FIRST LIGHT 14 March 2023

RESEARCH

BOB ECONOMICS RESEARCH | SOUTH ASIA ECONOMICS Daily macro indicators

Is South Asia on the brink of a crisis? Ticker 09-Mar 10-Mar Chg (%)
US 10Y
3.90 3.70 (20bps)
BOB ECONOMICS RESEARCH | CPI yield (%)
India 10Y
CPI remains above RBI’s upper band 7.43 7.42 (1bps)
yield (%)
USD/INR 81.98 82.05 (0.1)
METALS & MINING Brent Crude
81.6 82.8 1.5
Expert calls – Steel recovering; aluminium price range-bound (US$/bbl)
Dow 32,255 31,910 (1.1)

Hang Seng 19,926 19,320 (3.0)

SUMMARY Sensex 59,806 59,135 (1.1)

India FII Chg
08-Mar 09-Mar
(US$ mn) ($ mn)
INDIA ECONOMICS: SOUTH ASIA ECONOMICS
FII-D (152.1) (142.9) 9.3
The recent economic crisis in Pakistan is vividly reminiscent of a similar crisis in Sri
FII-E 481.3 (55.4) (536.7)
Lanka just last year. Even more alarming is the fact that many of India’s neighbors
Source: Bank of Baroda Economics Research
are facing a similar set of economic challenges. Apart from Pakistan and Sri Lanka,
even Bangladesh and to a lesser extent Nepal have been grappling with increased
economic instability in recent times, in the form of weak external buffers and high
domestic inflation. In fact, the similarities are eerie. The dual shock of the Covid-19
pandemic and the Russia-Ukraine war brought the external vulnerabilities of these
countries to the fore, which was compounded by short-sighted, and sometimes
politically motivated government policies. Consequently, several of these countries
are now scrambling for forex resources to 1) fund imports, 2) boost forex reserves,
and 3) avoid debt default. All of these countries are in advance stages of talk with
the IMF for securing the same.

Click here for the full report.

INDIA ECONOMICS: CPI

Headline inflation came in marginally above our expectation, though elevated print
continues to add discomfort. Food inflation remained high, with over 5 out of 12 sub-
groups within food and beverage composition registering above 6% inflation.
Acceleration in housing prices, kept considerable risk on Core. Stickiness in core
inflation alludes to higher discretionary spending and pass through of input costs to
output prices. A number of firms are yet to pass on these high prices, which will lift
their selling prices further. RBI would be highly cautious of this print and be in a wait
and watch mode. It expects CPI to edge up by 5.7% in Q4 and 6.5% for FY23.

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BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda

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FIRST LIGHT

METALS & MINING

 We summarise key takeaways from our interactions with ArcelorMittal (MT
NA) and Alcoa (AA US)

 Our interactions suggest near-term range-bound aluminium prices but the

possibility of upside over the medium term

 MT reaffirmed our view of continuing recovery in steel margin through FY24;

prefer TATA and JSP

Click here for the full report.

EQUITY RESEARCH 2 14 March 2023

INDIA ECONOMICS

SOUTH ASIA ECONOMICS 13 March 2023

Is South Asia on the brink of a crisis?

The recent economic crisis in Pakistan is vividly reminiscent of a similar crisis in Sri Aditi Gupta | Jahnavi Prabhakar
Economist
Lanka just last year. Even more alarming is the fact that many of India’s neighbors are
facing a similar set of economic challenges. Apart from Pakistan and Sri Lanka, even
Bangladesh and to a lesser extent Nepal have been grappling with increased economic
instability in recent times, in the form of weak external buffers and high domestic
inflation. In fact, the similarities are eerie. The dual shock of the Covid-19 pandemic and
the Russia-Ukraine war brought the external vulnerabilities of these countries to the
fore, which was compounded by short-sighted, and sometimes politically motivated
government policies. Consequently, several of these countries are now scrambling for
forex resources to 1) fund imports, 2) boost forex reserves, and 3) avoid debt default.
All of these countries are in advance stages of talk with the IMF for securing the same.

Major macro-economic indicators

Fig 1 – Snapshot of key macroeconomic indicators

Forex reserves
GDP growth Inflation rate Exchange rate Interest rates
Country (US$ bn)
2021 2022 2022 2023 2022 2023 2022 2023 2022 2023
Bangladesh 6.9 7.1 7.7 8.7 33.7 32.3 93.5 105.6 4.0 4.0
Nepal 3.8 5.5 7.6 7.3 9.5 10.3 125.8 131.5 8.5 8.5
Pakistan 5.7 6.0 19.7 29.6 5.6 4.3 202.3 256.2 16.0 20.0
Sri Lanka 3.3 (11.0) 45.9 51.2 1.9 2.1 325.3 359.9 14.5/15.5 15.5/16.5
Source: CEIC, Central Bank of Sri Lanka, State Bank of Pakistan, Nepal Rastra Bank, Bank of Baroda Reserach│Note: For 2023, latest data as available
from source is taken

Pakistan’s economic crisis: Years in making?

The economy has been suffering with ballooning of trade deficit and rising import bills,
while exports remain stagnant. Foreign exchange reserves have shrunk. Pakistan
largely imports commodities for its domestic consumption. ADB back in Feb’22 had
noted that Pakistan had the lowest trade to GDP ratio in the World, a valid cause of
concern. PKR has crashed and has been trading at 283/dollar. A large number of
industries have halted production and even supply chain movement has stopped.
Floods added a bigger blow to this ongoing economic meltdown with the destruction of
cotton crop-biggest commodity that the country exports.

Geo-political background: The crisis in Pakistan is attributed to multiple factors starting

with the political inability to break off from the group of powerful vested interest groups.
The country also lacked political will and gave undue privileges to a few elite group in
the form of tax breaks and access to easier capital. Heightened polarization, coupled
with political instability and catastrophic floods in 2022 added to an already precarious
economic situation. This, in addition to piling up of debt and short sightedness of policy
makers and accelerating inflation has pushed Pakistan on the brink of the worst
economic crisis that it has ever seen.

ECONOMICS RESEARCH
INDIA ECONOMICS

CPI 13 March 2023

CPI remains above RBI’s upper band

Headline inflation came in marginally above our expectation, though elevated print Jahnavi Prabhakar
Economist
continues to add discomfort. Food inflation remained high, with over 5 out of 12 sub-
groups within food and beverage composition registering above 6% inflation.
Acceleration in housing prices, kept considerable risk on Core. Stickiness in core
inflation alludes to higher discretionary spending and pass through of input costs to
output prices. A number of firms are yet to pass on these high prices, which will lift
their selling prices further. RBI would be highly cautious of this print and be in a wait
and watch mode. It expects CPI to edge up by 5.7% in Q4 and 6.5% for FY23.

Any large deviation from this forecast will be viewed with caution. Given the ongoing
challenges as well as the formation of EL NINO conditions and greater chance of heat
wave, puts an upside risk to inflation in the coming months. We expect CPI to average
around 6.5% in FY23 and 5-5.5% in FY24. The overshoot of CPI, mandates RBI to
hike rate by another 25bps in Apr’23 meet and will push RBI to remain data dependent
for the future course of action.

CPI inflation moderates a tad bit

CPI inflation eases marginally: CPI inflation data edged down modestly to 6.4% in
Feb’23 after moving up to 6.5% in Jan’23. For the second-month in a row, CPI data
came in above RBI’s upper tolerance band. Food inflation virtually remained steady at
5.9% in Feb’23. Stickiness of core inflation persists.

Modest changes in Food inflation: CPI food index continued to remain elevated at
5.95% in Feb’23 against 6% in Jan’23, on YoY basis. Amongst major food items,
sharpest pace of increase was led by fruit prices which moved up to 6-month high at
6.4% in Feb’23 from 3% in Jan’23. Cereals continued to clock double digit inflation
(highest in this series) in line with expectation at 16.7% from 16.3% in Jan’23. Even
milk prices also rose to 9.6% (8-year high) in Feb’23 from 8.8% in Jan’23. Pace of
disinflation in vegetable prices went down from -11.7% in Jan’23 to -11.6% in Feb’23.
Notably, 5 out of 12 broad group of food and beverage noticed inflation above 6%.
However, inflation of eggs, meat & fish, spices and pulses registered a fall in Feb’23.

ECONOMICS RESEARCH
SECTOR UPDATE

METALS & MINING 13 March 2023

Expert calls: Steel recovering; aluminium price range-bound

▪ We summarise key takeaways from our interactions with ArcelorMittal Kirtan Mehta, CFA
[email protected]
(MT NA) and Alcoa (AA US)

▪ Our interactions suggest near-term range-bound aluminium prices but

the possibility of upside over the medium term

▪ MT reaffirmed our view of continuing recovery in steel margin through

FY24; prefer TATA and JSP

MT on steel recovery: MT flagged improving market sentiment amid reduced fears of Recommendation snapshot
recession and anticipates double-digit HoH improvement in apparent demand over Ticker Price Target Rating
JSP IN 575 670 BUY
Jan-Jun’23. The company confirmed the restart of most of its shut-in European
JSTL IN 676 715 HOLD
capacity (20% of total) given lengthening of the order book. It expects margins to
SAIL IN 87 95 HOLD
improve in the March quarter as higher volumes and absorption of fixed costs offset
TATA IN 107 140 BUY
weaker prices, and in the June quarter as better prices make up for raw material costs. Price & Target in Rupees | Price as of 13 Mar 2023
Refer our note Steel cycle recovery underway – AMNS, 10 February, for added colour.

AA on near-term range-bound aluminium price: AA attributed the 9% correction

in aluminium prices since Jan’23 to a pullback in sentiment. Though it flagged cautious
buying behaviour, it is seeing the end of destocking. Management does not expect
Yunnan supply cuts to move the needle and believes European/US restarts look
difficult due to high energy costs. However, lower coal pricing could pose a risk if it
accelerates restarts in China. The company raised the possibility of medium-term
upsides in aluminium price as supply could lag a demand revival. See Aluminium
outlook healthy but limited price upside in FY24E, 8 March, and Constructive
outlook despite uncertainty – Alcoa, 19 January.

China soft but will support recovery: Both MT and AA find China’s 5% GDP
growth target for CY23 to be soft. While MT believes its base case for steel demand
recovery still holds, AA indicated that the government’s focus on improving the
economy will support recovery and that the continued thrust on infrastructure spend,
renewables and grid development is positive for the aluminium sector.

Read-across for Indian steel: Our interactions with the two global majors affirm our
view of continuing recovery despite slower CY23 growth in China and higher interest
rates in the western world. We retain our constructive outlook on Indian steel sector
and continue to prefer TATA (BUY, TP Rs 140) and JSP (BUY, TP Rs 670).

Read-across for Indian aluminium: Aluminium pricing is likely to remain range-

bound in the near term but see an upside over the medium term. Margins for Indian
players will depend upon domestic coal availability and international coal prices.

EQUITY RESEARCH
FIRST LIGHT

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EQUITY RESEARCH 4 14 March 2023