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eutsc e anResearch

Asia Economics Date21 March 2014

India Economics WeeklyDealing with taper tantrum, part 2

________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Taimur Baig, Ph.D

Chief Economist

(+65) 64238681

[email protected]

Kaushik Das

Economist

(+91) 22 7158 4909

[email protected]

Dealing with taper tantrum, part 2. This week's FOMC meeting nudged thecentral dynamic of 2014 back into focus, which is monetary policynormalization in the US. Mixed data due to harsh weather and concern aboutChina had pushed this issue to the back-burner for a while, but all it took was aslight change in Fed Chairwoman Yellen's tone about when rates could beginto rise to make it the issue of the moment again. US Federal Reserve's broadlypositive view on the economy has a number of implications for flows, assetprices, and financial stability in Asia. One can debate about the pace,

magnitude, and timing of taper and rates normalization (which, it isincreasingly apparent, will be tied not just to growth and job creation, but toquality of growth and employment as well), but the fact of the matter is thatrates have only one way to go, barring some major negative shock to globalgrowth or sentiments.

India, in our view, is in a much better position to deal with this scenario. Policyactions have reduced the economys external account deficits and reliance ofshort term external flows, fiscal consolidation has continued (even though atthe expense of growth supportive public investment), and inflation respite ispalpable. Financial markets have rallied considerably in anticipation of aneconomic reform friendly election outcome, foreign investor interest hassurged, rupee has been remarkably strong, and latest data suggest aneconomic recovery is in the making.

We are however not going to get carried away in this wave of politicaloptimism. Election cycles have come and gone over the past decade or two,with the markets rallying exuberantly in the lead-up or aftermath of decisiveelectoral results. These rallies have almost inevitably fizzled though as thereality of running a large, complex, and noisy democracy set in.Our optimismrests instead on the fact that tough measures (fuel price hike, tight monetaryand fiscal policy, FDI liberalization) have been taken over the past 18 monthsthat will hold India on strong footing regardless of the election outcome.

Key forecasts

Financial year (ending 31 March) FY11 FY12 FY13 FY14F FY15F

Real GDP (YoY %) 8.9 6.7 4.5 4.7 5.5

Central Govt. fiscal deficit, % of GDP -4.9 -5.8 -4.9 -4.6 -4.5

Consolidated fiscal deficit, % of GDP -7.5 -7.7 -7.2 -7.0 -7.0

WPI (YoY%) avg 9.6 9.0 7.4 6.0 4.0

CPI* (YoY%) avg 10.5 8.4 10.2 9.5 6.1

Current account balance, % of GDP -2.7 -4.2 -4.7 -2.0 -2.5

Calendar year 2010 2011 2012 2013F 2014F

Trade balance, % of GDP -8.2 -9.0 -11.0 -8.4 -8.8

Current account balance, % of GDP -3.3 -3.4 -5.0 -2.6 -2.5

INR/USD, eop 44.8 53.3 54.8 61.9 61.0Source: CEIC, Deutsche Bank forecast. Note: FY11, FY12 CPI data pertain to CPI (IW).

Publications on India 2014

FY14/15 budget is an exercise in optimism 17-FebCPI target will keep rates high for long 7-FebState of Indias state finances 30-JanRBI's path towards (soft) inflation targeting 22-Jan

2013

Economy and markets around elections 02-May

Mumbai and Delhi Trip Notes 20-Nov

More measures to stabilize the rupee 15-Aug

Whatever it takes to defend the rupee 13-Aug

Growth outlook darkens 06-Aug

India: Battling Vulnerability 05-Jul

Rupee worries likely to dissipate 07-Jun

How low can inflation go? 02-May

Impact of lower gold and oil price 17-Apr

Chartbook Re-starting the engine 01-Mar

A realistic budget but not a game changer 28-Feb

Indias cash transfer plan 24-Jan

Fuel price decision fuzzy but significant 18-Jan

Can the rupee turn a corner? 14-Jan

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India Economics Weekly: Dealing with taper tantrum, part 2

Page 2 Deutsche Bank AG/Hong Kong

Data monitor

Key macro variables monthly trend

Real sector (% yoy) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

Industrial production 2.5 0.6 3.5 1.5 -2.5 -1.9 2.6 0.4 2.7 -1.2 -1.3 -0.2 0.1

Mining and quarrying -1.8 -7.7 -2.1 -3.5 -5.9 -4.6 -3.0 -0.9 3.6 -2.9 1.7 0.7 0.7

Manufacturing 2.7 2.1 4.3 1.8 -3.2 -1.7 3.0 -0.2 1.4 -1.3 -2.7 -1.2 -0.7

Electricity 6.4 -3.2 3.5 4.2 6.2 0.0 5.3 7.2 12.9 1.3 6.3 7.5 6.5

Capital goods -2.5 9.1 9.6 -0.3 -3.7 -6.6 15.9 -2.0 -6.6 2.5 -0.1 -2.5 -4.2

Consumer goods 2.5 0.8 1.8 1.7 -6.6 -1.5 -0.7 -0.9 1.0 -5.0 -8.9 -4.7 -0.6

Core infrastructure production 8.3 -2.4 3.2 2.3 2.3 0.1 3.1 3.7 8.0 -0.6 1.7 2.1 1.6

Auto sales 4.0 -3.2 -6.5 -1.7 -1.9 -4.3 -1.3 7.5 12.4 12.2 1.6 0.5 4.3 5.3

Manufacturing PMI 53.2 54.2 52.0 51.0 50.1 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5

Services PMI 57.5 54.2 51.4 50.7 53.6 51.7 47.9 47.6 44.6 47.1 47.2 46.7 48.3 48.8

Monetary sector (%yoy)

WPI inflation 7.3 7.3 5.7 4.8 4.6 5.2 5.9 7.0 7.0 7.2 7.5 6.4 5.0 4.7

Primary articles 11.4 10.5 7.4 5.1 5.7 8.8 9.7 13.6 14.0 14.6 15.3 10.8 6.8 6.3

of which: Food 12.3 12.0 8.6 6.1 8.2 10.3 12.3 19.2 18.7 18.3 19.7 13.7 8.8 8.1

Fuel & power 9.3 10.6 7.8 8.3 7.3 7.5 11.4 12.7 11.7 10.5 11.1 10.9 10.0 8.7

Manufactured products 4.9 4.8 4.3 3.7 3.3 2.9 2.6 2.3 2.4 2.8 2.9 3.0 2.8 2.8

Core WPI inflation 4.2 4.0 3.7 3.0 2.6 2.2 2.3 2.3 2.5 2.9 3.0 3.3 3.0 3.1

CPI inflation 10.8 10.9 10.4 9.4 9.3 9.9 9.6 9.5 9.8 10.2 11.2 9.9 8.8 8.1

Core CPI inflation 8.2 8.4 8.5 8.3 7.7 7.7 8.0 8.2 8.4 8.0 8.0 8.1 8.1 7.9

M3 (broad money supply) 13.0 12.7 13.8 12.8 13.4 12.7 12.4 12.0 12.9 13.6 15.1 14.9 14.5 14.5

Credit to commercial sector 16.0 16.3 14.2 14.5 15.1 13.3 14.4 16.3 16.9 15.7 13.7 14.1 14.1 13.7

Aggregate deposits 13.1 12.7 17.4 13.0 14.5 13.8 13.4 12.2 10.4 14.2 16.1 15.8 15.7 15.9

External sector (% yoy)

Exports 1.2 2.3 5.9 2.0 -0.7 -4.8 10.6 13.5 11.9 13.4 2.4 1.9 3.8 -3.7

Imports 6.3 2.8 -3.4 10.0 6.0 -0.6 -6.3 -1.2 -18.6 -14.4 -16.8 -15.3 -18.1 -17.1

Trade Balance (USD bn) -20.0 -15.5 -10.4 -17.7 -20.1 -12.2 -12.5 -10.6 -6.4 -10.6 -9.9 -10.5 -9.9 -8.1

FX Reserves (USD bn) 295.5 290.9 292.1 293.9 287.9 282.5 277.6 275.5 277.2 281.5 290.7 293.9 291.1 294.4

INR/USD 53.3 53.8 54.4 54.2 56.5 59.7 61.1 66.6 62.8 61.4 62.4 61.9 62.5 62.1

GDP and Balance of Payments quarterly trend

National accounts, % yoy Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013

Real GDP (production side) 6.6 6.1 5.1 4.5 4.6 4.4 4.8 4.4 4.8 4.7

Agriculture 4.8 6.7 2.0 1.8 1.8 0.8 1.4 2.7 4.6 3.6

Industry 6.3 4.4 1.0 -0.6 0.1 2.0 2.0 -0.9 1.5 -1.2

Services 7.0 6.4 7.0 6.7 6.5 6.1 6.3 6.3 5.8 6.7

Balance of Payments, $ bn

Exports 79.6 71.4 80.2 75.0 72.6 74.2 84.8 73.9 81.2 79.8

Imports 124.1 120.1 131.7 118.9 120.4 132.6 130.4 124.4 114.6 113.0

Trade balance -44.5 -48.7 -51.5 -43.9 -47.8 -58.4 -45.6 -50.5 -33.3 -33.2

Net invisibles 25.6 28.8 29.8 26.8 26.7 26.6 27.5 28.7 28.1 29.1

Current account -18.9 -20.0 -21.8 -17.1 -21.1 -31.8 -18.2 -21.8 -5.2 -4.1

Capital account 19.6 7.7 16.6 16.5 20.8 31.5 20.6 20.6 -4.8 23.8

o/w: FDI 6.5 5.0 1.4 3.8 8.2 2.1 5.7 6.5 8.1 6.1

Portfolio investment -1.2 1.9 13.9 -1.9 7.7 9.8 11.3 -0.2 -6.6 2.4

BoP Balance 0.3 -12.8 -5.7 0.5 -0.2 0.8 2.7 -0.4 -10.4 19.1

Source: CEIC, Bloomberg Finance LP, RBI, CSO, various ministries of Government of India, Deutsche Bank

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Deutsche Bank AG/Hong Kong Page 3

Commentary

In a better position to deal with global market volatility

This week's FOMC meeting nudged the central dynamic of 2014 back intofocus, which is monetary policy normalization in the US. Mixed data due toharsh weather and concern about China had pushed this issue to the back-burner for a while, but all it took was a slight change in Fed Chairwoman

Yellen's tone about when rates could begin to rise to make it the issue of themoment again. US Federal Reserve's broadly positive view on the economyhas a number of implications for flows, asset prices, and financial stability inAsia.

So here we go again, notwithstanding some lingering questions about thequality of the US recovery, concerns about China and Russia, and littlemanifestation of demand pull inflation globally, we are sure that tapering willcontinue through the rest of the year, interest rates will rise, flows will be morediscriminating, and Asian FX will be under pressure, at least for a while. Onecan debate about the pace, magnitude, and timing of taper and ratesnormalization (which, it is increasingly apparent, will be tied not just to growthand job creation, but to quality of growth and employment as well), but thefact of the matter is that rates have only one way to go, barring some majornegative shock to global growth or sentiments.

India, in our view, is in a much better position to deal with this scenario. Policyactions have reduced the economys external account deficits and reliance of

short term external flows, fiscal consolidation has continued (even though atthe expense of growth supportive public investment), and inflation respite ispalpable. Financial markets have rallied considerably in anticipation of aneconomic reform friendly election outcome, foreign investor interest hassurged, rupee has been remarkably strong, and latest data suggest an

economic recovery is in the making.

We are however not going to get carried away in this wave of politicaloptimism. Election cycles have come and gone over the past decade or two,with the markets rallying exuberantly in the lead-up or aftermath of decisiveelectoral results. These rallies have almost inevitably fizzled though as thereality of running a large, complex, and noisy democracy set in. No amount ofelectoral triumph will change civil society's opposition to expansion of miningor fast acquisition of land to proceed with large scale infrastructuredevelopment. Similarly, getting the support from local governments, headedby opposition parties in many cases, will remain as challenging after theelections as it has been before. Many projects have been delayed due to

judicial oversight into corrupt practices in bidding, allocation of contracts, and

financing. Courts are not going to go quiet in these areas just because a newterm is beginning in the political cycle.

Our optimism rests instead on the fact that tough measures (fuel price hike,tight monetary and fiscal policy, FDI liberalization) have been taken over thepast 18 months that will hold India on strong footing regardless of the electionoutcome. We are encouraged by prospects of the economy; we just donthave a strong view on which party can deliver more than the other.

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Dealing with taper tantrum, part 2

Economy is weak but less fragile

As discussed in the commentary section, EM economies in general and India inparticular will likely come under renewed pressure as the market tries toposition against the likelihood of a quicker-than-expected pace of monetarypolicy normalization in the US. India has of course given investors plenty ofdomestic developments to ponder in recent months, both with a string ofconstructive macro data (especially on inflation and trade deficit) and anelection seemingly headed toward a pro-market outcome. Below we go overthe latest developments.

Growth

Real GDP growth has remained sub-5% for more than a year now, and willlikely remain so in the Jan-March quarter. Still, there is some room for

optimism as the economy seems to have put deceleration behind it. Highfrequency macro indicators such as the manufacturing and services PMIsuggest a bottom in activities. Indeed, economic momentum has improvedsince mid-2013, although the level of activity is clearly well below the comfortlevel of policy makers and India's aspirational population.

Real GDP and non-farm sector GDP growth PMI indicating that the economy has bottomed

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2013

Real GDP Non-farm sector% yoy

40

45

50

55

60

65

2007 2008 2009 2010 2011 2012 2013 2014

Manufacturing PMI

Services PMI

Composite PMI

3mma

Source: CEIC, Deutsche Bank Source: Haver Analytics, Deutsche Bank

The latest findings of the Manpower Employment Outlook Survey arepromising for future growth prospects. According to this survey (in which5,302 employers are surveyed across India), hiring activity is expected toimprove in the 2Q of 2014 (April-June), rebounding from a sharp dip in the

present quarter. Survey results show that net employment outlook rose to+45% in 2Q14 (a positivenumber indicates employers intention to increasehiring), from +29% in 1Q14 and +30% in 2Q13, led by improvement in hiringintentions across sectors.

This augurs well for overall growth outlook in the coming quarters, given thebroad directional similarity between employment outlook and GDP growth thathas held in the past. Between services and manufacturing, the biggerimprovement is expected in the services related sectors, which is good news,given that services contribute over 65% to Indias overal l GDP.

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Net employment outlook vs. real GDP growth Employment outlook and composite PMI

2

4

6

8

10

12

15

25

35

45

55

Overall Net Emp. Outlook, lhs

Real GDP, rhs

% %yoy

40

45

50

55

60

65

70

16

24

32

40

48

56

2007 2008 2009 2010 2011 2012 2013 2014

Net Emp. Outlook (t-1), lhs

Composite PMI, rhs% 3mma

Source: CEIC, Manpower Group, Deutsche Bank Source: Manpower Group, Haver Analytics, Deutsche Bank

Inflation and monetary policyIndias CPI inflation has eased somewhat in recent months (to 8.1% in

February from 11.2% in Nov13), led by normalization of vegetable prices(which had spiked up sharply in the latter half of 2013). WPI inflation has alsofallen below 5% in February, from 7.5% in November13. Recent hailstorms incertain parts of the country could adversely affect the food price dynamic butwe dont see this being significant enough to reverse the improvement seen in

the last few months. We also expect further price declines on energy andmetals, reflecting global developments and the rupee's recent appreciation.Additionally, a favorable base effect kicks in during the second half of 2014.Taking these factors into account, we forecast CPI inflation to ease to 5-6% bythe end of the third quarter of this calendar year. Core inflation should alsomoderate below 7% in 2H, especially if economic growth remains subdued.With this backdrop, the Reserve Bank of India will have no hesitation to remainon a prolonged pause, perhaps even entertain some policy easing toward theend of the year (DB forecast: 50bps rate cut in 2014).

Inflation has moderated in the last few months CPI inflation and repo rate forecast

0

4

8

12

16

2007 2008 2009 2010 2011 2012 2013 2014

CPI (IW) WPI inflation

CPI new

% yoy

7.0

7.5

8.0

8.5

9.0

0

2

4

6

8

10

12

2012 2013 2014 2015

CPI, lhs Forecast, lhs

Repo, rhs Forecast, rhs

%% yoy

Source: CEIC, Deutsche Bank Source: CEIC, Deutsche Bank

Balance of Payments and RupeeIn the first 9 months of FY14 (April-Dec13), Indias current account deficit wasUSD31.1bn (2.3% of GDP), significantly lower than the corresponding period ofFY13 (USD69.8bn). Based on the recent trade deficit trend (about USD8-9bnper month), it is clear that current account deficit will be in the USD5-5.5bnrange in Jan-March14 as well, which should lead to a full year outturn ofUSD36.6bn (2% of GDP).

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This will constitute a USD51bn narrowing of CAD in one year, or about 2.7% ofGDP worth correction from FY13. About half of the USD51bn improvement inCAD is due to lower gold imports, which should be around USD28bn in FY14versus USD54bn in FY13. In % of GDP terms, this constitutes a 1.5%downward adjustment, according to our estimate.

In FY15, we expect the current account deficit to be higher than this year(USD50.5bn vs. USD36.6bn), on the back of stronger imports growth (10%yoyin FY15 vs. -5.3%yoy likely in FY14).As restrictions on gold imports ease andeconomic momentum picks up, imports growth will turn positive and raise thetrade and current account deficit. But we dont expect gold imports to increase

as sharply as in FY12 and FY13, to lead to renewed concerns on the CAD front.

Funding a current account deficit of USD50bn (2.5% of GDP) should not be aproblem as long as there is no negative fallout of the upcoming generalelection in April-May. Consequently, we remain constructive on the rupee,though we dont see the rupee breaching 61 on a sustained basis, as we

expect the RBI to intervene and buy Dollars below those levels (DB forecast:INR/USD to end-Dec14 at 61).

BOP dynamic has improved considerably in FY14 Gold imports have come off sharply in FY14

0

1

2

3

4

5

FY09 FY10 FY11 FY12 FY13 FY14F FY15F

Current account deficit

Capital account surplus

% of GDP

1.0

1.5

2.0

2.5

3.0

3.5

0

10

20

30

40

50

60

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F

Gold imports, USDbn (lhs)

Gold imports, % of GDP (rhs)

USD bn % of GDP

Source: CEIC, Deutsche Bank Source: CEIC, Deutsche Bank

Rupee has appreciated in 2014, led by FII inflows FX reserves position has improved

42

46

50

54

58

62

66

70-6

-4

-2

0

2

4

6

2011 2012 2013 2014

Net FII: equity

Net FII: debt

USD/INR (inverted), rhs

USD bn

200

220

240

260

280

300

320

340

2008 2009 2010 2011 2012 2013 2014

Gross official reserves

Reserves (forward adj and excl

gold/SDR/IMF desposit)

USD bn

Source: CEIC, Deutsche Bank Source: IMF, RBI, Deutsche Bank

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Fiscal deficit and debtAs per revised estimates, Indias FY13/14 central government fiscal deficit

stood at 4.6% of GDP, marking an improvement over the FY12/13 outturn(4.9% of GDP). Despite various slippages, the government managed to achievea lower than budgeted fiscal outturn mainly through expenditure compression.As per the estimates, capital expenditure would be held back by 0.7% of GDP

(INR749bn) in FY14, a strategy which the authorities had adopted even in FY13.

The interim budget has set a 4.1% of GDP fiscal deficit target for FY15, in linewith the medium-term fiscal framework. The 50bps improvement is premisedon higher revenue collection (0.2% of GDP), and simultaneous expenditurecompression (0.3% of GDP).

The revenue side estimates look overly optimistic (gross tax revenue, personalincome tax and indirect tax receipts are projected to rise 19%yoy, 26.8%yoyand 18.8%yoy respectively) and we see risks of slippages there. Consequentlywe expect the FY15 fiscal deficit to be 4.5% of GDP, higher than the budgetestimate.

Irrespective of the political outcome, we expect the drive on fiscalconsolidation to continue. Subsidy rationalization, disinvestments and taxreforms will continue to be on the priority list of the next government, aswithout these, it will be difficult to bring the fiscal deficit down to the FY17target of 3% of GDP.

Fiscal consolidation continuing, but at a gradual pace Market borrowings remain high, putting pressure on

long term yields

0

1

2

3

4

5

6

7 Central Govt. fiscal deficit (% of GDP)% of GDP

5

6

7

8

9

0

2

4

6

8

Central Govt. fiscal deficit (% of GDP)

Gross market borrowing (INR trn)

10 year gov. bond yield (avg.), rhs

% of GDP,

or INR trn

%

Source: Budget documents, Deutsche Bank Source: Budget documents, Bloomberg Finance LLP, RBI, Deutsche Bank

There are some pockets of concern though. The governments gross marketborrowing is expected to be large in the next couple of years, given sizableredemptions, which could pose to be a challenge for the debt market, in theabsence of support from RBI through OMO operations.

The RBIs monetary policy stance could also complicate Indias debt dynamic.

If the RBI strives to keep real rates positive, by targeting CPI inflation, it wouldaffect the governments debt dynamic, putting an end to the trend of recent

years when the debt/GDP ratio kept declining even without fiscal adjustment.As lower inflation reduces nominal GDP growth rate and higher real rates hurtthe debt dynamic, the authorities would have to either embrace a faster paceof fiscal consolidation (which is difficult under current circumstances) or wouldhave to accept a slower improvement to the debt/GDP profile going forward.

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Data, forecast and charts

National accounts: production and expenditure side GDP% yoy FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E

Real GDP 8.9 6.7 4.5 4.7 5.5

Agriculture 8.6 5.0 1.4 3.4 2.3

Industry 8.3 6.7 0.9 -0.1 3.0

Services 9.2 7.1 6.2 6.3 6.8

Expenditure side GDP

Consumption exp. 8.0 8.5 4.9 3.0 4.7

Private 8.4 8.9 4.7 2.6 4.8

Government 6.2 6.3 5.8 5.0 4.3

Investment 13.0 9.9 0.8 -0.2 5.3

Exports 22.7 12.2 5.2 8.7 13.0

Imports 17.1 19.6 6.8 0.5 9.3Source: CSO, CEIC, Deutsche Bank forecasts

Fiscal operations

% of GDP FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E

Central government balance -4.8 -5.8 -4.9 -4.6 -4.5

Government revenue 10.6 8.9 9.1 9.4 9.0

Government expenditure 15.4 14.7 14.0 14.0 13.5

Central primary balance -1.8 -2.7 -1.8 -1.3 -1.3

Consolidated deficit -7.5 -7.7 -7.2 -7.0 -7.0

Memo

Central -4.8 -5.8 -4.9 -4.6 -4.5

State -2.7 -1.9 -2.3 -2.4 -2.5

Oil 0.0 0.0 0.0 0.0 0.0

Fertilizer 0.0 0.0 0.0 0.0 0.0

Debt/GDP 69.8 67.4 67.1 66.7 66.3Source: Controller General of Accounts, Government of India, Deutsche Bank

Balance of Payments

USD bn FY10/11 FY11/12 FY12/13 FY13/14E FY14/15E

1. Exports 250.6 309.8 306.6 323.1 349.1

2. Imports 381.1 499.5 502.2 475.8 525.3

3. Trade Balance (1-2) -130.6 -189.7 -195.7 -152.7 -176.3

% of GDP -7.8 -10.1 -10.6 -8.3 -8.7

4. Invisibles, net 84.6 111.5 107.8 116.0 125.8

% of GDP 5.0 6.0 5.8 6.3 6.2

5. Current a/c Balance 3+4) -45.9 -78.2 -87.8 -36.6 -50.5

% of GDP -2.7 -4.2 -4.7 -2.0 -2.5

6. Capital Account Balance 62.0 67.8 85.2 51.7 54.7

% of GDP 3.7 3.6 4.6 2.8 2.7

7. Overall BOP (5+6) 16.1 -10.4 -2.7 15.1 4.2Source: CEIC, RBI, Deutsche Bank forecasts

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Real GDP grew by 4.7%yoy in Oct-Dec13 the fifth

successive quarter of sub-5% growth

Industrial sector growth remains weak but likely to have

bottomed in this cycle

-4

0

4

8

12

0

2

4

6

8

1012

14

2007 2008 2009 2010 2011 2013

Real GDP, lhsNon-farm sector, rhsAgriculture, rhs

% yoy% yoy

-10

-4

2

8

14

20

45

50

55

60

65

2007 2008 2009 2010 2011 2012 2013 2014

Manufacturing PMI, lhs

IP

Core infra growth

% yoy,

3mma

3mma

Source: CEIC, CSO, Deutsche Bank Source: CEIC, Bloomberg Finance LP, Deutsche Bank

A sharp correction in food prices have led to substantialdecline in headline inflation

Credit growth remains weak

-2

2

6

10

14

18

22

2007 2008 2009 2010 2011 2012 2013 2014

CPI WPI food WPI inflation% yoy

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014

Deposits Credit M3% yoy,

3mma

Source: CEIC, RBI, Deutsche Bank. Note: IW denotes industrial workers Source: CEIC, RBI, Deutsche Bank

RBI has imposed a daily limit on the allocation of funds

under the LAF to 0.5% of NDTL of each bank

We expect rate cuts in the latter half of the year after a

prolonged pause

-1,500

-1,000

-500

0

500

1,000

1,500

2009 2010 2011 2012 2013 2014

Net LAFINR bn

7.0

7.5

8.0

8.5

9.0

0

2

4

6

8

10

12

2012 2013 2014 2015

CPI, lhs Forecast, lhs

Repo, rhs Forecast, rhs

%% yoy

Source: Bloomberg Finance LP, Deutsche Bank Source: CEIC, RBI, Deutsche Bank

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Large deficits remain features of the central and general

government

Considerable vulnerability to a rise in the real interest rate

and low GDP growth

-12

-10

-8

-6

-4

-2

0

FY05 FY07 FY09 FY11 FY13 FY15F

Central govt. Consolidated% of GDP

30

40

50

60

70

80

90

2004 2006 2008 2010 2012 2014 2016 2018 2020

Baseline public sector debt 1/

Real interest rate is at baseline + 1 s.d.

Real GDP growth is at baseline - 1 s.d.

% of GDP

Source: CEIC, Budget documents, Deutsche Bank Source: Government of India, Deutsche Bank. 1/ Combined Central and State level debt. Interest rate

shock entails real interest rate on public debt rising to 2.5%. Growth shock entails real GDP growing by

5%.

The rupee has stabilized after depreciating sharply

between MayAugust of 2013

Rupees movement is closely interlinked with the sum of

trade deficit and net portfolio flows

38

42

46

50

54

58

6266

7085

90

95

100

105

110

115

120

2009 2010 2011 2012 2013 2014

REER (6 currency, trade based, lhs)

INR/USD (inverted, rhs)

-8%

-4%

0%

4%

8%

12%-20

-15

-10

-5

0

2007 2008 2009 2010 2011 2012 2013 2014

(trade balance + net portfolio), lhs

INR/USD (inverted), rhsUSD bn % ch,

mom

Source: CEIC, RBI, Deutsche Bank Source: CEIC, RBI, Deutsche Bank

FII debt investments have turned positive since Dec, after

recording large outflows between May-Nov 2013

Current account deficit has narrowed sharply in FY14, led

by lower gold imports and a pickup in exports

42

46

50

54

58

62

66

70-6

-4

-2

0

2

4

6

2011 2012 2013 2014

Net FII: equity

Net FII: debt

USD/INR (inverted), rhs

USD bn

0

1

2

3

4

5

FY09 FY10 FY11 FY12 FY13 FY14F FY15F

Current account deficit

Capital account surplus

% of GDP

Source: CEIC, RBI, Deutsche Bank Source: CEIC, RBI, Deutsche Bank

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21 March 2014


Appendix 1

Important DisclosuresAdditional information available upon request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of thisresearch, please see the most recently published company report or visit our global disclosure look-up page on ourwebsite athttp://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

he views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendationor view in this report. Taimur Baig/Kaushik Das
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsrhttp://gm.db.com/ger/disclosure/DisclosureDirectory.eqsrhttp://gm.db.com/ger/disclosure/DisclosureDirectory.eqsrhttp://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

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21 March 2014



Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade IdeasDeutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that areconsistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at theSOLAR link athttp://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within themeaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) andits(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) isindirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases whereat least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in thepreparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility forits content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483.EU countries: Disclosures relating to our obligations under MiFiD can be found athttp://www.globalmarkets.db.com/riskdisclosures.Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau(Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial FuturesAssociation of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specificfinancial instruments or related services. We may charge commissions and fees for certain categories of investmentadvice, products and services. Recommended investment strategies, products and services carry the risk of losses toprincipal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value.Before deciding on the purchase of financial products and/or services, customers should carefully read the relevantdisclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in thisreport are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the

name of the entity.Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and mayfrom time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bankmay engage in transactions in a manner inconsistent with the views discussed herein.Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute,any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promiseto pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cashflows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause aloss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be theloss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adversemacroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation

(including changes in assets holding limits for different types of investors), changes in tax policies, currencyconvertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), andsettlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixedincome instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, toFX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that theindex fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intendedto track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating couponrates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It isalso important to acknowledge that funding in a currency that differs from the currency in which the coupons to bereceived are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to optionsin addition to the risks related to rates movements.
http://gm.db.com/http://gm.db.com/http://gm.db.com/http://www.globalmarkets.db.com/riskdisclosureshttp://www.globalmarkets.db.com/riskdisclosureshttp://www.globalmarkets.db.com/riskdisclosureshttp://gm.db.com/

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David Folkerts-LandauGroup Chief Economist

Member of the Group Executive Committee

Guy AshtonGlobal Chief Operating Officer

Research

Marcel CassardGlobal Head

FICC Research & Global Macro Economics

Richard Smith and Steve PollardCo-Global Heads

Equity Research

Michael SpencerRegional Head

Asia Pacific Research

Ralf HoffmannRegional Head

Deutsche Bank Research, Germany

Andreas NeubauerRegional Head

Equity Research, Germany

Steve PollardRegional Head

Americas Research

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Deutsche Bank AG

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Tel: (49) 69 910 00

Deutsche Bank AG

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International Commerce Centre,

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Tel: (852) 2203 8888

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Tel: (81) 3 5156 6770

Deutsche Bank AG London1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

Global Disclaimer

Emerging markets investments (or shorter-term transactions) involve significant risk and volatility and may not be suitable for everyone. Readers must make their own investing and trading decisions using their ownindependent advisors as they believe necessary and based upon their specific objectives and financial situation. When doing so, readers should be sure to make their own assessment of risks inherent to emergingmarkets investments, including possible political and economic instability; other political risks including changes to laws and tariffs, and nationalization of assets; and currency exchange risk.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, includingstrategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on theinvestors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice beforeentering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or s elling an option investors must review the"Characteristics and Risks of Standardized Options," at http://www.theocc.com/components/docs/riskstoc.pdf If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a copyof this important document.

The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than

the amount of funds initially deposited.Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report indeciding to trade on a proprietary basis. Deutsche Bank makes no representation as to the accuracy or completeness of the information in this report. Deutsche Bank may buy or sell proprietary positions based oninformation contained in this report. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof. This report is provided for information purposes only. It is not to beconstrued as an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. Unless governing lawprovides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., amember of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/orcommunicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and authorized by the BaFin.This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch or DeutscheSecurities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch orDeutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not anaccredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branchaccepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute theprovision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making anydecision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional informationrelative to securities, other financial products or issuers discussed in this report is available upon request. This report m ay not be reproduced, distributed or published by any person for any purpose without DeutscheBank's prior written consent. Please cite source when quoting.

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