peer countries.

More importantly, are corporates

increasingly relying more on external

debt over the last few years? If yes,

higher domestic interest rates need not

bite as much as we consider. We think

this is important because if indeed there is evidence that corporates successfully manage

82009-10 (Year ending March 2010) is the latest year for which data are available.

Exhibit 13: Financing sources

% of total

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Financing through debt, % of total

Financing through internal accruals, % oftotal

Source: Credit Suisse, RBI


10/13

02 August 2011


to diversify away from higher cost domestic debt to lower cost external debt, then higher

domestic interest rates need not have that significant an impact on their investment

decisions. Anecdotally, this indeed seems to be the case for some large corporates. But

our estimates below suggest that this does not hold true for the corporate sector as a

whole. Looking at the flow of credit to the corporate sector, we find that even in 2007,

when domestic interest rates were close to the peak and foreign capital inflows were

strong, domestic credit (bank loans and bonds) continued to dominate as it accounted for

close to 70% of the corporate sectors total credit intake (Exhibit 14).

Exhibit 14: Corporate sector borrowings domestic borrowing still dominates

INR trn % total

Borrowings by the corporate sector* 2006 2010 Avg 2006 to

2010

2006 2010 Avg 2006 to

2010

Domestic 3.2 5.8 4.2 74 84 81

Bank loans 3.2 5.3 3.9 73 76 75

Corporate bonds 0.1 0.5 0.3 2 8 6

External 1.1 1.1 1.0 26 16 19

External Commercial Borrowings (ECBs), net 0.7 0.5 0.5 17 8 11

Short-term credit, net 0.3 0.5 0.3 7 7 6

Foreign currency denominated bonds 0.1 0.1 0.1 2 2 3Total 4.3 7.0 5.2 100 100 100

* 1. We have compiled this by identifying key sources of debt. 2. Bank borrowings are estimated as change in outstanding non-food bank loansex retail loans. Borrowings through ECBs and short-term credit are estimates in net terms i.e, gross inflows minus repayments Source: CreditSuisse, CEIC , RBI, the BLOOMBERG PROFESSIONAL service

2) At least as far as debt-equity ratios suggest, corporate sector debt-sustainability

looks okay. Needless to say, higher interest costs are likely to squeeze profitability, which

is also under pressure from other input costs. But are there signs of debt having risen to

unsustainable levels? We look at debt/equity ratios for a sample of 255 listed companies

having available balance sheet data for the year-ending March 2011. We find that while

corporates have taken on debt quite aggressively over the last decade, the equity base too

has kept pace so that gross debt/equity ratios have actually come off over the long term from

about 0.64 in 2002 to 0.52 now (Exhibit 15). Given that there was no sustainability crisis in

2008 (when debt-equity ratios were somewhat higher than at present, interest rates hadreached a peak and the economy was subject to the Lehman shock), we would imagine that

from a sustainability point of view, things should be okay in 2011/2012. This is at an

aggregate level specific sectors such as real estate look more vulnerable, however.

Exhibit 15: Debt/equity ratio* -

Median for a sample of 240 listed companies

0.2

0.3

0.4

0.5

0.6

0.7

2002

2003

2004

2005

2006

2007

2008

2009

2010

Debt/equity ratio

Net debt/equity ratio

* Net debt = gross debt cash holdings. Years are financial years ending in March, e.g., 2010 is year-ending March 2011.Source: Credit Suisse, CMIE


11/13

02 August 2011


Appendix 1BOX: RBIs survey measure of household inflation expectations - determinants

The RBI now publishes a quarterly survey of households inflation expectations.

Unfortunately however, the series only starts in 2006 and for our analysis of the trend in

real interest rates, we really need to go back further. As a result, we checked if the RBIseries for households inflation expectations displays some connection with actual current

inflation readings of the CPI or the more popularly used WPI (Wholesale Price Index). If it

does, we can use that as an alternative. For instance, since expectations are often

considered to be adaptive, do we find evidence that households inflation expectations

closely track, for example, the six-month or one-year moving average of the WPI or CPI

(Exhibit 19)? We find a simple average of WPI and CPI inflation readings provides the

best proxy for households inflationary expectations as surveyed by the RBI, (Exhibit 18)

except for the last year, where RBIs survey expectations have remained sticky more in

line with WPI inflation rather than CPI inflation.

Exhibit 16: RBIs hhld expectationsand WPI

Exhibit 17: RBIs hhld expectationsand CPI

% yoy % yoy

0

4

8

12

16

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1

Hhld inflation expect'n, yr ahead

WPI

0

4

8

12

16

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1


CPI*

Source: Credit Suisse, CEIC, RBI * CPI for industrial workers Source: Credit Suisse, CEIC, RBI

Exhibit 18: RBIs hhld expectationsand avg WPI & CPI

Exhibit 19: RBIs hhld expectationsand 1-yr moving avg of WPI+CPI

% yoy

0

4

8

12

16

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1


Avg of WPI and CPI

0

4

8

12

16

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1


1 yr moving avg of avg WPI+CPI

Source: Credit Suisse, CEIC, RBI Source: Credit Suisse, CEIC, RBI


12/13

EMERGING MARKETS ECONOMICS AND FIXED INCOME STRATEGY

Kasper BartholdyHead of Strategy and Economics

+44 20 7883 [email protected]

Eric Miller, Managing DirectorGlobal Head of Fixed Income and Economic Research


LATIN AMERICA ECONOMICS

Alonso Cervera

Head of Non-BrazilLatin America Economics+52 55 5283 [email protected], Chile

Carola Sandy


Argentina, Peru, Colombia

Casey Reckman

+1 212 325 [email protected], Panama, El Salvador

Lorraine White

+1 212 538 [email protected] Analyst

Nilson Teixeira

Head of Brazil Economics+55 11 3841 [email protected]

Iana Ferrao


Leonardo Fonseca


Daniel Lavarda


Tales Rabelo


EASTERN EUROPE, MIDDLE EAST & AFRICA ECONOMICS

Berna Bayazitoglu

Head of EMEA Economics+44 20 7883 [email protected]

Sergei Voloboev

+44 20 7888 [email protected], Ukraine, Kazakhstan

Carlos Teixeira

+27 11 012 [email protected] Africa, Nigeria

Gergely Hudecz

+44 20 7883 [email protected] Republic, Hungary, Poland

Natig Mustafayev


Alexey Pogorelov

+7 495 967 [email protected], Ukraine, Kazakhstan

NON-JAPAN ASIA ECONOMICS

Dong Tao

Head of Non-Japan Asia Economics+852 2101 [email protected], Korea

Christiaan Tuntono

+852 2101 [email protected] Kong, Taiwan

Robert Prior-Wandesforde

+65 6212 [email protected], Indonesia

Devika Mehndiratta

+65 6212 [email protected], Philippines

Santitarn Sathirathai

+65 6212 [email protected], Vietnam

Kun Lung Wu

+65 6212 [email protected], Singapore

STRATEGY

Igor Arsenin

Head of Latin America Strategy+1 212 325 [email protected]

Paul Fage

Head of EMEA Strategy+44 20 7883 [email protected]

Ashish Agrawal

Asia Strategy+65 6212 [email protected]

Daniel Chodos

+1 212 325 [email protected] Local Markets Strategy

Helen Parsons, CFA


Saad Siddiqui


Ray Farris

Head of FX Strategy+65 6212 [email protected]

Daniel Katzive

+1 212 538 [email protected] Strategy


13/13

Disclosure Appendix

Analyst CertificationI, Devika Mehndiratta, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was,is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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