The Global Economic

ICRA BULLETIN

Environment and the Indian

Financial Markets
APRIL 2016

Global Economy At the start the of

The global economy expanded by 3 per cent in 2015, its slowest
pace in five years. In the absence of well co-ordinated policy measures, the new year, the
trade and investment continued to weaken, while consumption demand
turned sluggish towards the end of the year given inadequate wage and global economic
employment growth. In this environment, global inflation dynamics
also continues to be weaker than expected, further damaging pricing and financial
power and business sentiments (Chart G.1). At the start the of the new
market conditions
year, the global economic and financial market conditions deteriorated
drastically, and were dominated by a series of events such as a renewed deteriorated
fall in oil prices, fresh turmoil in China’s financial market, a looming
European banking crisis, and policy variations by some of the world’s key drastically,
monetary authorities. Some of these events, which could have boosted
sentiments significantly, actually failed to do so. Cheaper energy and dominated by
commodity prices, which enhance consumers’ disposable income and
lower companies’ input costs, are hurting energy companies’ profits and events such as
now seen as a threat to lender banks.1 The International Monetary Fund
(IMF) notes that though a decline in oil prices driven by higher oil supply
a renewed fall in
should have supported global demand given a higher propensity to spend oil prices, fresh
in oil importers relative to oil exporters, several factors have dampened
the positive impact of lower oil prices.2 Given the lack of structured turmoil in China’s
fiscal consolidation policies that are consistent with growth, private
investment and consumption have stagnated in many parts of the globe. financial market and
Risk perceptions have also changed with the gloomy growth prospects.
The US Federal Reserve (Fed) decided to raise its key policy rate in a looming European
mid-December, in what was considered to be a watershed moment for
banking crisis.
Note: A List of Abbreviations is presented at the end of this article.
1
The price of oil, which was trending lower in the last few months of 2015, dropped
below US$30 a barrel in January; the markets are oversupplied at a time when demand is faltering
because of the slowdown in key importers such as China, as well as exploration of alternate energy
sources in some countries.
2
Fiscal strain in many oil exporters has reduced their ability to smooth the shock, leading
to a sizable reduction in their domestic demand. The oil price decline has had a notable impact on
investment and employment in oil and gas extraction, also subtracting from global aggregate demand.
Finally, the pickup in consumption in oil importers has so far been somewhat weaker than evidenced
from past episodes of oil price declines. The impact of the fall in commodity prices has not only hit
oil producers in emerging economies but also US shale producers, with firms borrowing heavily from
both banks and markets against oil reserves and projected revenue. 129
 ICRA BULLETIN the global economic revival. However, the consequent intensification of
capital flow reversal and rise in the US dollar is deepening problems
of several emerging market economies (EMEs) that were already slowing
at this juncture. On the other hand, the monetary authorities in Europe
and recently in Japan have taken recourse to negative interest rates to
APRIL 2016
avoid deflation. While the lack of monetary policy action at this juncture
could further slow domestic demand, lower interest rates have begun to
hurt global financial market sentiments. Banks in Europe are
The US Federal under pressure to clean up their balance sheets ridden with non-
performing loans since the 2007-08 crisis, and policy induced negative
Reserve decided interest rates are hurting banks’ profitability and asset quality, as demand
has failed to pick up commensurately.  Financial instability risks have
to raise its key
again come to the fore with banking sector and emerging market
policy rate in mid- vulnerabilities rising, and have led to sudden strong market reactions as
seen by the declines in equity and bond prices worldwide at the start
December, in what of 2016.
CHART G.1
was considered Growth, Fiscal Balances and Key Monetary Policy Rates around the Globe (per cent)

to be a watershed

moment for the

global economic

revival.

On the other hand,

the monetary

authorities in Europe

and recently in Japan

have taken recourse

Government deficits for 2015 are IMF projections.

to negative interest Policy rates as of end-December 2014 and 2015.

China's Policy rate is taken as the one year benchmark lending rate.

rates to avoid Source: IMF, World Economic Outlook, January 2016 Update and Fiscal Monitor, October 2015;
central banks.
deflation.
The global economic outlook has been made worse by
productivity slowdown, policy gridlock, a widening geopolitical rift and
increasing leverage in EMEs with tighter liquidity conditions. Downside
risks have intensified again amidst heightened uncertainty about EME
growth prospects, further fallouts of China’s rebalancing, volatility in

130 financial and commodity markets, and a rise in geopolitical tensions.

Projections for global growth have been revised even lower in 2016.3 ICRA BULLETIN
The severe financial market turbulence in the first six weeks of 2016,
intensified by the fears about a sharper and prolonged slowdown in the
world economy, has led to calls for changes in the policy environment
from different quarters. Moody’s Investors Service has warned that
investors may start to price in the possibility of lower economic growth APRIL 2016
and returns, which could become partly self-fulfilling via negative
wealth effects and tighter financing conditions. The impact on the
global economy would be amplified if losses on trading portfolios and The deceleration
financial assets more generally led banks to tighten credit standards. The
Organisation for Economic Co-operation and Development (OECD) in US GDP grow th
points out that sole reliance on monetary policy has proven insufficient
in the four th
to boost demand and produce satisfactory growth, while fiscal policy
is contractionary in several major economies and structural reform quarter reflected
momentum has slowed. An increasing number of economic analysts are
now calling for a stronger fiscal policy response, as a commitment to deceleration in PCE,
raising public investment would boost demand and help support future
growth. The OECD has noted that with governments in many countries besides downturns
currently able to borrow for long periods at very low interest rates, there
is room for fiscal expansion to strengthen demand in a manner consistent in expor ts, in
with fiscal sustainability.
non-residential

United States fixed investment,

The US economy is estimated to have recorded a slower fourth
quarter growth of 1.4 per cent (qoq, saar), after a 2 per cent growth in and in state and
the third quarter, with weakness in the fourth quarter being concentrated
in inventories and trade. Positive contributions to growth came from local government
consumption, government spending and residential investment. Private spending.
inventory investment, non-residential fixed investment, and exports
subtracted from growth, while, imports, which are a subtraction in
the calculation of GDP, decreased (Table G.1). The deceleration in US
GDP growth in the fourth quarter reflected deceleration in personal
consumption expenditure (PCE), besides downturns in exports, in non-
residential fixed investment, and in state and local government spending.
These effects were partly offset by a deceleration in imports, a smaller

3
The IMF in January had already lowered its earlier projections for 2016, for global
and US growth by 0.2 per cent to 3.4 and 2.6 per cent, respectively, for emerging Asia by 0.1 per
cent to 6.3 per cent, and for Latin America by 1.1 per cent to -0.3 per cent as Brazil’s outlook
was lowered by a sharp 2.5 per cent to -3.5 per cent. The IMF forecasts the Russian economy will
shrink 1 per cent this year, after contracting 3.7 per cent in 2015. The Organisation for Economic
Co-operation and Development (OECD) has in February lowered forecasts for 2016 global growth
further, as well as for individual economies, with the largest impacts expected in the US, the euro
area and major economies reliant on commodity exports, like Brazil. Growth in the US is expected
to decelerate to 2 per cent in 2016 from 2.5 per cent last year, with the dollar’s strength weighing on
exports and manufacturing activity and lower oil prices curtailing investment in mining and related
industries. The euro area is projected to grow at 1.4 per cent, with German growth at 1.3 per cent,
both lower than 1.5 per cent in 2015. While China is expected to continue to grow at 6.5 per cent,
India is expected record a robust grow of 7.4 per cent. Brazil’s economy, which is experiencing a deep
recession, is expected to shrink by 4 per cent this year.
131
 ICRA BULLETIN decrease in private inventory, as well as acceleration in federal government
spending. Domestic demand slowed as PCE increased by 2.4 per cent in
the quarter, compared with an increase of 3 per cent in the previous one.
Non-residential fixed investment fell 2.1 per cent in the fourth quarter,
in contrast to an increase of 2.6 per cent in the third. Federal government
APRIL 2016
consumption expenditures and gross investment increased 2.2 per cent in
the quarter, in comparison to the increase of 0.2 per cent in the third, as
state and local government investment spending turned negative. Private
inventories, however, subtracted a lower 0.22 percentage point from the
US manufacturing is
fourth-quarter change in real GDP after reducing 0.71 percentage point
underper forming the from the third-quarter change. As for external demand, exports of goods
and services, which had barely grown in the previous quarter, contracted
overall economy as by 2 per cent in the fourth quarter, as exports of goods fell a sharp by
5.4 per cent in the quarter. Imports of goods and services slowed, and
producers struggle decreased by 0.7 per cent, in contrast to the third-quarter increase of 2.3
per cent. Net exports subtracted 0.14 percentage point from growth, after
with inventory subtracting 0.26 percentage point from third quarter growth.
correction, weak TABLE G.1
US GDP and Components
foreign demand GDP and Contributors
(percentage change over previous quarter, saar)

and sof tness in 2014:Q3 2014:Q4 2015:Q1 2015:Q2 2015:Q3 2015:Q4

GDP Growth 4.3 2.1 0.6 3.9 2.0 1.4
PCE 3.5 4.3 1.8 3.6 3.0 2.4
commodity-related Private 7.4 2.1 8.6 5.0 -0.7 -1.0
Investment
industries. Exports 1.8 5.4 -6.0 5.1 0.7 -2.0
Imports -0.8 10.3 7.1 3.0 2.3 -0.7
Govt. 1.8 -1.4 -0.1 2.6 2.3 -0.7
Consumption
and Investment
Contribution to change in GDP (per cent)
2014:Q3 2014:Q4 2015:Q1 2015:Q2 2015:Q3 2015:Q4
PCE 2.34 2.86 1.19 2.42 2.04 1.66
Private 1.22 0.36 1.39 0.85 -0.11 -0.16
Investment
Exports 0.24 0.71 -0.81 0.64 0.09 -0.25
Imports 0.15 -1.60 -1.12 -0.46 -0.35 0.11
Net Exports 0.39 -0.89 -1.92 0.18 -0.26 -0.14
Govt. 0.33 -0.26 -0.01 0.46 0.32 0.02
Consumption
and Investment
Change -0.01 -0.03 0.87 0.02 -0.71 -0.22
in Private
Inventories
Source: U.S. Bureau of Economic Analysis.

US manufacturing is underperforming the overall economy as

producers struggle with inventory correction, weak foreign demand and
softness in commodity-related industries. In the fourth quarter of 2015
132 industrial production fell by 3.4 per cent, while manufacturing output
rose by just 0.5 per cent (qoq), down from an average of about 2 per cent ICRA BULLETIN

in the prior two quarters (Table G.2). Industrial production fell by 0.6

per cent (mom) in November, as immense weakness in utilities caused
by warmer-than-usual weather, and mining output was responsible for
the steepest monthly drop in almost four years. In December industrial
production fell by 0.4 per cent, again dragged down by utilities and APRIL 2016
mining. Manufacturing output dipped 0.1 per cent as auto output
remained weak.  The softness is output reflected in separate forward
looking surveys as well. The Institute for Supply Management’s (ISM’s) Industrial production
Manufacturing Purchasing Manager’s Index (PMI) for January 2016
at 48.2, continues to indicate slowing industrial activity for the fourth fell by 0.6% (mom)
consecutive month. Even as the indices for new orders and production
in November, as
indicated expansion, exports, employment and inventories are seen to be
contracting.4 The export orders index of the US ISM Manufacturing PMI immense weakness
at 47 indicated contraction in January, and was 4 percentage points below
December’s level. in utilities caused
TABLE G.2
US Industrial Production and Inflation Levels
by warmer-than-
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 YoY Change
Industrial Production 0.8 0.1 0.0 -0.2 -0.9 -0.4 -1.8 usual weather, and
MARKET GROUP
Consumer Durables
Automotive products
5.7
11.1
-2.1
-4.3
0.4
0.2
0.8
1.4
0.1
-0.5
-0.3
-1.4
5.0
6.4
mining output was
Energy -0.2 1.8 1.0 -1.1 -5.3 -3.2 -7.8
Business equipment 0.1 0.6 -0.6 -0.4 -1.0 0.1 -0.8 responsible for the
Construction supplies 0.1 0.5 -1.1 2.2 0.0 0.6 1.6
INDUSTRY GROUP
Manufacturing (NAICS) 1.0 -0.1 -0.1 0.4 -0.2 -0.1 0.7 steepest monthly
Durable manufacturing 1.2 -0.3 -0.3 0.5 -0.5 0.1 0.5
Motor vehicles and parts
Computer and electronics
10.6
-0.3
-5.1
0.5
0.5
0.0
1.1
0.0
-1.5
0.3
-1.7
1.6
3.7
2.1
drop in almost four
Survey Indices
CFNAI 0.53 -0.36 -0.09 -0.14 -0.45 -0.31 0.13 years.
ISM-Manufacturing 51.9 51.0 50.0 49.4 48.4 48.0 55.1
ISM-NonManufacturing 59.6 58.3 56.7 58.3 56.6 55.8 56.5
Inflation
CPI 0.1 0.0 -0.1 0.2 0.1 -0.1 0.7
Food 0.2 0.2 0.3 0.1 -0.1 -0.2 0.8
Energy 0.1 -1.7 -3.7 0.4 0.3 -2.8 -12.6
Core Inflation 0.1 0.2 0.1 0.1 0.1 0.1 2.1
PPI (Final demand goods) -0.3 -0.5 -1.0 -0.3 0.1 -0.7 -3.7
Energy -0.7 -2.6 -5.3 -0.2 0.4 -3.5 -16.2
Export -0.4 -1.4 -0.6 -0.2 -0.7 -1.1 -6.6
Import -0.9 -1.8 -1.1 -0.3 -0.6 -1.2 -8.3
Fuel -6.1 -12.7 -8.4 -0.4 -4.0 -10.0 -41.0
Housing (FHFA purchase- 0.5 0.3 0.7 0.5 0.5 0.5 5.7
only index)
Production and inflation indicators are mostly percentage changes from the preceding
month.
Source: Federal Reserve statistical releases; U.S. Bureau of Labor Statistics; Federal Reserve Bank of
Chicago; Institute for Supply Management (ISM) and Federal Housing Finance Agency.

4
The New Orders Index registered 51.5 per cent, an increase of 2.7 percentage points
from the 48.8 per cent in December and Production Index registered 50.2 per cent, 0.3 percentage

133
point higher than the December reading of 49.9 per cent.  The Employment Index registered 45.9
per cent, 2.1 percentage points below the seasonally adjusted December reading of 48 per cent.
Inventories of raw materials registered 43.5 per cent, the same reading as in December. 
 ICRA BULLETIN Given the pullback in industrial production, not surprisingly,
the US labour market has been somewhat stagnant in recent months.
Employment rose by 151,000 in January, with a decrease in employment
in private educational services, transportation and warehousing, and
mining, even though the unemployment rate was little changed at 4.9
APRIL 2016
per cent (Chart G.2). The U-5 unemployment rate, which includes
discouraged workers, was at 6.2 per cent and the U-6 unemployment
rate, which also includes involuntary part-time workers, was at a high
Soft labour market of 9.9 per cent, reflecting continued labour market difficulties like skill
and demand mismatches. The high and stagnant numbers (2.1 million)
conditions in 2015 of long-term unemployed people out of work for 27 months and over
are reflecting current problems as well. Soft labour market conditions
were reflected in
in 2015 were also reflected in slowing wages and employment costs.
slowing wages and Compensation costs for US private industry workers have climbed a
modest 1.9 per cent over the year, slowing from the 2014 increase of
employment costs. 2.3 per cent. Wages and salaries increased 2.1 per cent, unchanged from
2014, while benefit costs increased 1.7 per cent for the 12-month period
Compensation ending in December 2015 compared with the 2.6 per cent recorded a
year-ago.5 The housing market continued on a growth path in end-2015;
costs for US private about 501,000 new homes were sold in the year, recording a 14.5 per
cent (yoy) growth, the highest annual rate in eight years. December also
industry workers
recorded strong sales of existing homes, which make up a proportionally
have climbed a larger share of overall housing transactions. Year 2015 became the best
year for such real estate activity since 2006, with existing sales jumping
modest 1.9% over 14.7 per cent in December and up 7.7 per cent from December 2014.6
However, persistently sluggish wage gains over the last year in conjunction
the year, slowing with stock market volatility and economic slowdown could make 2016
a tough year for housing. The housing market also faces less favourable
from the 2014 financing options now with the expected series of rate hikes.
  The US inflation environment is weakening again with the slow
increase of 2.3%. improvement in labour markets and falling commodity prices globally.
The US consumer price index (CPI) increased 0.7 per cent in the 12
Wages and salaries
months through December, the slowest advance since 2008,7 while the
increased 2.1%, core CPI rose 2.1 per cent, recording the highest rise since July 2012. The

unchanged from 5
The Employment Cost Index rose a paltry 0.2 per cent in the second quarter, a
significant deceleration from 0.7 per cent in the first three months of the year. Increases of wages and
2014. salaries also rose 0.2 per cent, from 0.7 per cent in the previous quarter.
6
Sales of previously owned homes fell in November, but the reason was not weakness in
the housing market but the commencement of regulations designed to protect the borrower in home-
purchase transactions. November was the first month that sales agreements were closed under the new
Truth in Lending Act and Real Estate Settlement Procedures Act integrated-disclosure rules. The new
rules make it easier to compare offers from multiple mortgage lenders, and also give a borrower three
business days to review the document and ask questions before closing on a mortgage. However, the
changes prolong the time from accepted offer to closing.
7
CPI dipped 0.1 per cent in December after remaining unchanged in November as
energy prices dropped 2.4 per cent, with gasoline prices declining by 3.9 per cent. Food prices fell for
a second consecutive month, while core consumer prices, which excludes food and energy, rose 0.1

134 per cent, a deceleration from November’s 0.2 per cent increase, kept in check by moderate increases in
rents, automobiles, clothing and medical care costs.
Fed’s preferred price-growth gauge, the Commerce Department’s PCE ICRA BULLETIN

measure, though hasn’t met the Fed’s 2 per cent goal since April 2012.
External price effects on US disinflation are not expected to abate soon.
In January 2016, import prices fell for the second consecutive month
declining 1.1 per cent (mom), taking it lower by about 6 per cent on
a year-ago basis. Imported petroleum prices dropped 13.4 per cent in APRIL 2016
January after falling 9.2 per cent in December. However, weakness is not
limited to petroleum, as nonfuel import prices fell 0.2 per cent, their
eighth consecutive monthly decline. Past appreciation in the US dollar Ex ternal price
and falling Chinese producer prices are weighing on nonfuel US import
prices. Export prices too declined 0.8 per cent in January after falling 1.1 ef fects on US
per cent in December. Inflation expectations too have turned negative
disinflation are not
with inflation-linked markets pricing in increasing doubts that prices will
recover soon. Further, the Federal Reserve Bank of New York’s survey of expected to abate
consumers, an increasingly important gauge of US inflation expectations,
fell to its lowest level since the survey began in mid-2013. US retail sales, soon. In January
an important coincident indicator of consumer activity and domestic
demand, on the other hand, remains fairly robust as it rose 0.2 per cent 2016, impor t prices
(mom) in both December and January (recording 2.4 and 3.4 per cent,
yoy, respectively). fell for the second
CHART G.2 consecutive month
US Productivity and Costs (per cent)
declining 1.1%

(mom), taking it

lower by about 6%

on a year-ago basis.

Impor ted petroleum

prices dropped

13.4% in January.

* Includes wages, salaries, and employer costs for employee benefits for Employees in
Private Industry (qoq, sa).
** Non-farm Business Sector (qoq, saar).
Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis.

The US external sector remained soft, as downsizing of the

energy industry held back US demand, while weak foreign demand and
a strong US dollar also thwarted trade. The US current account deficit

135
(CAD) increased to US$124.1 billion in the third quarter, up from
 ICRA BULLETIN US$111.1 billion in the second quarter (Table G.3). As a percentage of
US GDP, the CAD again went up to 2.7 per cent in the quarter from
2.7 per cent in the second. Even as the deficit on goods and services
increased only marginally to US$133.7 billion in the third quarter from
US$133.1 billion in the second quarter, both US exports and imports
APRIL 2016
declined in the quarter. Exports of goods decreased to US$379.9 billion
from US$384.7 billion. The largest decrease, which more than accounted
for the total decrease in goods exports, was in industrial supplies and
The US foreign materials, largely reflecting decreases in energy products, including
petroleum and products, and in metals and non-metallic products.
trade deficit Goods imports decreased to US$569.9 billion from US$573.9 billion.
continued to rise in Imports decreased in four of the six major general-merchandise end-use
categories and in nonmonetary gold, with major declines in the same
the four th quar ter, items as in exports. The US foreign trade deficit continued to rise in the
fourth quarter, with exports and imports both mostly declining. The
with expor ts and deficit widened slightly to US$43.4 billion in December, driven by a
small decrease in exports and marginal rise in imports.8 The third quarter
impor ts both mostly swell in CAD was mostly attributable to a higher deficit on secondary
income and decrease in the surplus on primary income.9 Income receipts
declining. The deficit from foreigners on US holdings of financial assets abroad decreased to
US$195.7 billion from US$196.7 billion, while payments to foreigners
widened slightly to
on US liabilities increased to US$147.1 billion from US$141.4 billion,
US$43.4 billion in taking the surplus on primary income to US$46.1 billion in the quarter
from US$52.8 billion in the second. Net US borrowing measured by
December, driven financial-account transactions decreased from US$61.3 billion in the
second quarter, to US$24.7 billion in the third quarter. Net US sales of
by a small decrease financial assets excluding financial derivatives was at US$89.9 billion in
the quarter, a shift from net acquisition of US$141.2 billion in the second
in expor ts and quarter as sales of portfolio investment assets abroad were US$115.0
billion in the third quarter, a shift from net acquisition of US$173.0
marginal rise in billion in the second.10
impor ts.
8
The foreign trade deficit widened slightly to US$43.9 billion in October from
US$42.5 billion in September. Total exports came to US$184.1 billion, a US$2.7 billion decrease
from the previous month, while total imports fell to US$228 billion, down US$1.3 billion from
September. The deficit narrowed slightly to US$42.4 billion in November from a revised US$44.6
billion in October. Total exports came to US$182.2 billion, a US$1.6 billion decrease from the
previous month, while total imports fell to US$224.6 billion, down US$3.8 billion from
October.
9
The deficit on secondary income increased to US$36.6 billion in the third quarter
from US$30.8 billion in the second quarter, as income receipts decreased to US$31.6 billion
from US$34.7 billion. The decrease was more than accounted for by a decrease in US government
transfers, particularly fines and penalties paid to the US government. Income payments increased
to US$68.2 billion from US$65.5 billion, largely reflecting an increase in US government grants to
foreigners. The surplus on primary income decreased to US$46.1 billion in the third quarter from
US$52.8 billion in the second quarter.
10
The shift reflected a shift to net US sales of equity securities of US$64.7 billion, from
net purchases of US$117.3 billion, and a shift to net sales of debt securities of US$50.3 billion, from

136 net purchases of US$55.8 billion.

 TABLE G.3 ICRA BULLETIN
International Transactions
(US$ billion)
2014:Q4 2015:Q1 2015:Q2 2015:Q1 2015:Q2
Current Account
Balance on current account -103.1 -118.0 -110.8 -129.9 -125.3
Balance on goods -186.0 -192.2 -189.3 -190.5 -187.3
Balance on services 57.6 57.9 56.2 51.9 53.5 APRIL 2016
Balance on goods and services -128.3 -134.3 -133.1 -138.6 -133.7
Balance on primary income 60.0 50.1 53.1 45.4 42.8
The US FOMC on
Capital Account (US$ million) (#) -24.0 -20.0 -1.0 0.0

Financial Account
2014:Q4 2015:Q1 2015:Q2 2015:Q1 2015:Q2
December 16, raised
Net acquisition of financial assets (financial 41.7 321.5 142.7 -95.9 -126.1
outflow)* the benchmark
Direct investment assets 112.5 68.8 106.6 67.8 101.9
Portfolio investment assets 81.1 233.5 173.0 -111.3 -108.9
Reserve assets -2.5 -4.2 -0.9 -0.3 -1.0
interest rate for the
Net incurrence of liabilities (financial inflow)* 57.7 341.3 204.8 -35.7 -84.4
Direct investment liabilities 52.4 191.2 110.7 49.1 58.9 first time since 2006.
Portfolio investment liabilities 133.0 101.1 262.2 -117.0 17.1
Financial derivatives (net) -31.7 -40.1 1.8 0.7 12.3 Given the economic
#Transactions are less than (±) $500,000.
*Excluding net financial derivatives.
outlook, and
Source: U.S. Bureau of Economic Analysis.

The US Federal Open Market Committee (FOMC) after recognising the time
deferring the much speculated mid-September policy rate increase,11 on
December 16, raised the benchmark interest rate for the first time since it takes for policy
2006. According to the FOMC there has been considerable improvement
in labour market conditions in 2015, and it was reasonably confident actions to af fect
that inflation will rise, over the medium term, to its 2 per cent objective. future economic
Given the economic outlook, and recognising the time it takes for
policy actions to affect future economic outcomes, the FOMC decided outcomes, the FOMC
to raise the target range for the federal funds rate to 0.25 to 0.50 per
cent. The stance of monetary policy was to remain accommodative after decided to raise the
this increase, to support further improvement in labour markets and a
return to 2 per cent inflation. In its end-January meeting the FOMC target range for the
mentioned that economic growth has slowed, net exports have been soft,
inventory investment slowed and that market-based measures of inflation federal funds rate to
compensation have declined further. Inflation is anticipated to remain
0.25 to 0.50%.
near its recent low level in the near term but would rise towards 2 per
cent over the medium term as the effects of declines in energy and import
prices dissipate. The central bank’s latest quarterly Summary of Economic
Projections, suggested an aggressive four rate increases in 2016, however, at
this juncture most analysts hold the view that the FOMC will defer the
projected March 2016 rate increase.

11
The FOMC, in its mid-September policy meet, estimated the risks to the outlook for
economic activity and the labour market as nearly balanced but is monitoring developments abroad.

137
The FOMC unanimously decided that it will be appropriate to raise the target range for the federal
funds rate when it has seen further improvement in the labour market and is reasonably confident
that inflation will move back to its 2 per cent objective over the medium term.
 ICRA BULLETIN Europe
The economic recovery in the euro area has continued at a
modest pace with domestic demand as the main driver of the ongoing
recovery, even as growth has been dampened by net external demand.
Euro area (EA19) GDP rose by 0.3 per cent (qoq, sa, 1.6 per cent, yoy) in
APRIL 2016
the third and fourth quarters of 2015, following second quarter growth of
0.4 per cent (Chart G.3).

Household final CHART G.3

EU Growth and Components (qoq percentage changes in chain-linked volumes)

consumption

expenditure slowed

from 0.5% grow th

and rose by 0.2%

in the euro area,

contributing

0.1 percentage point

to four th quar ter

grow th. Euro area

investment, however

improved, with

gross fixed capital

formation rising by

1.3% in the quar ter,

following just 0.3%

grow th.

Source: Eurostat.

Household final consumption expenditure slowed from 0.5 per

cent growth and rose by 0.2 per cent in the euro area, contributing

138
0.1 percentage point to fourth quarter growth. Euro area investment,
however improved, with gross fixed capital formation (GFCF) rising
by 1.3 per cent in the quarter, following just 0.3 per cent growth. The ICRA BULLETIN

contribution of GFCF to growth was 0.3 percentage point in the quarter,

while the contribution of changes in inventories was a positive 0.1
percentage point following a 0.3 percentage point addition in the third
quarter. A sharp deceleration in exports was a dampener on third and
fourth quarter growth; exports from the euro area grew by just 0.2 per APRIL 2016
cent after a 1.7 per cent gain in the second quarter. Imports expanded
by 0.9 per cent in the fourth quarter, maintaining the pace of the
previous quarters. The contribution of the external balance to GDP Euro area GDP
growth was negative in the quarter, though the depreciation in the euro’s
effective exchange rate in the first half of 2015 has been supporting grow th in the four th
exports.12 Euro area GDP growth in the fourth quarter was dragged
quar ter was dragged
lower as Greece barely avoided recession, while France and Italy, recorded
weaker than expected growth at 0.3 per cent and 0.1 per cent respectively. lower as Greece
Germany, the region’s largest economy, maintained the same momentum
with 0.3 per cent growth, while Spain continued to perform relatively barely avoided
well expanding by 0.8 per cent in the final three months of 2015.
recession, while
Euro area industrial output contracted sharply at the end of the
year, holding back fourth quarter growth. Industrial production fell 1.0 France and Italy,
per cent (mom, -1.3 per cent, yoy) in December, following a 0.5 per cent
(mom, 1.4 per cent, yoy) decline in November (Table G.4). In tune with recorded weaker
the global trend, energy production contracted 2.4 per cent in December,
following a sharper 4.3 per cent decline in November. Unusually warm than expected
weather across many parts of the globe weighed on energy demand.
Production of capital goods also contracted, by 1.9 per cent in December, grow th at 0.3% and
following a 1.5 per cent fall in November. Both intermediate goods and
0.1% respectively.
non-durable consumer goods also fell by 0.3 per cent, while production
of durable consumer goods rose by 1.4 per cent. Production of durable Germany, the
consumer goods revived in December growing by 1.4 per cent, after
contracting by 1 per cent in the previous month.13,14 Survey indicators region’s largest
signal some moderation in growth in the near term as external factors are
economy,
12
The EU28 grew 0.4 per cent (qoq, 1.8 per cent, yoy) in the fourth quarter of 2015,
following 0.4 per cent (qoq, 1.9 per cent, yoy) growth in the third quarter. Consumption expenditure maintained the same
grew by 0.4 per cent contributing 0.2 percentage point to growth. GFCF increased by 1.1 per cent
contributing 0.2 percentage point to growth. Exports from the EU28 grew 0.5 per cent, while
imports expanded by 1.1 per cent. The contribution of the external balance to GDP growth was momentum with
negative, while the contribution of changes in inventories was positive.
13
The largest decrease in industrial production was registered in Ireland (-4.3 per cent) 0.3% grow th.
and among the highest increases in Greece (1.4 per cent). The decrease of 1.3 per cent in industrial
production in the euro area in December 2015, compared with December 2014, was driven by
production of energy falling by 7.3 per cent and capital goods by 2.6 per cent, while production
of durable consumer goods by 0.8 per cent non-durable consumer goods by 1.4 per cent and
intermediate goods by 0.4 per cent.
14
Industrial production in the EU28 registered a 1 per cent (mom, sa, 0.8, yoy) fall in
December, after November’s 0.5 per cent contraction, again driven by the energy sector’s 2.8 per
cent fall. Capital goods fell by 1.6 per cent (mom) and intermediate goods fell by 0.4 per cent while
production of durable consumer goods by 1.5 per cent, and non-durable consumer goods by 0.1 per

139
cent. In the EU28, the annual decline of 0.8 per cent is because of production of energy falling by 5.7
per cent capital goods by 1.4 per cent, while durable consumer goods production rose by 1.5 per cent,
non-durable consumer goods by 1.4 per cent and intermediate goods by 0.1 per cent during the year.
 ICRA BULLETIN hurting businesses. For instance, both the European Commission’s (EC’s)
Economic Sentiment Indicator (ESI) and the composite output PMI
deteriorated slightly in the first month of 2016. The Markit January PMI
fell to 53.5 from 54.3 in December and data showed that manufacturing
production rose at the slowest pace in four months, as both total new
APRIL 2016 orders and new export business eased to the weakest since September.
TABLE G.4
The Markit January European Economic Indicators
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 YoY
Change
PMI fell to 53.5 from Euro Area GDP 0.3 0.3 1.7
EA(19) Industrial Production 0.5  -0.3  -0.1  0.8  -0.2  -0.5  -0.1
54.3 in December Capital Goods 1.4  -0.7  -0.2  1.4  -1.7  -0.6  -0.4
Intermediate Goods -0.3  0.3  0.1  0.1  0.8  -0.3  1.0
and data showed Consumer Durables -0.4  3.4  -3.3  2.4  -0.8  0.1  1.0
Construction Sector 0.2  -0.3  0.4  0.5  1.2  -0.7  0.4
Unemployment 10.8  10.7  10.6  10.6  10.5  10.4
that manufacturing CPI Inflation -0.6  0.0  0.2  0.1  -0.1  0.0  0.2
PPI Inflation -0.2  -0.8  -0.4  -0.3  -0.2  -0.8  -3.0
production rose at Capital Goods 0.1  0.0  0.0  0.0  0.0  0.0 0.6
Consumer Durables 0.1  0.0  -0.1  0.0  0.1  0.0  0.7
the slowest pace in Energy -0.6  -2.7  -0.9  -0.5  -0.2  -2.7  -8.9
Extra-EA19 Trade 22.6 19.4 19.6 19.5 22.3 22.5
Balance (sa, € bln.)
four months, as both Exports 173.0 166.6 167.7 168.1 170.4 170.7 3.0
Imports 150.4 147.3 148.1 148.7 148.1 148.2 3.0
total new orders and Policy Rate 0.05 0.05 0.05 0.05 0.05 0.05 0.00**
EU28 GDP 0.4 0.4 1.8
new expor t business Industrial Production 0.2  -0.1  0.1  0.7  -0.2  -0.6 0.2
Capital Goods 0.5  -0.2  0.3  0.9  -1.1  -0.6  0.1
eased to the weakest Intermediate Goods -0.4  0.1  0.2  0.3  0.6  -0.5  0.6
Consumer Durables -0.8  2.0  -2.1  1.5  -0.2  0.5  1.0
Construction Sector 0.1  -0.9  0.7  0.3  0.9  -0.1  1.7
since September. Unemployment 9.4  9.3  9.2  9.1  9.0  9.0 
CPI Inflation -0.5  0.0  0.1  0.1  -0.1  0.0  0.2
PPI Inflation -0.3  -0.9  -0.3  -0.3  -0.2  -0.8  -3.2
Capital Goods 0.1  0.0  0.1  0.1  0.0  0.0  0.7
Consumer Durables 0.1  0.0  0.0  0.0  0.1  0.0 0.9
Energy -1.3  -3.3  -0.7  -0.4  -0.5  -3.0 -10.8
Extra-EU28 Trade 6.5 5.8 4.8 2.4 5.2 11.8
Balance (sa, € bln.)
Exports 151.0 146.2 146.3 145.4 146.9 151.7 7.0
Imports 144.5 140.3 141.4 143.0 141.7 139.9 1.0
Germany GDP 0.3 0.3 2.1
Industrial Production 1.1  -0.7  -1.0  0.6  -0.4  -0.2  -1.2
Construction Sector 0.3  1.2  -1.6  1.2  1.8  -1.3  -2.8
Unemployment 4.6  4.6  4.5  4.5  4.4  4.4 
CPI Inflation 0.2  0.0  -0.2  0.0  0.0  0.0  0.2
PPI Inflation 0.0  -0.4  -0.4  -0.4  -0.2  -0.4  -2.2
France GDP 0.4 0.3 1.4
Industrial Production -2.1  2.9  -0.1  0.4  -0.5  -0.6  -0.5
Unemployment 10.5  10.6  10.4  10.2  10.1  10.1 
CPI Inflation -0.5  0.4  -0.4  0.1  -0.2  0.2  0.3

140
PPI Inflation -0.2  -1.0  0.0  0.1  0.2  -1.2 -2.7
(continued on the next page)
Italy GDP 0.2 0.1 1.1 ICRA BULLETIN
Industrial Production 1.1  -0.6  0.3  0.5  -0.4  -0.6  -1.0
Unemployment 11.7  11.4  11.5  11.5  11.5  11.6
CPI Inflation -1.9  -0.2  1.7  0.4  -0.4  0.0  0.4
PPI Inflation -0.5  -0.6  -0.3  -0.3  -0.5  -0.6 -3.9
Spain GDP 0.8 0.8 3.3
Industrial Production 0.6 -1.3 1.4 0.3 0.1 0.0 4.4 APRIL 2016
Unemployment 21.9  21.7  21.4  21.2  20.9  20.7 
CPI Inflation -1.5  -0.4  0.4  0.3  0.3  -0.4  -0.1
PPI Inflation 0.1  -1.7  -0.9  -0.8  -0.2  -0.7 -2.2
Greece GDP -1.2 0.1 -0.7
Industrial Production 3.0 4.1 -1.7 -1.3 3.8 2.3 6.4
Unemployment 24.8  24.6  24.7  24.5  24.4  24.0 
CPI Inflation -1.2  -0.2  1.2  -0.2  -0.7  0.0  0.4
PPI Inflation -1.4  -3.2  -0.5  -0.5  0.1  -2.4  -5.7
United GDP 0.4 0.6 1.8
Kingdom
Industrial Production -0.4  0.9  0.0  0.2  -0.8  -1.1  -0.2
Construction Sector -0.6 -3.7 1.6 -0.6 -0.4 1.3 1.5
Unemployment 5.4  5.3  5.2  5.0  5.0  5.0 
CPI Inflation -0.2  0.2  -0.1  0.1  0.0  0.1  0.2
PPI Inflation -0.8  -2.1  0.1  -0.3  -0.6  -1.2  -5.6
House Price Inflation 0.4 0.4 0.5 0.6 0.1 0.8 4.5
Foreign Trade (sa, £ -4.53 -3.12 -1.21 -4.03 -4.68 -3.69
billion)
Monetary Policy 0.5 0.5 0.5 0.5 0.5 0.5
Hungary GDP 0.6 1.0 3.2
Industrial Production -0.6  -1.8  2.9  1.6  -1.4  -0.7  6.9
Unemployment 6.8  6.5  6.5  6.4  6.3  6.1 
CPI Inflation 0.0  -0.6  -0.6  0.3  0.0  -0.3 1.0
PPI Inflation -0.6  -1.2  -0.2  -0.7  -0.1  -0.5 -2.7
Monetary Policy 1.50 1.35 1.35 1.35 1.35 1.35 1.20**
Poland GDP 0.9 1.1 3.8
Industrial Production 0.2  -1.3  1.6  0.8  0.7  0.7  4.4
Unemployment 7.5  7.5  7.4  7.4  7.2  7.1 
CPI Inflation -0.1  -0.3  -0.3  0.1  -0.1  -0.2  -0.4
PPI Inflation -0.4  -0.8  -0.2  0.0  0.1  -0.2 -0.8
Monetary Policy 1.50 1.50 1.50 1.50 1.50 1.50
Romania GDP 1.5 1.1 3.7
Industrial Production 0.2  -0.5  1.1  -0.3  -0.1  -0.3 1.6
Unemployment 6.8  6.8  6.9  6.6  6.6  6.7 
CPI Inflation -0.5  -0.6  0.3  0.3  0.3  0.2  -0.7
PPI Inflation -0.5  -0.6  -0.2  -0.1  0.0  -0.3  -1.7
Monetary Policy 1.75 1.75 1.75 1.75 1.75 1.75
Russia GDP* -3.7 -3.8
Industrial Production 2.3 0.2 3.4 5.2 -0.2 7.0 -4.5
Unemployment 5.3 5.3 5.2 5.5 5.8 5.8
CPI Inflation 0.8 0.4 0.6 0.7 0.8 0.8 12.9
Foreign Trade (US$ 10.3 8.6 9.4 10.1 9.1 10.9
billion)
Monetary Policy 11.50 11.00 11.00 11.00 11.00 11.00
Indicators are mostly seasonally adjusted percentage changes from the preceding month/
quarter.
*Indicates yoy percentage changes.

141
**Indicates latest policy rate.
Source: Eurostat, national statistical agencies and central banks.
 ICRA BULLETIN The euro area labour market situation is continuing to improve,
though at a slower pace. Employment increased further by 0.3 per cent
(qoq) in the third quarter of 2015, having now risen for nine consecutive
quarters. In line with an improvement in employment generation,
hourly labour costs rose by 1.1 per cent in the euro area in the third
APRIL 2016
quarter (compared with a 1.6 per cent rise in the previous quarter),
as the wages & salaries component firmed up by 1.4 per cent. The
unemployment rate for the EU, which started to decline in mid-2013,
The Markit January fell further in December to stand at 10.4 per cent, with the rate declining
in 23 member states.15 Survey results, point to further gradual labour
survey showed market improvements in the period ahead, despite recent weakness in
that manufacturing the economy. The Markit January survey showed that manufacturing
employment continued to increase for all euro area countries and the
employment rate of jobs growth accelerated for many. Despite stable labour market
conditions and consumer demand, domestic price pressures remained
continued to weak, reflecting declining input costs and rather moderate wage increases.
Euro area annual Harmonised Index of Consumer Prices (HICP)
increase for all euro inflation increased only slightly from 0.1 per cent in November to 0.2 per
cent in December. Positive base effects, due to falling energy prices at the
area countries and end of 2014, which were anticipated to have a strong impact on headline
inflation, were almost offset by the effect of further recent declines in
the rate of jobs
the oil price and by lower food price inflation, with the mild weather
grow th accelerated contributing to weaker prices for unprocessed food. HICP inflation
excluding food and energy remained stable at 0.9 per cent in December,
for many. Despite after continuing to move within the range of 0.9 per cent and 1.1 per cent
since August. On the other hand, the impact of the weaker euro exchange
stable labour market rate and the rise in consumption of durable goods, has taken durable
goods inflation to a strong 0.9 per cent in December. Services inflation
conditions and decreased in December for the second consecutive month, partly due
to the indirect effects of oil price declines on prices for transport-related
consumer demand, services. Survey indicators point to further renewed downward pressures
domestic price on euro area inflation. Markit survey data showed that the reduction
in purchasing costs was especially sharp in January, with the rate of
pressures remained deflation accelerating to the second-strongest during the past six-and-a-
half years. Further, output prices fell for the fifth month in a row and to
weak, reflecting the greatest extent since January last year, as all of countries covered by
the survey reported a reduction in factory gate prices. According to the
declining input costs European Central Bank (ECB) on the basis of current oil futures prices,
the expected path of annual HICP inflation in 2016 is now significantly
and rather moderate lower than that forecast in the December 2015 Eurosystem staff
macroeconomic projections. Also, the Q1 2016 ECB Survey of Professional
wage increases.
Forecasters revised inflations expectations for 2016 downwards by 0.3
percentage point to 0.7 per cent, mainly reflecting oil price developments. 

142 15
The largest decrease was registered in Spain (from 23.6 per cent to 20.8 per cent).
 External sector data show that euro area exports slowed in the ICRA BULLETIN

second half of the year. In October and November, exports improved,

and were 0.4 per cent above the average level in the third quarter. In
December, exports declined by 0.2 per cent over November, though,
it recorded a 3 per cent growth compared with December a year ago.
In 2015, euro area exports of goods to the rest of the world rose by 5 APRIL 2016
per cent to €2040.2 billion. Imports rose to €1794.2 billion, which is
an increase of 2 per cent compared with 2014. As a result the euro area
recorded a trade surplus of €246 billion, compared with €184.3 billion In 2015, euro area
in the previous year. The EU28’s exports of goods to the rest of the world
also rose in 2015 to €1789.1 billion, which is again an increase of 5 expor ts of goods
per cent compared with 2014. On the other hand, imports recorded an to the rest of the
increase of 3 per cent compared with 2014, rising to €1724.9 billion.
As a result, the EU28 recorded a surplus of €64.2 billion in the last year, world rose by 5%
compared with €13.3 billion in 2014. Consistent with improving demand
in the EU economies, in 2015, intra-EU28 and intra-euro area trade both to €2040.2 billion.
rose by 3 per cent compared with the previous year.
A few factors will hamper the consolidation of public finances in Impor ts rose to
2016. Apart from the migrant rehabilitation, the need to step up defence
expenditure after the terrorist attacks in France is one such factor. EU €1794.2 billion,
budget rules allow for temporary deviations from budget targets in cases
which is an increase
of unexpected national emergencies. Even before the terrorist attacks
in France, several countries, including Italy, requested such flexibility of 2% compared
to deal with the influx of asylum-seekers. As the ECB has discussed,
the assessment of the impact of the influx on the real economy and with 2014. As a
public finances is highly uncertain as there is no clarity on a number of
issues.16 The macroeconomic impact on the supply side would crucially result the euro area
depend on the labour market participation and speed of labour market
entry. The impact on employment, output and prices is differentiated recorded a trade
across countries and overall is likely to be modest in the euro area.
However, the budgetary effects will be notable as it is expected to reflect surplus of €246
government expenditure for food and accommodation, cash transfers billion, compared
and, to a lesser extent, increased government spending on education,
health and generally on integration measures. Thus the budgetary stance with €184.3 billion in
is expected to be expansionary in 2016 for several economies; however,
the public debt ratio for the EU is set to be firmly on a downward path, the previous year.
with ongoing improvements in economic conditions and advancement
of the restructuring process. At the end of the third quarter of 2015, the
government debt to GDP ratio in the euro area (EA19) came down to
91.6 per cent, compared with 92.3 per cent recorded at the end of the
second quarter and the third quarter of 2014 (Chart G.4). In the EU28,
the debt to GDP ratio also decreased, to 86 per cent from 87.7 per cent

16
The number of migrants and their skill characteristics are still very unclear, while the

143
number of subsequent family member arrivals is largely unforeseeable. Their distribution across the
euro area countries is also not yet clear. In addition, national asylum policies, with macroeconomic
and fiscal implications, are in the process of being adjusted.
 ICRA BULLETIN in the previous quarter.17 The government deficit to GDP ratio in the
euro area also came down to 1.8 per cent, in the third quarter of 2015,
from 2.2 per cent in the second quarter. In the EU28, the deficit to
GDP ratio stood at 2.3 per cent, down from 2.6 per cent in the previous
quarter. Government expenditure has come down marginally, while
APRIL 2016
revenue remains more or less stagnant.18
CHART G.4
EU Government Deficit and Debt (as percentage of GDP)
The government

deficit to GDP ratio

in the euro area

came down to 1.8%,

in the third quar ter of

2015, from 2.2% in

the second quar ter.

In the EU28, the

deficit to GDP ratio

Source: Eurostat.

stood at 2.3%, down As for private sector finances, the fourth quarter euro area
bank lending survey suggests that changes in credit standards and loan
from 2.6% in the demand continue to support the recovery in the debt financing market.
Lending rates for non-financial corporations (NFCs) and households
previous quar ter. have declined by significantly more than market reference rates since the
ECB’s credit easing package was announced in June 2014. This has been
helped by receding fragmentation in euro area financial markets and the
improvement in the pass-through of monetary policy measures to bank
lending rates.19 More importantly, small and medium-sized enterprises
have benefited to a larger extent than large firms from the recent lending
rate developments as the spread between interest rates charged on very

17
The highest ratios of government debt to GDP at the end of the third quarter of 2015
were recorded in Greece (171 per cent), Italy (134.6 per cent) and Portugal (130.5 per cent), and the
lowest in Estonia (9.8 per cent).
18
Government revenue in the euro area amounted to 46.5 per cent of GDP, in the
both the quarters, while government expenditure in the euro area stood at 48.3 per cent of GDP,
compared with 48.7 per cent in the previous quarter. In the EU28, government revenue was about
45 per cent of GDP. Government expenditure in the EU28 was 47.1 per cent of GDP, compared
with 47.4 per cent in the previous quarter.
19
The decline in composite lending rates has been supported by a decrease in banks’
composite funding costs, which stand at historically low levels. Between May 2014 and November

144
2015, the composite lending rate on loans to euro area NFCs fell by more than 80 basis points to
2.12 per cent. And, over the same period, the composite lending rate on loans to households for
house purchase decreased by more than 60 basis points, reaching 2.27 per cent in November.
small loans (loans of up to €0.25 million) and those charged on large ICRA BULLETIN

loans (loans of above €1 million) in the euro area decreased further till
November. Credit dynamics was driven by rising loan demand by NFCs
and households given the low general level of interest rates. Financing
needs related to working capital and fixed investment, together with
improved consumer confidence and housing market prospects were APRIL 2016
additional factors behind stronger loan demand. Increased competition
remained the main factor driving less stringent credit standards for credit
supply. Inflation remains
Looking ahead, EU economic recovery is expected to continue
as domestic demand is further supported by the non-standard monetary far below policy
policy measures and their favourable impact on financial conditions, as
objectives. Thus
well as by earlier progress made with fiscal consolidation and structural
reforms. Moreover, the renewed fall in oil prices should provide additional in December the
support for households’ real disposable income and corporate profitability,
and thus for private consumption and investment. However, inflation central bank decided
remains far below policy objectives. Thus in December the central bank
decided to further ease monetary policy to anchor inflation expectations. to fur ther ease
The ECB decided to: (i) lower the interest rate on the deposit facility
by 10 basis points to -0.30 per cent. The interest rate on the main monetary policy
refinancing operations and the rate on the marginal lending facility
to anchor inflation
remain unchanged at 0.05 per cent and 0.30 per cent respectively; (ii)
extend the end-date for its monthly bond-purchases under the asset expectations. The
purchase programme (APP) by six months, to March 2017; (iii) pledge
to reinvest the principal payments of its purchased assets under the ECB decided to
APP once they mature, for as long as necessary, in order to augment
liquidity; (iv) include, under the public sector purchase programme, euro- lower the interest
denominated marketable debt instruments issued by regional and local
governments located in the euro area in the list of assets that are eligible rate on the deposit
for regular purchases by the respective national central banks; (v) continue
conducting the main refinancing operations and three-month longer-term facility by 10 basis
refinancing operations as fixed rate tender procedures with full allotment
points to -0.30%.
for as long as necessary, and at least until the end of the last reserve
maintenance period of 2017. The ECB emphasises that given continued
high structural unemployment and low potential output growth in
the euro area, in order to reap the full benefits from monetary policy
measures, the ongoing cyclical recovery should be supported by effective
structural reforms and more growth-friendly composition of fiscal
policies. Measures to improve the business environment, including the
provision of adequate public infrastructure, are vital to increase productive
investment, boost job creation and raise productivity. According to the
IMF, common areas of focus in reforms should include strengthening
labour market participation and employment, and reducing barriers to
entry in product and services markets.  Policy actions to support the
integration of migrants into the labour force are critical to unlocking the
potential long-term economic benefits of the population inflow. 145
 ICRA BULLETIN Euro area’s largest economy, though sluggish, was able to sustain
its momentum in end-2015, despite strong headwinds from its dominant
export sector. German GDP advanced 0.3 per cent (qoq) in the final
quarter of 2015, following a 0.4 per cent increase in the previous quarter.
For 2015 as a whole, the German economy grew by 1.7 per cent. The
APRIL 2016
second half expansion was driven solely by domestic demand, while net
exports contracted in the last two quarters. Household and government
consumption expenditures continued to increase, and at accelerated rates.
For 2015 as a whole, German industrial production, however, contracted a sharp 1.2 per cent
(mom) in December, following near stagnancy in November, a sign that
the German economy a slowdown in major export markets is holding back factory activity
despite strong domestic demand.20 The German central bank expects the
grew by 1.7%.
economy to expand at a somewhat faster pace in the first quarter of 2016
The second half compared with end-2015. Greater momentum is likely to be provided
by consumption, which is continuing to benefit from the buoyant labour
expansion was driven market situation and the fall in oil prices.21 Even as the central bank
remains optimistic leading indicators have pointed to further weakness
solely by domestic in coming months. Germany’s Markit manufacturing PMI for January
decreased to 52.3 from 53.2 in December, largely as a result of stagnating
demand, while net output at intermediate goods producers. Further, the ZEW Institute’s
economic sentiment index for February sank to 1 from 10.2 in January,
expor ts contracted
to reach a 16-month low, on concerns of slowdown of the world economy
in the last two and the uncertain consequences of falling oil prices.22
France’s economy grew 1.1 per cent in 2015, the highest in four
quar ters. Household years, possibly a confirmation of a turnaround after years of economic
stagnation. Domestic demand was the driver of growth as consumer
and government spending shot up 1.4 per cent in 2015, while business investment grew
by 2 per cent. GDP increased 0.2 per cent (qoq) in the final quarter after
consumption it rose 0.3 per cent in the previous one. Fixed investment, government
consumption and exports increased, while household consumption fell.
expenditures Industrial production in France fell 1.6 per cent (mom) in December,
following a 0.9 per cent decline in the previous month. Manufacturing,
continued to increase, which accounts for over 80 per cent of the indicator, however, added 0.4
percentage point. The Markit Manufacturing PMI at a five-month low
and at accelerated
of 50 has indicated stagnation in the first month of 2016, as both total
rates. new orders and new export business fell in the month. The fiscal situation
is weak, with a chronic deficit, considerable government spending,
correspondingly high taxes and rising public debt. There have been urgent
calls for efforts to reduce complexity in the labour code, business norms

20
In year-ago terms too production contracted by 2.3 per cent in December. German
manufacturing output slid 1.1 per cent, driven by a 2.6 per cent slump in the production of
investment goods. Energy production declined 3 per cent on unexpectedly warm weather and
consumer goods output fell 1.4 per cent.
21
The German labour market got off to a strong start in the new year, with jobless claims
dropping more than expected in January and the unemployment rate falling to a record low. 

146
22
The largest drop in investment confidence was reported in banks and insurance
companies due to worries regarding credit default and a sharp decline in European bank equity prices
in February. Fall in steel and utilities sectors was mainly because of declining commodity prices.
and regulations, the structure of the government, taxation and pensions. ICRA BULLETIN

The economy has failed to create enough jobs to reduce the pool of 3.6
million people seeking work and unemployment is at a record high of
10.2 per cent.23 Recently, measures have been announced to try to bring
down France’s jobless rate. This, combined with tax cuts for business
worth €40 billion over three years, is designed to give the economy some
APRIL 2016
boost. The Spanish economy has been expanding in the last two years,
following the extended double-dip recession in 2008-13. The economy
grew 0.8 per cent (qoq) in the final quarter, taking 2015 growth to a The Spanish
robust 3.2 per cent. Stronger private consumption and robust investment
continue to drive the expansion. The government has reduced personal economy has been
and corporate tax rates, changed labour regulations to make hiring and
dismissal easier, reduced spending on civil-service salaries and imposed expanding in the last
fiscal discipline on regional governments. Other reforms have sought to
encourage enterprise; in particular the government has made it easier
two years, following
to start a business, reducing the number of procedures involved.24 High the ex tended double-
unemployment, disinflation and failure to comply with EU fiscal norms
remain problems for Spain.25 On the political front the impasse after the dip recession in
inconclusive December 20 election that led to no governing coalition may
hamper reforms and medium-term growth though near-term indicators, 2008-13. The
like the PMI, remain strong. Italy’s economy slowed significantly in the
final quarter, growing 0.1 per cent (qoq), following a 0.2 per cent increase economy grew
in the third quarter. Higher domestic consumption possibly contributed
the most, while net exports acted as a dampener.  Industrial production 0.8% (qoq) in the
deteriorated in December, with output falling 0.7 per cent (mom) after
a 0.5 per cent drop in the previous month. According to January’s PMI final quar ter, taking
reading growth lost further momentum at the start of this year. The
slowdown in China and recession in Russia and Brazil will weigh on
2015 grow th to a
Italy’s exports and industrial production.26 Further the economy, one of
robust 3.2%.
the hardest hit in the banking crisis this year, faces high borrowing costs,
and Italian banks have accumulated €200 billion (17 per cent of GDP) of
bad loans that have lost significant value in 2016. This prevents the free
flow of credit needed to revitalise the economy, and in turn hampers tax
revenues. The Italian government’s public debt amounting to €2.2 trillion,
(over 130 per cent of GDP) is the second highest in the EU.

23
Youth unemployment in France, at 25.7 per cent, is among the highest in Europe.
France’s labour laws make it extremely difficult to dismiss permanent staff, so companies have
responded by only offering temporary contracts, many of which last less than a month.
24
Spain has moved up the World Bank’s ease of doing business rankings, from 52nd two
years ago to 33rd in 2014 out of nearly 190 economies considered.
25
The unemployment rate declined to 20.9 per cent in the fourth quarter from 21.2 per
cent, but remains among the highest in the euro area. HICP inflation in January slipped a sharp 2.5
per cent (mom, -0.4 per cent, yoy), as weak global oil and commodity prices continue to offset price
growth in other sectors, where stronger domestic demand is exerting upward pressure. Spain will
report a budget deficit of about 4.8 per cent of GDP for 2015 and 3.6 per cent this year, well above
the EU targets.

147
26
The index fell to 53.2 from a five-year high of 55.6 in December, the slowest pace of
growth in four months. Similarly, Italy’s business confidence slid to 101.5 in January from 105.6 in
the previous month.
 ICRA BULLETIN The UK economy continues to present a mixed picture. Growth
in the UK remained stable in the final quarter of 2015, with GDP
growing at 0.5 per cent (qoq) after a 0.4 per cent increase in the third
quarter.27 Services sector was the highest contributor to output growing
by 0.7 per cent and contributing 0.5 percentage point to the quarterly
APRIL 2016
GDP growth rate. Agriculture grew by 0.6 per cent and contributed
0.2 percentage point to growth. In contrast, industrial production and
construction output decreased, weakening overall growth.28 GDP for year
The UK annual 2015 increased by 2.2 per cent, slightly lower than 2014’s growth rate
of 2.9 per cent. Industrial production fell by 0.5 per cent in the fourth
headline CPI rose quarter, reflecting decreases of 2.3 per cent in mining & quarrying, 2.4
per cent in electricity and related output, while manufacturing growth
0.3% in January,
was flat at 0.0 per cent. The quarterly decrease was accentuated by the
af ter rising 0.2% December contraction in production industries of 1.1 per cent (mom),
with decreases of 4.0 per cent in mining & quarrying, 5.4 per cent in
in the previous electricity etc., and 0.2 per cent in manufacturing. Although a sharp
retrenchment in capital spending in the oil and gas sector is under way,
month. Much of mining & quarrying output rebounded in December, with 7.4 per cent
jump over the previous year. The unemployment rate for the fourth
the gap between quarter was 5.1 per cent, down from 5.7 per cent for a year earlier,
with the highest employment rate of 74.1 per cent since comparable
inflation and the
records began in 1971. Wage growth has been weaker than anticipated
target reflects low as in the fourth quarter, average earnings excluding bonuses grew 2 per
cent compared with the same period last year, slower than the 2.9 per cent
oil prices and impor t growth rate seen in the three months to September and 3.3 per cent a
quarter earlier. The UK annual headline CPI rose 0.3 per cent in January,
prices for other after rising 0.2 per cent in the previous month; a further drop in global
oil prices in recent months point to increased deflationary pressures.
goods, while the Much of the gap between inflation and the target reflects low oil prices
and import prices for other goods, while the remaining reflects the past
remaining reflects weakness of domestic cost growth, and unit labour costs in particular.
Despite domestic demand remaining healthy, it is clear that increasing
the past weakness
productivity remains a priority as a means of achieving sustainable wage
of domestic cost growth and a positive effect on inflation. The UK current account deficit
remained unchanged at £17.5 billion or 3.7 per cent of GDP in the third
grow th, and unit quarter. The £4.0 billion widening in the total trade deficit was due to a
widening of £5.4 billion in the trade in goods deficit, partially offset by
labour costs in
27
However, in year-ago terms, growth has decelerated to 2.7 per cent in the second
par ticular. quarter, below the average of the past four quarters.
28
Household final consumption increased by 0.7 per cent, following a 0.9 per cent
increase in the previous quarter. GFCF also grew by 0.9 per cent, within which business investment
increased by 2.9 per cent. General government final consumption increased by 0.9 per cent and
non-profit institutions serving households grew by 0.5 per cent. Both production and services grew
by 0.7 per cent over the quarter. The increase in production was largely driven by a 6.1 per cent
increase in mining and quarrying including oil and gas extraction, a sector that has been contributing

148
to growth in the year. Construction output grew by 0.2 per cent after a contraction of 0.2 per cent in
the previous quarter. Agriculture, forestry and fishing was the only industry group to show a decline,
contracting by 0.1 per cent.
a widening of £1.4 billion in the trade in services surplus. UK’s public ICRA BULLETIN

finances were on the mend with the narrowing of the current budget
deficit. Net borrowing by the UK public sector excluding financial
interventions was £7.5 billion in December, narrowing significantly
from £11.7 billion in December 2014. Extreme varying views have
emerged on the prospects of UK’s exit from the EU and their economic APRIL 2016
effects particularly on trade, business and employment. According to the
Confederation of British Industry, while there is little current evidence of
uncertainty ahead of the referendum on the exit from the EU negatively Ex treme varying
affecting business investment, this is a potential risk to the UK’s economic
outlook, along with concerns over overseas weaknesses. The Bank of views have emerged
England (BoE) has decided to keep its main repurchase rate at 0.5 per
on the prospects
cent and its target for asset purchases unchanged at £375 billion in
February. of UK’s exit from
Among the large EU28 members, growth in the Czech Republic
was a robust 4.3 per cent in 2015, the fastest rate recorded since 2007. the EU and their
However, quarterly growth has been sliding throughout last year from
2.5 per cent in the first quarter to a marginal contraction in the final economic effects
quarter. Industrial production, which had been strong for most of the
year, contracted in December by 1.6 per cent (yoy). However, demand particularly on
remains strong with improving employment and wage growth. Core
trade, business
consumer price inflation picked up to 0.6 per cent in January, while
the decline in producer prices has moderated through 2015. Hungary’s and employment.
growth moderated to around 3 per cent in 2015 from 3.7 per cent
2014. Deceleration in industrial activity towards the end of the year, while there is lit tle
and subdued output in construction contributed to the slower-than
expected expansion. In both the Czech Republic and in Hungary, growth current evidence of
is expected to slow further in the first half of 2016, because of a drop
in government investment financed from EU funds, the deteriorating uncer tainty ahead
external environment and base effects. Easing of fiscal policy has been
helping real disposable household income, apart from the positive labour of the referendum
market. Forward-looking manufacturing PMIs for January recorded
negatively af fecting
encouraging improvements in the Czech Republic (from 55.6 up to
56.9), as well as in Hungary (from 49.9 up to 53). Monetary policy business investment,
too has remained in expansionary mode. The Czech National Bank in
February decided unanimously to keep interest rates unchanged at zero this is a potential
and also decided to continue using the exchange rate as an additional
instrument for easing monetary conditions.29 The Hungarian central bank risk to the UK’s
too has left its policy rate at a record low of 1.35 per cent in February,
while considering more unconventional monetary easing if needed to economic outlook.
combat lower-than-forecast inflation and slowing economic growth.30

29
The CNB confirmed the commitment to intervene in the foreign exchange market if
needed to weaken the koruna so that the exchange rate is kept close to CZK 27 to the euro.
30
Boosting its unconventional measures, the central bank in February would phase out a
two-week deposit facility and boost the amount offered at interest-rate swap auctions by 20 per cent
to channel commercial-bank liquidity into government debt and to help cut yields. The steps have
already reduced longer-dated bond yields.
149
 ICRA BULLETIN Russia, the EU’s most influential neighbour, remains mired in
recession. The oil-exporting economy registered the steepest economic
contraction in six years in 2015 on the back of persistently low oil prices
and international sanctions. Russia’s industrial output declined by 2.7
per cent (yoy) in January, following a 4.5 per cent drop in December,
APRIL 2016
the steepest in the last five months. Russia’s retail sales, which has been
contracting continuously in the past year, dropped by 7.3 per cent in
January after it plunged by 15.3 per cent (yoy) in December, as weak
Russia, the EU’s consumer confidence and declining real income of consumers curbed
spending. Private consumption has been adversely affected by the
most influential steep depreciation of the rouble and the subsequent spike in inflation,
which caused real wages to deteriorate. Annual CPI inflation in Russia
neighbour,
decelerated in January, to 9.8 per cent (1 per cent, mom), against 12.9
remains mired in per cent (0.8 per cent, mom) in December, mostly reflecting base effects
and also to an extent subdued demand. Other factors weighing on the
recession. The oil- economy in 2015 were a massive decline in investment, which was in
response to harsh financial conditions, a drop in corporate profitability
expor ting economy and a cut in investment projects of many commodity producers.  Russia’s
trade balance remains in surplus as the fall in exports is outweighed
registered the by decreased imports because of depressed domestic demand, Russia’s
reciprocal sanctions, and the depreciating currency. Lower oil prices
steepest economic
are hampering the government’s response to the crisis, as lower fiscal
contraction in six revenues curb spending.31 Volatility and a sharp weakness in oil prices
put additional pressure on the rouble at the outset of the year and the
years in 2015 on the currency reached an all-time low in January. Despite the elevated risks for
inflation stemming from the recent spate of currency depreciation, the
back of persistently Bank of Russia has so far kept the key policy rate on hold at 11 per cent
since August.
low oil prices

and international Asia

Japan’s economic expansion was derailed from its expected path
sanctions. in 2015 by a sharp slowdown in demand from China and other Asian
countries, and sluggish domestic private consumption. The economy
grew 0.5 per cent (yoy) in the fourth quarter, following a 1.7 per cent
growth in the third (Chart G.5 and Table G.5), with GDP contracting
by 0.4 per cent (qoq) in the last quarter of 2015, after a third quarter
expansion of 0.3 per cent. Even as the sudden surge in investment which
had driven third quarter growth reversed in the fourth quarter, the
largest drag was from lower consumer spending, housing investment and

31
The government, which gets nearly half its revenue from oil and gas, is struggling with a
1.5 trillion rouble (US$19.2 billion) deficit in its budget.

150
declining exports. During the fourth quarter private consumption, which ICRA BULLETIN

constitutes 60 per cent of the economic output, fell by 0.8 per cent.
CHART G.5
Asian Economies—GDP Growth, Inflation and Policy Rates (yoy percentage changes)

APRIL 2016

Even as the sudden

surge in investment

which had driven

third quar ter grow th

in Japan reversed in

the four th quar ter,

India's GDP is measured in market prices instead of factor cost and the base year has been
changed to 2011-12 from 2004-05.  the largest drag
CPI Inflation and Policy rates are for December 2015.
Source: National statistical agencies and central banks. was from lower
TABLE G.5
Asian Economic Indicators consumer spending,
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
Japan Industrial Production* -0.8 -1.2 1.1 1.4 -0.9 -1.7 housing investment
Consumption Expenditure* 0.4 2.9 -2.1 -2.3
Machinery Orders* -3.6 -5.7 7.5 10.7 and declining
Value of Public Works Contracted* -6.5 6.5 -11.6 7.6 5.9
Unemployment Rate 3.3 3.4 3.4 3.1 3.3 3.3 expor ts. During
CPI Inflation* -0.1 0.2 0.1 -0.1 -0.3 -0.1
Real Exports* 0.9 -0.3 2.1 1.3 1.6 the four th quar ter
Real Imports* 2.2 0.1 3.7 -3.1 -0.7
China Industrial Production 6.0 6.1 5.7 5.6 6.2 5.9 private consumption,
Investments in Fixed Assets 11.2 10.9 10.3 10.2 10.2 10.0
CPI Inflation 1.6 2.0 1.6 1.3 1.5 1.6
which constitutes
Trade Balance (US$ billion) 43.0 60.2 60.3 61.6 53.7 59.4
Hong Kong Industrial Production 2.2 1.9
Private Consumption 4.3 3.2
60% of the economic
CPI Inflation 2.5 2.4 2.0 2.4 2.4 2.5
Trade Balance (HK$ billion) -28.4 -25.1 -36.4 -29.6 -33.1 -45.7 output, fell by 0.8%.
Malaysia Industrial Production 6.1 3.0 5.1 4.2 1.8 2.7
Private Consumption 4.1 4.9
CPI Inflation 3.3 3.1 2.6 2.5 2.6 2.7
Trade Balance (Ringgit billion) 2.4 10.2 9.7 12.2 10.2 8.0

(continued on the next page) 151

 ICRA BULLETIN Singapore Industrial Production -6.6 -7.1 -4.8 -5.4 -5.5 -7.9
CPI Inflation -0.4 -0.8 -0.6 -0.8 -0.8 -0.6
Exports (Non-oil) -0.7 -8.4 0.3 0.0 -3.4 -7.2
South Korea Industrial Production -3.3 0.3 2.8 1.7 -0.2 -2.1
Private Consumption -1.2
CPI Inflation 0.7 0.7 0.6 0.9 1.0 1.3
APRIL 2016 Trade Balance (US$ billion) 7.72 4.27 8.90 6.69 10.40 7.16
Policy Rate 1.50 1.50 1.50 1.50 1.50 1.50
Thailand Industrial Production 2.7 0.5 -0.3 -0.8 0.3 1.41
Japan’s Private Consumption 0.7 3.0
CPI Inflation -1.1 -1.2 -1.1 -0.8 -1.0 -0.9
unemployment Trade Balance (US$ billion) 0.77 0.72 2.79 2.10 0.30 1.49
Policy Rate 1.50 1.50 1.50 1.50 1.50 1.50
rate remains low at Indicators are mostly yoy percentage changes.
*Indicates mom percentage changes.
3.3% in December; Source: National statistical agencies and central banks.

Capital spending encouragingly increased in the quarter. While

however, this masks domestic demand deducted 0.5 percentage point from growth, external
the lack of wage demand was positive, because of a sharper decline in the value of imports
caused by falling oil prices, and net exports added 0.1 percentage point
grow th, even in to growth. Private demand has slowed post the consumption tax rise in
April 2014, while private residential investment, which was boosted
an environment of earlier in the year by revised tax laws, also turned sluggish later. Japan’s
unemployment rate remains low at 3.3 per cent in December; however,
firming corporate this masks the lack of wage growth, even in an environment of firming
corporate profits. As corporate profits declined sharply in the third
profits. As corporate quarter, wage growth has been near zero in the fourth, holding down
consumption. Indicative of the lack of sufficient spending power, Japan’s
profits declined
inflation rate remained flat at 0.2 per cent in December, with core
sharply in the third inflation excluding volatile food prices up by just 0.1 per cent. As for the
Japan’s external sector, even as exports and imports are both declining,
quar ter, wage the country’s imports have been falling faster than exports. Exports fell
by 12.9 per cent in January, supporting concerns that the slowdown
grow th has been in China, one of the country’s most important trading partners, is
continuing to hurt demand.32 Imports, meanwhile, fell by 18 per cent,
near zero in the leaving a 645.9 billion yen (US$5.7 billion) trade deficit. Import demand
was hurt by slowing private demand and lack of energy demand because
four th, holding down of warmer weather and revival of domestic power sources, while import
consumption. values were also lower because of price effects.33 The Bank of Japan
(BoJ) unexpectedly reduced a benchmark interest rate below zero in late
January, in another move to stimulate the economy as volatile markets
and slowing global growth threaten efforts to overcome deflation. BoJ
adopted a policy of Quantitative and Qualitative Monetary Easing (QQE)

32
Exports to China were down almost 18 per cent, driving an overall decline of nearly 13

152
per cent in the value of overseas shipments in January.
33
Volume of exports fell 9.1 per cent in January, the biggest drop since February 2013,
while import volumes declined 5.1 per cent.
with a Negative Interest Rate. According to the new policy, the BoJ will ICRA BULLETIN

apply a negative interest rate of minus 0.1 per cent to current accounts
of financial institutions at the bank. It will reduce the interest rate
further into negative territory if judged necessary. The BoJ introduced
a multiple-tier system which some central banks in Europe have put in
place. Specifically, it adopted a three-tier system in which the outstanding APRIL 2016
balance of each financial institution’s current account at the bank will be
divided into three tiers, to each of which a positive interest rate, a zero
interest rate, or a negative interest rate will be applied, respectively. The The BoJ
system is conceived so as to ensure compliance as well as to moderate
any losses faced by the financial institutions. While some analysts opine unexpectedly
that it is a reactionary measure to counter recent market volatility, others
reduced a
feel it is a positive step to boost the economy. As an initial reaction, the
Japanese currency, which had risen against the US dollar by about 5 per benchmark interest
cent through last year dropped markedly, raising hopes for the country’s
export sector. rate below zero
In ex-Japan Asia, growth momentum has moderated in 2015
to 6.6 per cent, from 6.8 per cent in 2014, and is expected to slow in late January,
somewhat to 6.3 per cent in 2016, according to IMF estimates. China has
initiated a switch from investment-driven high growth to more balanced in another move
consumption-oriented growth. Led by curtailed investment spending,
to stimulate the
which is a part of the reform process, economic growth is slowing, fiscal
revenues are shrinking, overcapacity is worsening and financial risks are economy as volatile
on the rise. The external environment too has clouded in a vicious circle
caused by lower Chinese external demand, affecting China’s own external markets and slowing
sector through reduced demand from the country’s trading partners.
China’s economy grew by a strong 6.9 per cent in 2015, however, the global grow th
slowest since 1990. Fourth quarter GDP decelerated to 1.6 per cent
(qoq) from 1.9 per cent in the third quarter, though annual growth threaten ef for ts to
was stable at 6.8 per cent (yoy, saar) compared with 6.9 per cent in the
third quarter.34 Though business confidence is on a decline, consumer overcome deflation.
sentiment indicators have been on the rise and retail sales has held steady
BoJ adopted a policy
in the last quarter.35 The manufacturing PMI at 48.4 signalled further
contraction in January, with both output and employment declining at of Quantitative and
slightly faster rates than in December, with an accelerated contraction
in new export orders. It also indicated a further decline in Chinese Qualitative Monetary
manufacturing employment, with the rate of job losses quickening to a
four-month record in January. Chinese service providers, on the contrary, Easing with a
had a strong start to 2016, with business activity increasing at the fastest
Negative Interest
34
Factory output, that is suffering the steepest slowdown, rose 5.9 per cent in December, Rate.
down from 6.2 per cent in November. Fixed-asset investment, which includes infrastructure and
factory construction, rose 10 per cent in 2015, down from 10.2 per cent for the first 11 months of
the year and over 15 per cent in December 2014.
35
The Westpac MNI Consumer Sentiment in China increased to 114.90 in January from

153
109.7 in October of 2015. NBS Manufacturing PMI in China stood at 49.4 in January of 2016,
down from 49.7 in December of 2015 and below market expectations.
 ICRA BULLETIN rate in six months, with improved inflows of new business underpinning
the expansion.36 The services sector, which accounted for more than
50 per cent of the nation’s economic output last year for the first time
as a result of the rebalancing efforts, grew 8.2 per cent in the fourth
quarter, slightly lower than 8.6 per cent in the third quarter. China’s
APRIL 2016
trade situation worsened significantly in January, as falling prices for
commodities and slowing growth in infrastructure spending have lowered
China’s import values, while exports have been hurt by weak overseas
Chinese service demand, along with rising labour costs and the increasing competitiveness
of rival economies.37 With exports declining and consumer spending
providers had showing signs of stagnation,38 China has been relying on government-led
a strong star t spending, mainly in infrastructure, to boost growth.39 In a move to view
stabilise the economy the government has been easing local government
to 2016, with financing and introducing tax breaks. Government spending has gone
up significantly in 2015, and if growth is held in check, fiscal revenue
improved inflows generation would be a considerable difficulty in the near-term. In a move
to counter global pessimism about China’s growth prospects and assuage
of new business doubts as to whether the government is putting reforms on the back
burner to revive growth, China’s leaders announced formulation of plans
underpinning the on how they intend to restructure the economy without having growth
fall precipitously.
expansion. The
The rest of emerging Asia is generally projected to continue
services sector, growing at a robust pace, although with some countries facing strong
headwinds from China’s economic rebalancing and global manufacturing
which accounted weakness, according to the IMF’s WEO Update. In Korea, growth
weakened to 2.6 per cent in 2015 from 3.3 per cent in 2014.40 Although
for more than 50% private consumption and construction investment expanded and facilities
investment sustained steady growth, exports, which constitutes almost
of the nation’s half of GDP, decelerated in the year. Exports registered an 8 per cent
contraction in 2015, which marked the weakest result since 2009. The
economic output last trend of decline in exports in recent months has accelerated in January.
year grew 8.2% in Moderation in demand from China, the biggest export market, will
continue to dampen export growth. Business and consumer sentiment
the four th quarter. too have been on a downward trend. The Bank of Korea’s policy rate is at
a record low of 1.5 per cent, but the fading effect of government stimulus
36
The Caixin China General Services Business Activity Index was up from December’s
17-month low of 50.2 at 52.4 in January. Retail sales rose 11.1 per cent from a year earlier, down
from an 11.2 increase in November.
37
Exports dropped 11.2 per cent (yoy) to US$177.5 billion, while imports plummeted
18.8 per cent to US$114.2 billion, causing a record monthly trade surplus of US$63.3 billion.
38
The stock market crash has taken a serious toll on already slowing luxury consumption,
while the rebalancing and gloomy outlook have also had an effect on consumer expenditure.
39
Chinese banks extended a record 2.5 trillion yuan in new credit in January, and
ministries jointly instructed financial institutions to increase support to the industrial sector. In a
move to ease a housing glut afflicting large parts of China, the finance ministry reduced deed taxes for
home buyers. The reduced tax rates won’t apply to the few big cities, such as Beijing, Shanghai and

154
Shenzhen, where demand remains strong.
40
Growth weakened to 0.6 per cent (qoq) in the last quarter of 2015 from 1.3 per cent in
the third quarter. Construction investment fell by 6.1 per cent, with a decrease in civil engineering.
will be felt. Thailand’s GDP grew by a moderate 2.8 per cent in 2015, ICRA BULLETIN

following dismal growth of 0.8 per cent in 2014, as government spending

more than offset faltering external demand.  Budget spending accelerated
in an effort to help both businesses and farmers and to boost slowing
private consumption. Government expenditure recorded the largest
expansion in three years, rising 4.8 per cent (yoy) in the final quarter of APRIL 2016
last year, while both private consumption and investment accelerated in
the quarter, responding to the stimulus measures.41 The revival of tourist
arrivals has also benefitted the economy in 2015. Thailand’s external Thailand’s GDP grew
sector however, weakened substantially in the last three months of 2015.42
Malaysia’s GDP grew a strong 5 per cent in 2015, after a 6 per cent by a moderate 2.8%
growth in 2014, despite weakness in export markets and the steep slide in
in 2015, following
prices for oil and gas in the year. Fourth quarter growth slowed but was
still at 4.5 per cent, as private consumption unexpectedly revived in the dismal grow th
quarter, in line with a strong labour market. Although public and private
investment in the oil and natural gas sector fell substantially, private of 0.8% in 2014,
investment in manufacturing and services remained robust in the fourth
quarter. This rebalancing is in line with the trends in exports. Exports as government
of palm oil, natural gas and petroleum products all saw decreases, or
only subdued expansions. However, the remainder of Malaysia’s exports spending more
performed well and helped to propel exports to a 3.7 per cent expansion,
than of fset faltering
indicating that the rest of the economy is picking up the slack from the
natural resource sector.  Government consumption was lower with the ex ternal demand.
completion of a number of sponsored projects earlier in the year. Lower
revenues from its primary exports will also curtail government spending. Budget spending
The central bank is maintaining its key policy rate at 3.25 per cent.
Indonesia’s economy too slowed in 2015, growing 4.8 per cent following accelerated in an
a 5 per cent growth in 2014. However, the economy accelerated in fourth
quarter and could strengthen further on a pickup in delayed government ef for t to help both
stimulus measures. However, low prices for important commodity
exports and weak global demand, particularly from China, will limit businesses and
momentum.43 The Singapore economy paints a mixed picture. Growth
farmers and to boost
accelerated in the final quarter of 2015 on the back of improvements in
all sectors of the economy, with the construction sector recording the slowing private
41
Growth in private spending accelerated from 1.8 per cent in the third quarter to 2.5 consumption.
per cent, thus marking the fastest increase in three quarters. Moreover, fixed investment rebounded in
the final quarter of 2015 and grew 9.4 per cent in contrast with a 2.6 per cent decline in the previous
quarter.
42
Weak global demand weighed on exports, which recorded a 3.5 per cent annual
decrease in the fourth quarter. The figure contrasts with the 1.7 per cent expansion observed in
the third quarter. On the other hand, the contraction in imports softened from a 2.6 per cent
decrease in the third to a 1.3 per cent drop in the fourth quarter. Overall, the external sector took
off 1.9 percentage points from overall economic growth, in contrast with the 3.3 percentage points
contribution to growth recorded in the previous quarter. 
43
Exports contracted a significant 6.4 per cent in Q4, which marked a multi-year low and
followed the 0.6 per cent drop registered in Q3. Imports plummeted 8.1 per cent, which was a more

155
pronounced fall than Q3’s 5.9 per cent drop. As a result, the external sector’s net contribution to
overall growth moderated from 1.2 percentage points in the third quarter to 0.4 percentage points in
the fourth quarter.
 ICRA BULLETIN most notable expansion. The strong services sector continued to prop-
up growth through 2015, however, it has decelerated from a year ago.
Despite a strong financial sector, Singapore’s economy has been struggling
through 2015 to fight the spillover effects from China’s slowdown, one
of its key trading partners. Exports continued to contract, falling by 9.9
APRIL 2016
per cent (yoy) in January, and the manufacturing PMI for the month has
inched down further into negative territory.

Brazil’s economy
Latin America
is experiencing a Latin’s America’s economic performance in the past two years has
been dismal. Aggregate regional GDP slowed sharply to 1.0 per cent in
deep recession with 2014 and is expected to have contracted in 2015. Economic activity in
the region began to deteriorate in the third quarter, when GDP decreased
a bleak outlook; by 0.6 per cent (yoy). The region’s contraction deepened even further to
1 per cent in the final quarter of the year dragged down by mounting
af ter stagnating in economic problems in Brazil, which is by far the region’s largest
economy, and by sharp declines in commodity prices towards the end
2014, the economy
of the year (Chart G.6 and Table G.6). Brazil’s economy is experiencing
contracted a sharp a deep recession with a bleak outlook; after stagnating in 2014, the
economy contracted a sharp 4.1 per cent in 2015 and is expected to
4.1% in 2015 and is shrink by a similar amount this year. Imports have recorded double-digit
contractions for nine months till December amidst subdued domestic
expected to shrink demand and a weak real. Brazil’s current account deficit thus declined
notably last year, to US$58.9 billion for 2015, nearly half of 2014’s deficit
by a similar amount of US$104 billion, and is equivalent to approximately 3.3 per cent of
GDP. The government has recently announced several different measures
this year. Impor ts
to boost credit by US$20 billion to help companies weather the recession.
have recorded The Markit manufacturing PMI gained back some lost ground in January,
rising from December’s 45.6 to 47.4. Brazil’s outlook, however, remains
double-digit grim as the economy is expected to record another steep contraction this
year amid slow reform momentum and fall in sovereign rating. Inflation
contractions for nine in January remained at December’s 10.7 per cent, which marked the
highest level since November 2003. In its latest policy meet, the central
months till December bank left the benchmark SELIC interest rate unchanged at 14.25 per
cent, in view of the sharp contraction in economic activity.
amidst subdued

domestic demand

and a weak real.

156
 CHART G.6 ICRA BULLETIN
Latin American Economies—GDP Growth, Inflation and Policy Rates (yoy percentage changes)

APRIL 2016

CPI Inflation and Policy rates are forDecember 2015.

Source: National statistical agencies and central banks.
TABLE G.6
Latin American Economic Indicators
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
Mexico Industrial Production 1.0 1.2 1.4 0.9 0.1 0.0
EAI 2.2 3.0 3.1 2.7 2.4 2.6
Unemployment 4.7 4.7 4.5 4.6 4.0 4.0
CPI Inflation 2.7 2.6 2.5 2.5 2.2 2.1
Trade Balance (US$ million) -2266.9 -2782.1 -1419.9 -1443.9 -1568.8 -927.0
Policy Rate 3.00 3.00 3.00 3.00 3.00 3.00
Brazil Industrial Production -8.9 -8.8 -10.8 -11.1 -12.5 -12.2
EAI -3.9 -4.7 -5.6 -4.7 -6.1 -6.8
Unemployment 7.5 7.5 7.5 7.8 7.5 6.9
CPI Inflation 9.6 9.5 9.5 9.9 10.5 10.7
Trade Balance (US$ billion) 2.39 2.69 2.94 2.00 1.20 6.24
Policy Rate 13.75 14.25 14.25 14.25 14.25 14.25
Chile Industrial Production -1.7 -5.2 0.6 -0.6 0.6 -3.3
EAI 2.8 1.2 2.5 0.7 1.5 1.7
Unemployment 6.6 6.5 6.4 6.3 6.1 5.8
CPI Inflation 4.6 5.0 4.6 4.0 3.9 4.4
Trade Balance (US$ million) -389.5 -322.0 -281.1 -357.3 350.9 71.4
Policy Rate 3.00 3.00 3.00 3.00/3.25 3.25 3.25/3.50
Argentina Industrial Production 2.1 3.6 0.1 -2.6
EAI 2.7 2.6 2.8
Unemployment 5.9
CPI Inflation 14.8 14.7 14.4 14.3 23.9 26.9
Trade Balance (US$ million) -98.0 -308.0 -355.0 93.0 -740.0 -1110.0
Indicators are mostly yoy percentage changes.
Source: National statistical agencies and central banks.

157
 ICRA BULLETIN Mexico’s economy firmed slightly in 2015, growing 2.5 per cent,
only marginally better than the 2.1 per cent rise in 2014. Remittances
from Mexican workers abroad rose 4.8 per cent in 2015, supporting the
economy’s expansion. Mexico’s economy expanded more than forecast
for the fourth consecutive quarter in the final three months of the year,
APRIL 2016 growing by 2.5 per cent, as domestic consumption rebounded given
record low inflation. The services sector has been expanding and more
than compensated for the very sluggish performance in industrial output.
Mexico’s economy Business activity in Mexico’s manufacturing sector started the year on a
positive note as the lead indicator for manufacturing  moved up to 51.5 in
firmed slightly in
January, above the 50-threshold that separates expansion from contraction
2015, growing 2.5%, driven by new business orders.44  Consumer confidence, however,
slipped to 92.5 in January from December’s 93, given the renewed bout
only marginally of oil price declines and global financial market volatility. Even though
the survey showed that consumers were still optimistic regarding their
bet ter than the personal current and financial situation, they were less optimistic about
the country’s near-term prospects. The peso has plunged against the dollar
2.1% rise in 2014. partly because of the sharp decrease in oil prices and was threatening
to spur inflation, which had remained low throughout 2015 to end the
Remit tances from year at 2.1 per cent. In mid-February, several measures were announced
Mexican workers to defend the currency, which according to authorities was below rates
warranted by the economic fundamentals.45 The measures included the
abroad rose 4.8% removal of daily dollar auctions, and US$7 billion in spending cuts by
the government particularly in state-owned oil companies. In addition
in 2015, suppor ting the central bank increased its overnight lending rate by 50 basis points
to 3.75 per cent. It is unlikely that a stronger rebound in GDP will
the economy’s materialise in 2016 as weak external demand, persistently low oil prices
and further government spending cuts are expected to hold back growth
expansion. this year. Argentina’s economy is likely to decelerate and experience
recession in 2016, as the economy slowly adjusts to the new government’s
radical austerity policies drastically curbing public expenditure and
reducing public sector employment. The government hopes to lower the
country’s fiscal deficit, now at 7.1 per cent of the GDP, by one percentage
point this year, while aiming at inflation between 20 and 25 per cent.
Moreover, external threats, such as the prolonged recession in Brazil and
low commodity prices, still cloud the country’s outlook.

Indian Financial Markets

The global economic outlook is weak and global financial
markets have been experiencing severe volatility in the new year. Major

44
The Markit Manufacturing Purchasing Managers’ Index (PMI)—showed that activity
continued to expand in January, although at a slower pace. The PMI edged down from 52.4 in
December to 52.2 in January. 
45
Mexico’s peso, the most-traded emerging-market currency, has repeatedly plunged to

158
new record lows this year. Traders often use the peso to hedge against other risks because it trades all
day, has high volume and is cheap to borrow, hence it ends up being more vulnerable to swings when
investors flee riskier assets.
economies like the US and the UK, which were seen to be leading global ICRA BULLETIN

recovery around mid-last year, have failed to sustain momentum. The

EU remains on a recovery path which is rather anaemic, with its largest
economy, Germany failing to pick-up enough steam, even as some of
the EU28 economies are still exhibiting robust growth. Latin America’s
prospects are bleak due to the problems in Brazil, along with Argentina APRIL 2016
and Venezuela, all experiencing contractions in output. Japan’s economy
is still weak and volatile, and recourse has been taken to negative interest
rates to stall deflationary pressures. The emerging Asian economies
have mostly moderated towards the end of the year with a slowdown The Indian economy
in domestic demand with fading policy stimulus. India, a major net oil
and commodity importer, continues to grow at the fastest pace among has been resilient
emerging economies.
in an environment
The Indian economy has been resilient in an environment of
slowing global growth and capital flow reversals amidst extreme market of slowing global
volatility, with GDP growth estimated to accelerate to 7.6 per cent (yoy)
in the current fiscal year ending in March.  GDP grew at a robust pace of grow th and capital
7.3 per cent in the third quarter of 2015-16, though slowing from the 7.7
per cent growth recorded in the second quarter. However, the figures also flow reversals amidst
reveal some underlying weaknesses in the economy. Investment growth
decelerated to the weakest in over a year, while exports witnessed the ex treme market
sharpest decline in more than four years despite currency depreciation,
and imports contracted by the most in two years.  A sharper contraction volatility, with GDP
in imports, as compared to exports added to GDP growth in the quarter, grow th estimated to
however, indicating sluggish domestic demand. Even as government
expenditure is being curtailed, the trend in expansion of GFCF, which accelerate to 7.6%
was expected to continue, failed to materialise.46 Private consumption
growth accelerated, but is likely to have been supported by festival season (yoy) in the current
demand, thus making it unlikely to be sustainable. The concern that the
fourth quarter domestic demand might be lower is also reinforced by an fiscal year ending in
8.5 per cent growth in inventories in the third quarter, indicating a rise
in unsold stocks. The lackluster growth in the core and manufacturing March.
sectors throughout the year, has given rise to some doubts about the
latest GDP numbers and projections, with manufacturing showing 12.6
per cent growth in the third quarter.47 Survey statistics indicate that the
Indian manufacturing sector climbed back into expansionary territory
in January, as industry recovered following the contraction seen at the
end of 2015. Alongside a resumption of output at some firms impacted
by December’s floods in Tamil Nadu, encouragingly manufacturers also
benefited from rising inflows of new business both through domestic and

46
The share of GFCF in GDP declined to 30.4 per cent in from over 32 per cent in the
previous two quarters.
47
The Index of Industrial Production (IIP) for November slipped to a four-year low of

159
-3.4 per cent (yoy) and IIP growth, for December, contracted 1.3 per cent. Industrial output data
further underscored that risk as capital goods production, a proxy for investments, fell nearly 20 per
cent in December. 
 ICRA BULLETIN export orders. In January, the services indicator too pointed to accelerated
expansion of activity across the sector.48 The Reserve Bank of India’s
(RBI’s) industrial outlook survey suggests a modest expansion of activity
likely in the fourth quarter. GDP growth projected by the RBI for 2015-
16 is at 7.4 per cent, however, with a downward bias, with headwinds
APRIL 2016
from still weak domestic private investment demand in a phase of balance
sheet adjustments, re-emergence of concerns relating to stalled projects,
excess capacity in industry, and sluggish external demand conditions
In January, the dampening export growth.

two measures of
Money, Credit and Debt Markets
inflation have shown The softening of retail as well as consumer price inflation in
India continued almost steadily till October. Thereafter the disinflationary
divergent trends, trend in the wholesale price index (WPI) continued, driven by further
deceleration in global commodity prices and lack of domestic demand
with WPI inflation at pressures. The rate of deceleration in WPI inflation came down in the
third quarter of 2015-16, from –3.8 per cent in October, to –2.0 per
-0.90%, decelerating
cent in November and further to -0.90 per cent in December, mostly
faster than expected, with the firming up of domestic food prices. Headline consumer price
index (CPI) inflation, moved up to 5 per cent in November, from 4.4
while CPI inflation per cent in October and quickened to 5.6 per cent in December.49 In
January, the two measures of inflation have shown divergent trends, with
at 5.7% continued WPI inflation at -0.90 per cent, decelerating faster than expected, while
CPI inflation at 5.7 per cent continued to firm up. This has led to calls
to firm up. This for the RBI to look at WPI inflation too while considering its monetary
policy decisions. However, even though inflation has remained within the
has led to calls for projected range, following a 125 basis points (bps) reduction in policy
rates previously in the year, in the policy review meet in December and
the RBI to look at
in the sixth and final bi-monthly monetary policy review of 2015-16, in
WPI inflation too early-February, the RBI kept its key policy interest rate unchanged to 6.75
per cent. Accordingly, all rates linked to the repo rate, namely, the reverse
while considering repo rate, the marginal standing facility (MSF) rate and the Bank rate,
stand unchanged. The RBI emphasised that while its stance will continue
its monetary policy to be accommodative, it would wait for the announcement of meaningful
structural reforms in the forthcoming Union Budget. Such measures
decisions. that boost growth while controlling spending will create more space for
expansionary monetary policy, while also ensuring that inflation remains
on the projected path of 5 per cent by the end of 2016-17.
Liquidity conditions mostly remained tight from October
to mid-February, despite the active liquidity management operations,

48
The Nikkei India Manufacturing PMI at a four-month high of 51.1 in January,
following December’s 49.1, pointed to an improvement in the health of the manufacturing sector.The
seasonally adjusted Nikkei Services Business Activity Index was at a 19-month high of 54.3 in January
up from 53.6 in December.

160 49
The pick-up was in large part due to a rise in food inflation, the result of delays in the
sowing of the rabi (winter) crop amid unusually warm temperatures in recent months.
under the revised framework adopted by the RBI more than a year ICRA BULLETIN

ago.50  Liquidity conditions tightened in October and November with

the festival season draining currency from the system and some slowdown
in government expenditure. In response, the RBI conducted variable
rate repo and reverse repo auctions of various tenors in addition to
regular 14-day variable rate repo. As a result, average net daily liquidity APRIL 2016
absorptions amounting to Rs. 119 billion in the second quarter gave
way to average daily net injection of Rs. 372 billion in October, through
the fixed rate repos under the liquidity adjustment facility (LAF), and The CMR averaged
variable rate term repo or reverse repo and MSF. This was scaled up to Rs.
856 billion in November and Rs. 1,200 billion in December, as liquidity at 7.79% in the first
conditions tightened further in the second half of December with advance
week of January,
tax outflows. The liquidity crunch was reflected in the money market
rates too, which fluctuated around the upper bound of the policy rate over 100 bps higher
corridor given by the repo rate between October and December, rising
slightly higher in the second week of November at the height of festival than the policy
currency demand.  The uncollateralised inter-bank call money rate
(CMR), which serves as the operating target of the RBI’s monetary policy, repo rate, reflecting
moved above the policy repo rate on several occasions since early October,
understandably after the 50 bps reduction of the rate in end-September ex tremely tight
(Chart F.1). A weekly average of CMR shows an over 30 bps jump
liquidity conditions.
between early- and mid-November, the average CMR, however, softened
by about 10 bps by end-December on significant liquidity injections by It was brought down
the central bank. However, the liquidity crunch intensified in January and
February, 2016, with money market rates shooting up on days. A seasonal by similar amounts
pick-up in demand for currency, restrained spending by the government
ahead of the Union Budget for 2016-17, and a pick-up in bank credit in the nex t week,
growth in relation to deposit mobilisation were contributing to tightening
liquidity during this period. In order to mitigate these conditions, the while a similar spike
RBI injected liquidity through variable rate term repos of varying tenors
ranging from overnight to 56 days, besides provision through the regular occurred again by
liquidity windows. The average daily liquidity injection, including
mid-February.
variable rate overnight and term repos, increased from Rs. 1,200 billion
in December to about Rs. 1,345 billion in January.51 The CMR averaged
at 7.79 per cent in the first week of January, over 100 bps higher than
the policy repo rate, reflecting extremely tight liquidity conditions. It was
brought down by similar amounts in the next week, while a similar spike
occurred again by mid-February. All other money market rates mostly
moved in close alignment with the CMR during the period.

50
Under this system, overnight variable rate repo/reverse repo auctions announced early
in the day give markets advance intimation of the RBI’s assessment of system-wide liquidity needs for
the day, allowing fine tuning of liquidity.
51
In addition, the RBI also injected Rs. 200 billion through open market purchase
operations on December 7 and January 20. 

161
 ICRA BULLETIN CHART F.1
CMR and RBI's Fixed Reverse Repo and Repo Rates (per cent)

APRIL 2016

Despite a policy

rate reduction in

end-September by

a sharp 50 bps,
Even though the RBI reduced the prevailing interest in late
shor t-term rates September, contrary to expectations, sovereign bond yields across the
maturity spectrum firmed somewhat between October and December,
remained unchanged followed by a mild softening recorded in January. The reduced possibility
of further rate decreases in course of the year combined with sluggish
in October, while demand from domestic investors like MFs kept rates sticky. Foreign
investors too made large disinvestments in the Indian secondary debt
moving upwards in market in November and December, with the imminent and actual
US Fed rate increase also reducing interest rate differentials in an
both November and environment of risk aversion. Despite a policy rate reduction in end-
September by a sharp 50 bps, short-term rates remained unchanged
December.
in October, while moving upwards in both November and December.
Yields to maturity (YTMs) from the secondary debt market (Charts
F.2-F.3) show that between October and December, the 3-month and the
6-month yields hardened by over 15 bps, over their September levels.
CHART F.2
CMR and T-bill Yields (per cent)

162
 CHART F.3 ICRA BULLETIN
Secondary Market Yields of Government Securities (per cent)

APRIL 2016

Yields almost

across the maturity

spectrum sof tened

in January possibly

taking cues from

global sovereign

bond yields which

were at record lows,

driven down by

greater expansionary
Yields for securities over three to seven years to maturity rose by
about 15 to 20 bps in the same period, while longer term yields hardened measures and
even more as the 10-year yield rose by about 55 bps and the 15-year yield
by 45 bps. Yields for securities with one year to maturity fell by 15 bps deeper negative
in December, after remaining unchanged in the two months following
RBI’s rate reduction. Yields almost across the maturity spectrum softened interest rates by
in January possibly taking cues from global sovereign bond yields which
were at record lows, driven down by greater expansionary measures and the central banks in
deeper negative interest rates by the central banks in Europe and Japan.52
Europe and Japan.
The 3-month, and the 1-year to 3-year yields declined by about 15 to 18
bps, the 5-year yield declined 10 bps while the 6-month yield fell by a
softer 5 bps from their December levels. The 7-year and 10-year yields,

52
In early-2016, an estimated US$7 trillion of government debt with yields below zero
exists globally, with the average yield on the Bank of America Merrill Lynch World Sovereign Bond
Index at 1.29 per cent, the lowest in the series going back to 2005. Treasury bond prices gained about
3.4 per cent in 2016 so far till mid-February, the most in the same period during any year since 1988,
while demand is at low seen in 2009.

163
 ICRA BULLETIN which had firmed in last three months of 2015, reversed and fell by a
sharper 30 and 60 bps respectively, while the 12-year and 15-year yields
remained unchanged. A renewed demand from foreign investors with
the ebbing of uncertainties regarding the Fed rate increase, also led to a
firming up of bond prices and thus a fall in yields. Indian government
APRIL 2016 bond yields have again jumped since early February, with rising inflation
and higher inflation expectations as the benefits of the Seventh Pay
Commission would add to demand, and the possibility of higher supply
The trends in the of bonds to meet government financing needs to boost the banking
and infrastructure sectors, amongst others. A sense of uncertainty about
currency markets
future rate cuts as the RBI links them to the consumer price inflation
between October and the government’s success in keeping the fiscal deficit under control,
has contributed to higher YTMs. With WPI inflation rising slowly since
and February were August from -5 per cent to about -1 per cent by January, and yields
remaining sticky, the large gap between nominal yields and wholesale
dominated by the inflation has reduced somewhat in the past few months (Chart F.4).

relative strength CHART F.4

Government Bond Yields and WPI Inflation (per cent)

of the advanced

economy currencies,

China’s continued

devaluation of the

yuan, depreciating

currencies of

commodity

dependent EMEs, Foreign Exchange Market

The trends in the currency markets between October and
and fluctuations February were dominated by the relative strength of the advanced
economy currencies, China’s continued devaluation of the yuan,
caused by changing depreciating currencies of commodity dependent EMEs, and fluctuations
caused by changing risk perceptions. The US dollar mostly continued
risk perceptions. to gain strength with stronger US economic performance compared to
the rest of the world, together with the prospect and the materialisation
of a US policy reversal making investment in dollar denominated assets
more profitable. The depreciation in EME exchange rates accelerated,
with further declines in currencies of commodity exporters with a fresh

164
slide in global commodity prices, and was accentuated by capital flight.53 ICRA BULLETIN

In addition, the search for safer options by an increasingly larger number

of global investors, on clouding prospects in emerging markets and
mounting concerns regarding the health of the global economy and the
role of monetary policy, in the absence of significant fiscal stimulus, as
well as increasing geo-political tensions have led to further appreciation of APRIL 2016
safe-haven currencies. The dollar benefited for most of the past two years
from the perception that the Federal Reserve would raise interest rates
which it eventually did in December. However, the Fed’s dovish outlook, Despite the steady
which has put doubts on any further rate increases in the immediate
future, also led to dollar depreciation against currencies like the Swiss depreciation
franc, the euro and the Japanese yen, particularly in February.
witnessed over
Even as the US Fed rate increase in September was postponed,
the RBI’s rate reduction in end-September augured well for the revival of the past year, the
investment demand and growth. Consequently, there was a steady inflow
of net foreign investments to the Indian market in October, leading INR has fared
to an appreciation of the Indian rupee (INR) against the US dollar.
The INR, which had averaged 65.87 in the closing week of September, relatively bet ter
averaged at 65.18 in the first week of October, 64.93 in the second week
and 64.84 in the third week, before falling to 65.09 in the last week compared with most
of the month (Charts F.5.1-5.2). The INR-US$ exchange rate mostly
EME currencies
remained on a steady depreciating trend since then, as the INR slipped to
average around Rs. 66.3 to the dollar in the second week of November, in 2015. Among
and continued to decline in tandem with falling FPI flows, as there was
significant reversal of flows starting November. After falling to Rs. 66.6 key emerging
to the dollar in end-November, the INR held steady around that level till
mid-December, when it rose to around 66.8, mostly driven by year-end markets and Asian
dollar demand from importers and continued FPI withdrawals from the
Indian equity and debt markets post the US Fed rate increase. However, neighbours, the
as the Fed rate increase did not have any immediate adverse impact on
global equity markets, with some amount of dollar sales by exporters, the Indian currency has
INR‘s exchange rate firmed up marginally towards the end of December
depreciated the least
to around Rs. 66.3 to the dollar in the final two weeks of 2015. Despite
the steady depreciation witnessed over the past year, the INR has fared between end-2014
relatively better compared with most EME currencies in 2015. Among
key emerging markets and Asian neighbours, the Indian currency has and end-2015.

53
Over the past two years, a net of more than US$846 billion has exited emerging
markets , according to an estimate from the Institute of International Finance (IIF).Between 2010
and 2014, an average of US$1.2 trillion worth of foreign private capital flowed into emerging markets
each year, according to the IIF. In 2014, these countries collectively saw their first net cash outflows
since 1988.

165
 ICRA BULLETIN depreciated the least between end-2014 and end-2015.54
CHART F. 5.1
Spot Rates (Rupees per US Dollar and Euro)

APRIL 2016

Af ter beginning 2016

at around

Rs. 66.3 to the

dollar, the INR

slipped to average
CHART F. 5.2
Rs. 67.7 by Spot Rates (Rupees per UK Pound and 100 Yen)

mid-January, and

averaged at 68.06

in the last week of

the month, with

the exchange rate

breaching the 68

mark for the first

Since the beginning of 2016, however, with the global economic
time since the outlook worsening and with persistent capital outflows, the Indian rupee,
like many major EME currencies, has declined significantly against
currency turmoil in the US dollar. In early January, the INR depreciated further, though
strengthening on occasions, with FPI inflows to the debt market resuming
August 2013. after a gap of two months. Volatile currency market sentiment across
Asia following a fresh round of China’s yuan depreciation further added
to the volatility of the INR, however, the dollar’s weakness in this period

54
The INR depreciated by 4.2 per cent as against China’s renminbi falling by 4.3 per
cent, South Korean won declining by 6.6 per cent, Thailand’s Baht by 9.4 per cent, Indonesia’s rupiah
by 10.4 per cent and the Malaysian ringgit by 22.6 per cent. Due to its macroeconomic conditions,
Brazil’s real had depreciated steeply by 43.9 per cent, while the euro has declined by 13.6 per cent to
the US dollar. Relative performance for currencies is often measured via the carry trade (i.e., selling

166
a currency that yields a lower interest rate and using the proceeds to purchase a higher-yielding
currency).In 2015, the INR and its associated interest rates outperformed all EME currencies from a
risk-adjusted basis when compared against the US dollar.
has softened the fall of the INR.55 The fresh financial market turmoil ICRA BULLETIN

originating again from China also added to FPI outflows from EMEs,
including India. After beginning 2016 at around Rs. 66.3 to the dollar,
the INR slipped to average Rs. 67.7 by mid-January, and averaged at
68.06 in the last week of the month, with the exchange rate breaching
the 68 mark for the first time since the currency turmoil in August 2013. APRIL 2016
After recovering marginally on RBI intervention and averaging at a
slightly higher Rs. 67.9 in the first week of February the INR averaged
at Rs. 68.06 in the second week of the month, with another bout of Forward premia
equity market outflows amidst a global turmoil. Part of the reason for
this sustained, even if gradual, depreciation of the Indian currency was had been mostly
that the central bank has not been as aggressive in its intervention. RBI
sof tening
reiterated that its stated policy is not to manage currency risk, and a
sharp fall in the rupee despite its active intervention to manage volatility with currency
remains a possibility. Aggressive defence of the currency is also not
warranted as, despite the INR’s continuous depreciation against the US depreciation till the
dollar, it has appreciated against several EME currencies and those of
trading partners, leading to a loss of competitive edge for the country’s end of 2015, with
exports.56
The Indian currency also mostly appreciated against the pound the knowledge that
and the euro till end-October, in line with its movement against the US
the central bank
dollar, and consequent on strong FPI inflows. From November, the rupee
started depreciating against these currencies, with sustained outflows is allowing for a
from emerging markets lowering the value of the INR. With the euro
and the yen strengthening significantly since mid-December post the Fed cer tain amount of
rate increase, the rupee depreciated sharply against the euro and yen till
mid-February. However, as the UK pound depreciated with concerns of depreciation of the
its exit from the EU, the rupee appreciated against the pound during the
period. From a weekly average of 71.7 against the euro and 54 against the INR. Premia have,
yen in end-October, the exchange rate depreciated to average 76.5 and
59.6, respectively, against these major currencies by mid-February. After however hardened
averaging 99.4 to the pound in early-October, the exchange depreciated
considerably post
to average 101.9 by the third week of December, but has climbed back
to 99.7 by mid-February, given the weakness of the UK pound. Forward the Chinese market
premia had been mostly softening with currency depreciation till the end
of 2015, with the knowledge that the central bank is allowing for a certain led volatility in early
amount of depreciation of the INR. Premia have, however hardened
January.
55
Given the market’s lack of faith in the Federal Reserve’s forecast for four interest rate
rises this year, investors are unsure of how to value the dollar, and shifted to currencies like the Swiss
franc and the yen. The yen and Swiss franc perform well in times of financial turmoil since they are
often used to fund trades of more risky assets because of their low interest rates. When investors
reverse those risky bets, they buy back those currencies. The dollar fell to its lowest against the yen
since November 2014, having fallen more than 5.0 per cent against the currency since the start of
February.
56
On a 36-currency basis, the real effective exchange rate (REER) for the rupee was at

167
115.23 for export-based weights, while on trade based weight, the REER was at 112.88. The value
has climbed up steadily in the past few years. In 2013-14, the export-based REER was at 105.48,
which climbed to 111.24 in 2014-15.
 ICRA BULLETIN considerably post the Chinese market led volatility in early January. The
3-month premia for all major currencies came down by 45 to 70 bps
between late-September and end-December, but has again increased by
about 60 bps by mid-February (Charts F.5.3-5.4).
CHART F.5.3
APRIL 2016 Annualised Premia for the US Dollar and Euro (3 Month, per cent)

The Fed rate rise has

led to exacerbation of

financing problems

par ticularly of

emerging markets.

EMEs are facing

even tighter liquidity

conditions due to CHART F.5.4

Annualised Premia for the UK Pound and Yen (3 Month, per cent)

capital flow reversals

given their worsening

economic prospects

together with a sharp

depreciation of the

local currencies

and significant

challenges of Global and Indian Capital Markets

repayment of dollar Even before the effects of last year’s stock market meltdown faded
out, the global and Indian capital markets have been subjected to severe
denominated debt. volatility again in the first few weeks of this year. Along with the renewed
problems in China’s stock markets and those of European banks, financial
market volatility was induced by the realignment of resources consequent
on policy actions of monetary authorities. The first move towards the
normalisation of the US policy rates with a 25 basis point increase in
mid-December was well accepted by global investors, with the major

168
indices advancing by up to 3 per cent intraday post the announcements. ICRA BULLETIN

However, the Fed rate rise has led to exacerbation of financing problems
particularly of emerging markets. EMEs are facing even tighter liquidity
conditions due to capital flow reversals given their worsening economic
prospects together with a sharp depreciation of the local currencies and
significant challenges of repayment of dollar denominated debt. Cross- APRIL 2016
border lending to emerging economies, like China, already declined in the
third quarter of 2015 and US dollar borrowing by non-bank companies
in those economies was flat for the first time since 2009, according to the In December,
Bank for International Settlements (BIS).57 Further, the strengthening of
the US dollar has led to subsequent need for deleveraging by emerging though the Fed rate
market debtors. Companies were attracted to a relatively weak US dollar
increase had an
and low interest rates since 2009 and 1 per cent depreciation of the dollar
has been associated with a 0.6 percentage point increase in the quarterly immediate positive
growth of dollar-denominated cross-border lending, according to BIS
estimates. With profitability of these firms also persistently declining at ef fect on stock
a time when global liquidity is shrinking, the challenges of deleveraging
would add to the stress. On the other hand, expansionary monetary markets, global
policy with negative interest rates by the EU and Japan is also exerting
pressure on the profitability of banks, as they are neither able to park markets lost ground
funds with their central banks, nor invest in government debt without
with the MSCI
paying a fee, nor are they able to impose negative rates on their retail
deposits, in an environment where the demand for high quality loans World Index returns
is not yet strong. The situation is particularly bad for some of these
banks, which are yet to clean up their balance sheets and are stranded declining by -1.9%
with non-performing loans. Banking sector outlook and the financial
market outlook in general is also affected by the fact that dependence mom. The Sensex
on monetary policy alone is not having the desired effect on growth and
corporate profitability. fell marginally,
Indian equity markets moved very much in tandem with global
markets between October and December, 2015, remaining relatively while the Nif ty
stable as effects of the August 24 crash receded. During October, stock
rose marginally to
markets across the globe recorded a sharp recovery with the expectation
of additional monetary easing from the ECB, more confidence from the close at 26,117.54
US Fed’s remarks and the announcement of further stimulus in China.
The Indian markets stabilised gradually after the turmoil in July and and 7,946.35
August, and steadily moved up throughout October, as foreign portfolio
investor (FPI) flows to the market resumed. During October the respectively on
benchmark indices, the S&P BSE Sensex and the CNX Nifty jumped
by 1.9 and 1.5 per cent to close the month at 26,656.8 and 8,065.8 December 31, 2015.
respectively (Chart F.6).

57
Liquidity conditions for emerging markets may have peaked as seen from a decline in
cross-border lending to China, Brazil, India, Russia and South Africa. In the third quarter of last year
lending shrank by US$38 billion to US$824 billion from the second quarter.

169
 ICRA BULLETIN CHART F.6
Movement in Indian Stock Indices

APRIL 2016

Indian equity indices

skid to their lowest

levels in 21 months

in mid-February as
Sensex and Nifty in the month touched their respective intraday
overseas market
highs of 27,618.1 and 8336.3 on October 26, rising from the intraday
volatility and low of 26,168.7 and 7930.6, respectively on the first of the month.
Global equity markets remained lacklustre in November with the MSCI
deepening concerns World Index returns for the month in the negative at -0.7 per cent.
Market focus was back on the prospect of a US rate rise ahead of FOMC
over the health of meeting on December 16. Euro area equity markets outperformed other
regions, with the expectations of further easing. The Indian markets saw
Indian public sector another downturn with volatile and mostly negative foreign equity flows.
The Sensex and Nifty fell by 1.9 and 1.6 per cent to close at 26,145.7 and
banks prompted a
7,935.3 respectively in end-November. Sensex and Nifty touched their
sharp sell-of f by respective intraday highs of 26,824.3 and 8336.3 in beginning of the
month. Sensex touched intraday low of 25,451.4 and Nifty at 7714.2 in
investors. mid-November, while the indices stabilised towards the end of the month,
with steady support from domestic buyers like MFs. In December,
though the Fed rate increase, in fact had an immediate positive effect on
stock markets, global markets lost ground in the month, with the MSCI
World Index returns declining by -1.9 per cent (mom). The Sensex fell
marginally, while the Nifty rose marginally to close at 26,117.54 and
7,946.35 respectively on December 31, 2015. Sensex and Nifty touched
their respective intraday highs of 26,169.4 and 7954.9 on first day of
the month. Sensex touched intraday low of 25,036 and Nifty at 7610.4
on December 09, and December 11, respectively, giving an idea about
the volatility in stock price movements, particularly prior to the FOMC
meeting. Reflecting the downward trend in market movements, the
market capitalisation of BSE and NSE fell to Rs. 1,00,377.34 billion and
Rs. 98,316.58 billion, respectively, at the end of December 2015 from
Rs. 1,01,492.9 billion and Rs. 99,301.2 billion, respectively, at the end of
the financial year 2014-15.

170
 Fresh turbulence from China led to a resurgence of risk ICRA BULLETIN

aversion in global markets in the new year. A stock index circuit breaker
introduced in the beginning of January to limit stock market losses, and
aimed at bringing calm to volatile trading in China’s stock markets, was
deactivated after four days of use because it probably exacerbated a sharp
selloff due to a faulty design.58 This along with another crash in already APRIL 2016
persistently low oil prices taking it to below US$30 to the barrel, has led
to sustained downtrend in global equity markets till mid-February amidst
immense volatility. By mid-January 2016, European shares recorded A weakening
extended losses, with the FTSEurofirst 300 index of top regional shares
closing at its lowest level since October 2013. In end-January, Japanese economic outlook
stocks declined sharply with the Nikkei225 sliding by over 2.5 per cent
par ticularly for
intraday in response to the BoJ’s announcement to introduce a negative
interest rate policy. During January, the Indian market too weakened emerging markets,
persistently, with the Sensex slipping by over 1200 points from 26160.9
in the beginning of the month to end the month at 24870.7, while the strengthening
Nifty fell from 7963.2 to 7563.6 in end-January. Investors risk aversion
intensified further in the first fortnight of February, with gold reaching of US dollar and
its highest value in more than a year and 10-year US Treasury yields
to levels not seen since mid-2012, while the yen, another safe-haven interest rates with
currency appreciated. Further evidence of the central banks’ concerns
the anticipated rate
about the world economic outlook came from the Swedish Riksbank’s
decision to reduce interest rates more aggressively than expected, taking increase by the US
the repurchase rate even deeper into negative territory. European stocks
fell over 3 per cent intraday to a 2-1/2 year low with bank stocks falling Fed taking ef fect,
by 6 per cent. The broad based STOXX Europe 600 index59 lost more
than 15 per cent in the year to mid-February on concerns about banks’ and a flight to safe-
profitability and resilience in an environment where monetary stimulus
continues to put pressure on margins. A gauge of global equities the haven assets in
Nasdaq Composite Index edged nearer to a bear market, defined as a
decline of 20 per cent from the last peak, while the Standard & Poor’s 500 general, has slowed
Index traded at the lowest since April 2014. Indian equity indices skid
FPI flows to both the
to their lowest levels in 21 months in mid-February as overseas market
volatility and deepening concerns over the health of Indian public sector Indian equity and

debt markets.
58
The primary reason behind this crash was attributed to the regulatory ban, announced
by China during July-August 2015 crash. China had restricted major shareholders and directors with
holding exceeding 5 per cent in a single stock from selling shares in the market for next six months.
This six month lock-in period was set to expire on January 8, 2016. This might have spurred investor
to sell their holding in anticipation of selling by promoters and directors. Considering the market
sentiments, regulators reviewed their policy and announced extension of the ban on selling shares by
major shareholders by another 3 months. In order to avoid mass selling while giving exit option to
promoters/directors, Chinese regulators have now allowed them to sell a maximum of 1 per cent of
company shares every 3 months.
59
With a fixed number of 600 components, the STOXX Europe 600 Index represents
large, mid and small capitalisation companies across 18 countries of Europe.

171
 ICRA BULLETIN banks (PSBs) prompted a sharp sell-off by investors.60 On February 12,
the Sensex fell 807.07 points, or 3.4 per cent intraday, to 22,951.83,
its lowest close since 8 May, 2014.61 The Nifty also slipped below the
7,000-mark and closed 239.35 points, or 3.32 per cent, lower at 6,976.35
points, its lowest close since 9 May 2014. Both the indices posted their
APRIL 2016
steepest intra-day decline since August 24. In line with global markets
volatility also has been at record highs; while the CBOE VIX volatility
index, the so-called equity fear gauge for global markets, was above 28 its
Financial highest close since September, NSE’s India VIX, volatility index, rose to
a 21 month high of 26.87. So far this year, 463 of BSE 500 stocks have
per formance of declined indicating widespread selling in the Indian markets, while 27 of
Indian companies 30 Sensex stocks and 44 of 50 Nifty stocks have seen declines in the year
to mid-February.
have worsened The sharp volatility in global financial markets, set off in early
July by the crisis in China, the ensuing change in risk perceptions for
in the December EMEs’ equity, a weakening economic outlook particularly for emerging
markets, strengthening of US dollar and interest rates with the anticipated
quar ter, mainly rate increase by the US Fed taking effect, and a flight to safe-haven assets
in general, has slowed FPI flows to both the Indian equity and debt
driven down by markets. Net FPI flows, which had turned negative, picked up in October
after a gap of almost 5 months, to Rs. 223.5 billion, with investments
the banking sector
worth Rs. 66.5 billion in equity and Rs. 157 billion in debt (Chart F.7).
and to an ex tent FPI flows, however, again turned negative from November, falling by
Rs. 108.3 billion as both equity and debt markets witnessed outflows to
by the commodity the tune of Rs. 70.7 billion and Rs. 37.5 billion, respectively. December’s
FPI outflow was at Rs. 83 billion, with Rs. 28.2 billion in equity and
producing sector and Rs. 54.9 billion worth debt outflows. In January 2016, overall FPI
outflow was at Rs. 88 billion, with equity outflows accelerating sharply to
infrastructure and Rs. 111.3 billion; however, net debt inflows to the Indian market picked
up to Rs. 23.3 billion. Till mid-February, FPI outflow from the Indian
construction as well. markets was at Rs. 23.8 billion, with equity outflows worth Rs. 22.9
billion and debt outflows of Rs. 0.8 billion. Amidst the global financial
market turmoil, FPIs have sold a net of Rs. 134.2 billion (about US$2
billion) of Indian stocks 2016. Mutual Fund (MF) investments in the
Indian debt and equity markets improved marginally in the last quarter
of year 2015, after skidding since the stock market problems in July. The
total net investments in the secondary market by MFs improved from Rs.
279.5 billion in October, to Rs. 373.9 billion in November, and further

60
Prices 17 of the 24 listed PSBs banks fell to 52-week lows. The BSE Bankex dropped to
its lowest level since May 2014, driven down by the deterioration in earnings followed a RBI directive
asking banks to classify visibly stressed assets as non-performing and increase provisions against such
assets. Between January 1 and February 11, the Sensex had declined by 12 per cent and the BSE
banking index has witnessed a 18 per cent fall. Some of the large public sector banks had lost much
more than the index. Share prices of State Bank of India and Punjab National Bank have fallen by 32

172
per cent and 35 per cent, respectively, during this period.
61
On 29 January 2015, Sensex had closed at an all-time high of 29,681.77 points, and
since then, it has fallen 22.67 per cent.
to Rs. 437.1 billion in December, but remained far below the Rs. 812.4 ICRA BULLETIN

billion in achieved in June. However, much of the recovery was in debt

flows, which rose from Rs. 250.1 billion in October, to Rs. 308.4 billion
in November, and further to Rs. 391.6 billion in December. MFs’ equity
investments remained subdued at Rs. 29.4 billion in October, Rs. 65.5
billion in November, and Rs. 45.4 billion in December. In January when APRIL 2016
there were increasingly large FPI outflows from the Indian equity markets,
MFs supported the markets with a net investment of Rs. 67 billion,
their total net investment, however, dwindled in the month to Rs. 133.1 Given the financial
billion as their debt market investment fell to Rs. 66.1 billion. MF’s net
investment remained positive in February, with Rs. 20.4 billion invested stress of non-
in equity markets and Rs. 71.9 billion in debt markets till mid-month. financial companies,
CHART F.7
FPI and MF Stock Market Investments (Net, Rs. billion) the banking sector

in general and public

sector banks in

par ticular, are facing

problems of steadily

rising NPAs.

Financial performance of Indian companies have worsened in

the December quarter, mainly driven down by the banking sector and
to an extent by the commodity producing sector and infrastructure and
construction as well. Net sales and profits after tax (PAT) were down,
and operating profits stagnated for a sample of 2,561 companies, even
173
 ICRA BULLETIN computed on a low base of last year’s falling numbers.62 The overall
decline in net profits is due to the financial sector which has seen profits
fall by an extraordinary 40 per cent, mainly because PSU banks have been
impacted by higher provisioning for their non-performing assets (NPAs).
Encouragingly, power, information technology services, pharmaceuticals
APRIL 2016
and automobiles were the biggest contributors to corporate profitability
and growth during the quarter. The worst laggards were understandably
those in metals, mining, construction, infrastructure and capital goods
Since most of the sectors, with low prices hurting commodity producers despite falling raw
materials and energy costs, and an overall lack of demand weighing on
banks have taken the rest. While interest costs of Indian companies have inched down in
the December quarter, their debt servicing ability has also declined, with
up 50% of the RBI
slowing revenues. Interest coverage ratios (ICR) or the ratios of operating
mandated bad loan profits to interest costs were seen to be flat in the quarter, and the
percentage of firms reporting the most stress, with ICR less than 1, were
classification in the on the rise with metal firms accounting for an increasing share. Also, the
share of chronically-stressed firms, or those with ICR less than 1 for four
December quar ter, of the past eight quarters, rose significantly. Earnings of most metal firms
declined during the quarter as along with crude oil the global crash has
it has shown up as also pushed prices of commodities like iron and steel to multi-year lows.63
The infrastructure sector also faced problems, as some firms were highly
large losses on their
leveraged, and projects were yet to gain traction. While the recovery in
financial results metals is a function of revival of global economy and a slowdown of
cheap imports from China, the recovery of infrastructure, capital goods
explaining the slide and construction industries is expected to start with a lag with increased
government facilitation of these sectors. The depreciating rupee has added
in Indian stock to the problems of firms with foreign currency loans.
Given the financial stress of non-financial companies, the
markets driven by banking sector in general and public sector banks (PSBs) in particular,
are facing problems of steadily rising NPAs. It is difficult to reconcile
the banking sector India’s strong growth figures with rising NPAs and points to a disbalance
in loan allocation to certain sectors. Existing loans increasingly need to
index.
be written down significantly given the inability to pay back because of
various circumstances including extensive project delays, cost overruns,
overcapacity, and overoptimistic demand projections, apart from some

62
Financial results of 2,561 companies including those in energy and financial sectors,
show that net sales have dropped by 4.4 per cent year-on year (y-o-y) while total income has dropped
by 0.1 per cent y-o-y. Operating profits (profits before interest, depreciation, amortisation and taxes,
or PBDIT) have grown just 0.9 per cent. Net profits (Profits After Tax or PAT) have shrunk 1.7 per
cent. These results are computed upon a low base. Net profits in the corresponding quarter last year
for the same sample fell by 11.4 per cent y-o-y, while sales grew only 1.5 per cent. Net sales for 2,100
ex-energy and ex-financial sector companies have expanded 0.7 per cent, the slowest growth in three
years, while PAT is up by 3.3 per cent.

174
63
Reflecting the financial performance of the steelmakers’ Indian operations alone,
Hindalco Industries Ltd’s net profit fell 89 per cent in the December quarter because of lower price
realization, while Tata Steel Ltd posted a loss of 48.7 per cent.
cases of wilful default.64 The RBI has introduced the Asset Quality Review ICRA BULLETIN

(AQR) to ensure that banks are taking proactive steps to clean up their
balance sheets, with the intent to have clean and fully provisioned bank
balance sheets by March 2017. The AQR identified loans that were of
concern, as well as, loans that had potential weaknesses but do not classify
as NPAs, and banks were to make additional provisions for them in the APRIL 2016
final two quarters of 2015-16. Since most of the banks have taken up 50
per cent of the RBI mandated bad loan classification in the December
quarter, it has shown up as large losses on their financial results explaining The ex treme
the slide in Indian stock markets driven by the banking sector index. For
30 of the 39 listed banks that have reported third-quarter earnings so volatility and
far, gross NPAs have risen 26 per cent between the September and the
reversal of FPI flows
December quarters; provisions have surged 74 per cent and aggregate
net profit has dropped 42 per cent.65 However, the RBI has assured that in recent times, and
while the profitability of some banks may be impaired in the short run,
the system, once cleaned, will be able to support economic growth in a the slowdown in
sustainable and profitable way.66
Indian companies have been more reliant on domestic resources ability to service
for their funding requirements this fiscal, given the higher borrowing
costs abroad with a rising US dollar and imminent possibility of the US foreign loans with
rate increase. Primary issuances of securities have improved significantly,
significant rupee
in line with the relatively stronger fundamentals of the Indian economy.
During 2015-16 so far (till end-December, 2015), 71 companies have depreciation, has
accessed the capital market and raised Rs. 516 billion, compared with Rs.
115.6 billion from 61 issues during the corresponding period of 2014- given fresh impetus
15. Despite volatile secondary market conditions, there were 59 issues
which mopped up Rs. 208.9 billion worth equity compared with Rs. 42.3 to reforms aimed
billion via 44 issues during the corresponding period of 2014-15. Indian
capital markets regulation, on the other hand, has kept pace with the at the facilitation of
requirements of changing business environment by, among other things,
creating a special platform for enabling the start-up companies to access foreign investment
the capital markets. The assets under management (AUM) of MFs during
flows and also
April-December 2015-16 have grown to Rs. 12,748.4 billion from
Rs. 9,747.2 billion recorded in April December of 2014-15. During the easing of the
April-December 2015-16, the net amount raised by all MFs was
Rs. 1,616.96 billion, of which, debt funds accounted for 43.6 per cent, ex ternal commercial

64
borrowing (ECB)
A loan is classified as an NPA if an instalment remains unpaid for 90 days. Gross
NPAs plus written off assets and restructured assets accounted for 14.1 per cent of total bank loans
as on September 2015, against 13.6 per cent in March 2015. However, as of September, for PSBs, regulations.
the total stress (gross NPA plus written off assets plus restructured assets) was at 17 per cent of total
loans, increasing from 16.1 per cent in March. For private banks, the number was at 6.7 per cent. The
medium industries showed the highest stress, with 31.5 per cent of its loans being stressed while 23.7
per cent of loans to large industries were stressed.
65
With the nation’s largest lender, State Bank of India’s net profit plunging by 62 per cent
(yoy), while Punjab national Bank reported a 93 per cent decline in net profits.

175
66
Additional support from the Government is also expected. The government had
announced a revamp plan to infuse Rs.700 billion in PSBs over four years.
 ICRA BULLETIN followed by growth/equity funds with 43.3 per cent share. FDI to India
witnessed an increase of 35 per cent and reached US$33.5 billion during
April-December, 2015 as compared to US$24.8 billion in the same
period last fiscal. The extreme volatility and reversal of FPI flows in recent
times, and the slowdown in ability to service foreign loans with significant
APRIL 2016
rupee depreciation, has given fresh impetus to reforms aimed at the
facilitation of foreign investment flows and also the easing of the external
commercial borrowing (ECB) regulations.
The government Foreign direct investment (FDI) is a major source of long-term
non-debt financial resource for economic growth, as foreign companies
has recently invest in India to take advantage of relatively lower wages, special
investment privileges such as tax exemptions, etc. The government
announced major
has recently announced major reforms, easing FDI norms across 15
reforms, easing FDI sectors including defence, banking, construction, single brand retail,
broadcasting and civil aviation. For faster approvals, the government has
norms across 15 raised the threshold limit of approval by Foreign Investment Promotion
Board (FIPB) from the earlier Rs. 30 billion to Rs. 50 billion.67 In the
sectors including defence sector, foreign investment up to 49 per cent has been allowed
under automatic route from the earlier government approved route, while
defence, banking, proposals in excess of 49 per cent will be considered by FIPB. Further,
FPI and foreign venture capital investment, which were restricted to 24
construction,
per cent, have now been hiked to 49 per cent and channelled through the
single brand retail, automatic route. The amended policy for the construction sector includes
easing of area restriction norms, reduction of minimum capitalisation
broadcasting and and easy exit norms. Foreign investors can exit and repatriate investments
before a project is completed, but with a lock-in of three years. Further,
civil aviation. For in order to provide boost to low cost affordable housing, conditions
of area restriction and minimum capitalisation will not apply to cases
faster approvals, committing 30 per cent of the project cost towards affordable housing.
Banks are allowed FDI investment up to 74 per cent. The government has
the government has also raised FDI cap in insurance from 26 per cent to 49 per. Moreover,
these limits are composite and fungible in nature as they include
raised the threshold
foreign investment in the form of foreign portfolio investment, foreign
limit of approval by institutional investment, qualified foreign investment and foreign venture
capital investment. The government has also relaxed the FDI policy
FIPB from the earlier norms for Non-Resident Indians (NRIs). Under this, the non-repatriable
investments made by the Persons of Indian Origin (PIOs), Overseas
Rs. 30 billion to Citizens of India (OCI) and NRIs will be treated as domestic investments
and will not be subject to FDI caps.
Rs. 50 billion. To augment the liberalisation of FDI caps in a host of sectors,
a revised ECB framework has been finalised, which includes: (i) a more
liberal approach, with fewer restrictions on end uses, higher all-in-cost
ceiling, etc. for long term foreign currency borrowings as the extended

176
67
As per the extant policy, FIPB considers foreign investment proposals of inflow up to
Rs. 30 billion and those above that limit are placed for consideration of the Cabinet Committee on
Economic Affairs.
term makes repayments more sustainable and also minimises roll-over ICRA BULLETIN

risks for the borrower; (ii) a more liberal regime for INR denominated
ECBs where the currency risk is borne by the lender; (iii) expansion
of the list of overseas lenders to include long-term lenders, such as,
Insurance Companies, Pension Funds, Sovereign Wealth Funds; (iv)
only a small negative list of end-use restrictions applicable in case of APRIL 2016
long-term ECB and INR denominated ECB; and (v) alignment of the
list of infrastructure entities eligible for ECB with the Harmonised List
of the Government of India. The measures will include allowing leeway The budget with
for borrowers to raise capital in a larger basket of currencies, against an
over-reliance on dollar-denominated loans so far, and a larger window for a much needed
exposure to the real estate sector.
emphasis on the
The government’s Union Budget for the fiscal 2016-17 has a
number of announcements, which could, if implemented effectively, agricultural and
augment the real and financial sectors of the economy. Stability has
been maintained in tax rates and structures, with some benefits to social sectors is
smaller individual and corporate tax payers, and an orientation towards
domestic manufacturing, as well as rationalisation and simplification. a step forward in
The budget with a much needed emphasis on the agricultural and social
sectors is a step forward in addressing some of the supply-side issues in addressing some
agriculture and in skilled manpower,68 at the same time this would also
of the supply-side
help in demand generation from the rural sector and weaker sections
of the economy. A consolidated set of proposals for the housing sector issues in agriculture
should help the sector clear some inventory and augment demand
for downstream sectors. The infrastructure sector not only has a high and in skilled
allocation but also high priority accorded to public-private partnerships,
including introduction of a bill for dispute resolution, renegotiation manpower, at the
of concession agreements, and a new credit rating system which gives
emphasis to various in-built credit enhancement structures aimed same time this would
at alleviating problems of mispriced loans. Financial sector reforms
proposed earlier have been taken forward in the budget and are mostly also help in demand
aimed at broadening the product and investor base, as well as providing
generation from
transparency, dispute resolution and exit routes. The scope of foreign
investment has been further broadened,69 while retail participation in the the rural sector and
government securities market, deepening of the corporate debt market,
weaker sections of
68
This includes proposals for irrigation, electrification, e-marketing of produce along
with amendments to the Agricultural Produce Market Committee (APMC) Acts, agricultural credit the economy.
and interest subvention, crop insurance, increased warehousing facilities amongst others. There are
also measures for affordable healthcare and health insurance, skill, education and entrepreneurship
development and job creation.
69
FDI to be allowed in insurance and pension sectors up to 49 per cent under the
automatic route, 100 per cent in ARCs under the automatic route and 100 per cent through the
FIPB route in marketing of food products produced and manufactured in India. FPIs are allowed
to invest up to 100 per cent of each tranche in securities receipts issued by ARCs subject to sectoral
caps. Investment limit for foreign entities on Indian stock exchanges is to be enhanced from 5 to
15 per cent on par with domestic institutions. Limit for investment by FPIs in central public sector

177
enterprises (other than banks) listed in stock exchanges to be increased to 49 per cent from 24 per
cent. Basket of eligible FDI instruments is to be expanded to include hybrid instruments subject to
certain conditions.
 ICRA BULLETIN and the introduction of more products in the commodity derivatives
market have been envisaged. A specialised resolution mechanism to deal
with bankruptcy situations in banks, insurance companies and financial
sector entities has been proposed. Various steps announced for stressed
assets and strengthening asset reconstruction companies (ARCs), which
APRIL 2016
include permissions for 100 per cent FDI and sponsor ownership on
ARCs, would also help to unclog investment bottlenecks. The fiscal
deficit target is being adhered to; this lends credibility to country’s fiscal
Various steps consolidation efforts and improves the prospects for better sovereign
ratings. This would help capital flows and the depreciating currency, and
announced for also allow for more expansionary monetary policy to counter sluggishness
in private sector demand.
stressed assets
Overall, India’s external environment has deteriorated further
and strengthening with increased downside risks and this would continue taking a toll on
exports, capital flows, the currency and business sentiment in the near
asset reconstruction term. Global liquidity and financial market volatility could continue
to impact domestic markets, particularly as divergent consequences of
companies (ARCs) recent monetary policy changes by the US Fed, and the European and
Japanese central banks play out. However, the Union Budget with a slew
would also help to of measures for the economically weaker section, together with large scale
pay revisions, should help to counter the overall sluggishness in domestic
unclog investment
consumer demand in India. The budget also takes forward the domestic
bot tlenecks. policy initiatives with the strong push for consolidated reforms aimed at
reviving investment spending by broadening markets, rationalising policy
and bringing in transparency. These should augur well for sustainable
development and augment the credibility of the Indian growth numbers,
which have so far been ignored by investors in a turbulent market.

178
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