1
Market Dynamics : India, Asia and World The LBMA/LPPM Precious Metals Conference 2013, Rome The London Bullion Market Association September 30, 2013
Shekhar Bhandari Executive Vice President
Kotak Mahindra Bank email: [email protected]
2
India
3
Trade :: 500 - 300 Equation
Source: CEIC, Kotak Mahindra Bank
CAD without gold imports within the comfort zone
(80)
(60)
(40)
(20)
0
20
40
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
CAD CAD ex gold imports$bn
Policy makers needed to take
cognizance of a steadily widening
CAD in these years
Source: CEIC, Kotak Mahindra Bank
Consumption oriented growth has led to jumps in import items
Major imports ($bn)
9 7 8
2129
87
10 7 10
27
41
106
1711 13
33
56
155
158 11
31
54
125
0
20
40
60
80
100
120
140
160
180
Coal Fertiliser Metal scrap Electronics Gold Oil
2010 2011 2012 2013
Source: Bloomberg, Kotak Mahindra Bank
Oil prices drop in $ terms…..beneficial to CAD but not in terms of other economic variables
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013
1800
2300
2800
3300
3800
4300
4800
5300
5800
6300
6800Brent ($/bbl) Brent (Rs/bbl), RHS
CAD sensitivity to oil and gold
1150 1200 1250 1300 1350 1400 145090 (56.6) (57.7) (58.7) (59.8) (60.9) (62.0) (63.1)95 (61.6) (62.7) (63.8) (64.9) (65.9) (67.0) (68.1)
100 (66.6) (67.7) (68.8) (69.9) (71.0) (72.0) (73.1)105 (71.7) (72.7) (73.8) (74.9) (76.0) (77.1) (78.2)110 (76.7) (77.8) (78.8) (79.9) (81.0) (82.1) (83.2)115 (81.7) (82.8) (83.9) (85.0) (86.0) (87.1) (88.2)120 (86.7) (87.8) (88.9) (90.0) (91.1) (92.1) (93.2)
Gold price (US$/oz)
Cru
de
pri
ce
(US$
/bb
l)
$/` 43.30 $/` 68.85
Source: Bloomberg, Kotak Mahindra Bank
The non-trade portion of CAD is also under stress
(12)
(2)
8
18
28
38
48
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Private transfers Software services%yoy, 4QMA
(22)
(12)
(2)
8
18
28
38
48
58
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Software services Transfers Income$ bn
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(25)
(20)
(15)
(10)
(5)
0
IIP asset ($bn)
IIP Liabilities ($bn)
Net investment income ($bn, reverse scale, RHS)
Stress on the BoP due to (1) wide CAD (2) volatile capital flows
Source: CEIC, Kotak Mahindra Bank Estimates
8
(US$bn) 2014E
2011 2012 2013 Oil@100 Oil@105 Oil@110
Current account (45.9) (78.2) (88.2) (70.6) (76.3) (82.0)GDP 1,708 1,871 1,842 1,927 1,927 1,927CAD/GDP (%) (2.7) (4.2) (4.8) (3.7) (4.0) (4.3)Trade balance (130.6) (189.8) (195.7) (182.2) (187.9) (193.6)Trade balance/GDP (%) (7.7) (10.3) (10.6) (9.5) (9.7) (10.0) - Exports 250 310 307 308 310 312 - Imports 381 500 502 490 498 505 - oil imports 105 155 170 154 162 169 - non-oil imports 276 345 332 336 336 336Invisibles (net) 85 112 107 112 112 112 - Services 49 64 65 71 71 71 - software 53 61 64 69 69 69 - non-software (4.4) 3.1 1.4 2.0 2.0 2.0 - Transfers 53 63 64 65 65 65 - Income (net) (17.3) (16.0) (21.5) (24.0) (24.0) (24.0)Capital account 62.1 67.8 89.4 77.0 77.0 77.0Percentage of GDP 3.7 3.7 4.9 4.0 4.0 4.0Foreign investment 39.7 39.2 46.7 35.0 35.0 35.0 - FDI 9.4 22.1 19.8 20.0 20.0 20.0
- FII 30.3 17.2 26.9 15.0 15.0 15.0
Banking capital 5.0 16.2 16.6 17.0 17.0 17.0 - NRI deposits 3.2 11.9 14.8 12.0 12.0 12.0
Short-term credit 11.0 6.7 21.7 20.0 20.0 20.0
ECBs 12.5 10.3 8.5 8.0 8.0 8.0External assistance 4.9 2.3 1.0 2.0 2.0 2.0Other capital account items (11.0) (6.9) (5.0) (5.0) (5.0) (5.0)
E&O (3.0) (2.4) 2.7 0.0 0.0 0.0
Overall balance 13.1 (12.8) 3.9 6.4 0.7 (5.0)Memo items
Average USD/INR 45.63 47.96 54.41 57.56 57.56 57.56Average crude (US$/bbl) 85.1 111.7 108.2 100.0 105.0 110.0
Need to fund CAD makes India heavily reliant on global capital flows
§ CAD in FY2013 at US$ 88 bn, implies India would need ~US$ 7-8 bn / month of capital inflows to bridge this gap
§ Global capital flows to EM economies face uncertainty with the ongoing debate of Fed QE withdrawal
§ With CAD correction proving to be difficult, reliance on capital flows are higher, thereby leading to INR volatility
Trade Trade Trade Trade Trade
Fresh RBI Circular
Trade Trade Trade Trade Trade
• Import of gold in the form of coins and medallions is now prohibited.
• It shall be incumbent on all nominated banks/nominated agencies and other entities to ensure
that at least one fifth, i.e., 20%, of every lot of import of gold imported to the country is exclusively
made available for the purpose of exports and the balance for domestic use. A working example of
the operations of the 20/80 scheme envisaged in terms of the present instructions is given in
the Annex. This shall be monitored by customs authorities, and will be implemented port-wise only.
• Further, nominated banks/ nominated agencies and other entities shall make available gold for
domestic use only to the entities engaged in jewellery business/bullion dealers and to banks
authorised to administer the Gold Deposit Scheme against full upfront payment. In other words,
supply of gold in any form to the domestic users other than against full payment upfront shall not
be permitted.
• The nominated banks/agencies/refineries and other entities shall ensure that there is no front
loading of imports, particularly in the first and second lots of imports. Such imports shall be linked
to normal quantities of gold supplied to the exporters by the nominated banks/agencies and shall
not exceed the highest quantity supplied during any one year out of last three years. The quantity
thus arrived at, however, will not be imported in one or two lots only. As a thumb rule, imports of
more than maximum of two months of requirements of the exporters in a lot would be considered
unusual. Illustratively, if the gold supplied to exporters by a bank during the last three years is say,
30 tonnes, 40 tonnes and 60 tonnes respectively, imports in terms of this circular shall be based on
highest of three i.e. 60 tonnes. Further, import of 50 tonnes( two months export of 10 tonnes for
exports and 4 times the amount for domestic use, totalling 50 tonnes) will be considered unusual.
In case of nominated banks not having a previous record of having supplied gold to the exporters
they would need to seek prior approval from RBI before placing orders for import of gold for the
first lot under the 20/80 scheme.
Fresh RBI Circular…contd
Trade Trade Trade Trade Trade
• The 20/80 principle would also apply for the henceforth import of gold in any form/purity including
gold dore, whereby 20 per cent of the gold imported shall be provided to the exporters. This will be
administered and monitored at the refinery level for each consignment at the time of such imports.
This will also be monitored by the customs authorities. The refinery shall make available for
domestic use only to the entities engaged in jewellery business/bullion dealers and to the banks
authorised to administer the Gold Deposit Scheme against full upfront payment and sale of gold
against any other form of payment shall not be permitted. Further, the import of gold dore is
permitted only against a licence issued by DGFT.
• Any authorisation such as Advance Authorisation/Duty Free Import Authorization (DFIA) is to be
utilised for import of gold meant for export purposes only and no diversion for domestic use shall
be permitted.
3. Entities/units in the SEZ and EoUs, Premier and Star trading houses are permitted to import gold
exclusively for the purpose of exports only.
4. AD Category I banks are advised to strictly ensure that foreign exchange transactions effected by /
for their constituents are compliant with the above instructions. Head Offices of nominated agencies /
International Banking Divisions of banks would be responsible for monitoring operations of the revised
scheme taking into account transactions put through different centres. In respect of gold released
for the purpose of exports, AD Category I banks will also put in place a special mechanism to
monitor realization of export proceeds as per the extant regulations and any contraventions/
unusual developments in this regard should be reported forthwith to the concerned Regional
Office of the Reserve Bank of India.
5. Government of India will be issuing separate instructions, if any, to the customs authorities/DGFT to
operationalise and monitor the above requirements for import of gold.
6. The above instructions will come into force with immediate effect. Authorised dealers may please
bring the contents of this circular to the notice of their constituents and customers concerned.
Fresh RBI Circular - Example
Trade Trade Trade Trade Trade
1. A nominated bank/agency/ any other entity ABC imports say 100 kg of gold, which shall be routed
through custom bonded warehouses only. If considered necessary, the lot can be procured
through two invoices – one for exporters (i.e.20%) and the other one for domestic users (80%).
2. Out of the above import of 100 kg, 20 kg gold held in the bonded warehouse can be got released
in part or full to be made available to the exporters of gold against undertaking to customs
authorities as is the practice now.
3. The balance 80 kg can be supplied in part or full to domestic entities engaged in jewellery
business/bullion traders/banks operating the Gold Deposit Scheme against full upfront payment.
In other words, no credit sale of gold in any form will be permitted for domestic use. In case, the
nominated bank itself is operating the Gold Deposit Scheme, the bank is permitted to use out of
80 kg, a portion for regularising own open position in gold arising out of operations of the Gold
Deposit Scheme.
4. Next lot of import of gold by ABC shall be permitted by the customs authorities only after 20% of
the quantity earmarked for exporter clients is released to the exporters against their undertaking to
fulfill the export commitments within the stipulated time.
5. The quantum of gold permitted to be imported in the third lot will be restricted to 5 times the
quantum for which proof of export is submitted. For import of gold in the subsequent lots, the cycle
will be repeated following the 20/80 principle.
Note: The same procedure is to be followed by the refineries and by any other entity importing gold in
any other form/ purity and in the case of import of Gold Dore also.
India : : Monetising Gold Reserves
§ Recycling
§ Processing
§ Temple Gold
§ Gold imports in 2016 …. Will it be required at all !!
Trade Trade
14
China ….Asia …..World
15
World Growth : Turnaround remains muted
• Economic problems of developed countries spilling onto developing countries through
Weaker demand for exports
Volatility in capital flows and commodity prices
2012E 2013E
IMF 3.3 3.6
World Bank 2.3 2.4
EIU 3.0 3.3
IIF* 2.5 2.7
Bloomberg Consensus 2.4 2.4* annualised saar
Global GDP (%yoy) - Estimates
Source: UN/DESA
World GDP (%yoy)
4.1
1.4
-2.1
1.1
2.4
3.2
4.53.8
2.7
4.0
0.2
2.2
4.1
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Baseline
Downside
risk
Best case
16
Faltering trade as an “engine of growth”
(15)
(10)
(5)
0
5
10
15
2008
2009
2010
2011
2012
2013E
st
Global Trade volume of goods and services (%yoy)
Source: IMF
17
Unwinding not easy
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