India: A High Troubled Story (CitiBank)

Inflation has been a concern for the RBI, which raised its March 2011 inflation estimates by ~250bps over the last quarter from 5.5% to 8%. We expect trends to remain sticky in the ~7.5% range through FY12 due to higher global crude prices, continued stickiness in manufactured non-food products inflation, and structural food price increases due to changing dietary preferences. Our base case factors in the RBI raising rates by 75bps by early 2012, taking the repo/reverse repo rate to 7.50/6.50%, but upside risks to inflation could result in an extension of the monetary tightening cycle.

On the fiscal front, we expect to see an expenditure overshoot of ~Rs500-700bn, which would take the FY12 headline deficit number to 5.3% of GDP vs. the target of 4.6% of GDP. Key risks are (1) higher oil subsidies — assuming no deregulation in diesel prices, oil subsidies are expected to rise to Rs1.4trillion, with the govt’s share pegged at 50% (2) Food subsidy: With the government likely to introduce the National Food Security Bill, we could see an additional outgoing Rs200bn (3) financial losses of State Power Utilities (SPUs) are currently at Rs526bn, or 0.9% of GDP. What’s more concerning is that the 13th Finance Commission estimates losses could mount to Rs686bn in FY11 and further to Rs1.2trn in FY15E.

On the external front, the trade deficit is estimated to widen to US$161bn in FY12 from US$125bn in FY11E; on the back of (a) imports rising 22.5%YoY in FY12 due to a 35% rise in oil imports and (b) exports rising 19%YoY. Coupled with a slight moderation in invisibles, this would result in the CAD coming in at US$61.7bn in FY12 (3.1% of GDP vs. 2.3% in FY11). On the capital account, recent budgetary measures could result in flows remaining strong at US$69.6bn. This could take the overall balance to US$7.9bn vs. US$18.2bn in FY11E. We expect trends in the INR to be range-bound, with key factors influencing movement being (1) risk appetite that would facilitate a move in portfolio flows from EMs to DMs (2) sustained rise in export growth. 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

Hi-Yo Silver...Away! We Could Take Out $ 50/oz in 2011, Maybe $70/oz with some extraordinary luck

Yes silver, the precious metal, is on the move again.

We’ve talked about the promise of silver many times in the past.  I showed you a great low-risk buying opportunity for silver here.  I went into the idea of silver as a hyper-inflation hedge here.  And I even went over some of the conspiracy theories behind silver's exploding price here.

Clearly, there’s more than one reason to be bullish on silver.

But over the last few months, silver’s been taking a break...

While stocks and other commodities have been roaring higher, silver has been lounging by the watering hole.  Some investors even said silver had seen its best days.  In their minds, silver was getting turned out to pasture and wasn’t going any higher.

Uhhh… they couldn’t be more wrong.

Over the last few weeks, silver has been galloping past just about everything.  The metal is currently pushing to new 30-year highs. Even silver’s big brother, gold, is getting left in the dust.

Silver is up 20% in the last month while gold is up a meager 4%.

Why are investors so gung ho on silver?

Well, a number of factors have investors pushing silver to multi-decade highs.  We talked about them in past articles… inflation hedging, industrial use, and silver coin investing.

But you can roll all those factors into one… its simple supply and demand.

Silver supply is dwindling…

Accurate figures for above ground silver stockpiles are hard to come by.  There are a few estimates, but most vary wildly.

However, experts agree above ground silver inventories are extremely low.  The majority of silver is already used up or still sitting in the ground waiting to be mined.

Of course, miners are ramping up production to take advantage of high silver prices.  And they’ll likely be able to slowly increase supply in coming years.  But right now, demand is far outpacing supply for the illustrious metal.

In fact, the market is so tight that silver futures are in “backwardation”.

This unusual word essentially means the market is worried about near term supply.  Near term futures contracts are priced higher than outlying contracts.  Backwardation is a rare occurrence, but it’s happening right now in silver.

Silver is already pushing above its 2010 highs.  Take a look…

As you can see, silver is breaking above the highs of late December. Since silver has broken this important technical area, it can now use it as support.  In other words, whenever silver pulls back to $30, use it as a buying opportunity!

Gold, on the other hand, is rising but still below its 2010 highs.

What’s my ultimate price target for silver?

Putting a price tag on future silver prices is pretty challenging.  Some estimate $70-$100 an ounce, while others have grandiose ideas of $1,000 for an ounce of silver.  While I think $1,000 is out of the question, $50 to $70 is very possible.

How long will it take it to get there?

Well, if recent price movement is any indication, we may hit $50 by the end of this year.

Hi-Yo Silver… Away.