asia special report mgm mirage - home | nomura€¦ · nomura | iga’ 2011 rxworrn: rvlqj v\pswrp...

$: Asia Special Report MGM Mirage - Home | NOMURA€¦ · Nomura | IGa’ 2011 RXWORRN: RVLQJ V\PSWRP a SSO\-constrained economy 14 January 2011 2 Economic growth to moderate Real GDP$
MGM Mirage Credit Research | United States Asia Special Report Global Economics

Nomura Financial Advisory and Securities (India) Private Limited

See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures

14 J ANU ARY 2011

Economist

Sonal Varma

+91 22 4037 4087

[email protected]

This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)

India’s 2011 outlook: Rising symptoms of a supply-constrained economy

Having experienced an inflationary recovery in 2010, we now expect the Indian

economy to enter a period of consolidation. While private consumption and export

growth will remain robust, we expect slower agriculture growth, adverse base

effects and the lagged effects of policy tightening to slow real GDP growth to 8% in

FY12 (year ending March 2012) from 8.7% in FY11. Inflation has become

stubbornly high and rising commodity prices will, we believe, result in WPI inflation

averaging 7.5% in FY12, far above the RBI’s 5.0-5.5% comfort zone. As a result,

we expect 100bp of interest rate hikes between now and March 2012. While

economic growth is set to moderate, we see these as necessary because

inadequate investment in agriculture, infrastructure and education are emerging as

binding constraints on the economy’s ability to expand without fuelling inflation.

Economic growth to moderate 2

We expect real GDP growth to moderate to 8.0% y-o-y in FY12 from 8.7% in FY11, due to slower

growth in agriculture, adverse base effects and lagged effects of policy tightening.

Investment cycle to move towards trend 3

We expect the infrastructure, real estate and services sectors to drive capex in FY12.

Manufacturing faces headwinds from rising costs and domestic substitution.

Inflation to stay stubbornly high 6

We expect WPI inflation to average 7.5% in FY12, remaining above the RBI’s comfort zone, due to

sticky food prices, rising input costs and elevated inflation expectations.

Interest rate cycle moves to a tightening phase 9

We expect 100bp of further interest rate hikes by March 2012. A narrower gap between credit and

deposit growth should ease the liquidity deficit, but the repo rate will remain the operative policy rate.

Fiscal slippage likely in FY12 11

We expect the central government’s fiscal deficit to amount to 5.2% of GDP in FY12, due to higher

expenditure. We expect net market borrowing of INR3.74trn, 8.4% higher than in FY11.

Dependence on net capital inflows to rise 14

Rising commodity prices are likely to widen the current account deficit to 4.0% of GDP in FY12 from

3.5% in FY11, sharply increasing India’s dependence on net capital inflows.

Outlook at a glance: The consolidation year 16

Details of our forecasts.

mailto:[email protected]

http://www.nomura.com/research

Nomura | India’s 2011 outlook: Rising symptoms of a supply-constrained economy 14 January 2011

2

Economic growth to moderate

Real GDP growth to moderate to 8% on slower agriculture growth, adverse base and lagged effects of policy tightening

The sharp rebound in economic growth to 8.7% y-o-y in FY11 (year ending March

2011) from 7.5% in FY10 has been buttressed by numerous temporary factors:

inventory restocking demand, an above-trend surge in agriculture after last year’s

drought and the release of pent-up demand boosted by very loose macro policies.

In FY12, we expect real GDP growth to moderate to a still-strong 8.0% y-o-y as

some of the above mentioned factors dissipate (Figure 1).

Even with a normal monsoon, agriculture growth is likely to moderate from close to

5% y-o-y in FY11 to 3% in FY12 on base effects. We also expect manufacturing

production to face headwinds as pent up consumer demand fades. The sharp rise

in short-term funding costs has increased the cost of working capital, which,

together with rising wages and raw material costs, will be a drag on production. We

pencil in a slower 8.0% y-o-y pace of expansion in manufacturing output growth in

FY12 compared to an estimated 9.0% in FY11. Government services – as

measured by community, social and personal services GDP rose 7.6% y-o-y in H1

FY11, suggesting that excess government stimulus may be leading to an

overheating in consumption. We expect real government services GDP growth to

slow to 4.0% y-o-y in FY12 from 6.5% in FY11 as fiscal finances face greater

constraints in FY12 due to a lack of one-off asset sales.

At the same time, underlying momentum is likely to be supported by robust growth

in private services such as trade, transportation and financial services, and

acceleration in export demand, which is partly offsetting the slack in industry. We

remain bullish on consumption demand, both rural and urban, against a backdrop

of large wage increases, though some moderation in year-on-year private

consumption growth is likely after the strong 9.2% rise in FY11. Therefore, we see

FY12 as a period of consolidation, rather than one of a sharp deceleration in

economic activity Collaborating evidence is found in Nomura’s composite lead

index for India, which has a lead of two quarters over non-agriculture GDP growth

(Figure 2).

Figure 1: Real GDP growth by industry

Figure 2: Nomura’s composite leading index for India*

% y-o-y

Weight

(%)FY08 FY09 FY10 FY11F FY12F

Real GDP growth 9.2 6.6 7.5 8.7 8.0

Agriculture 13.5 4.7 1.6 0.2 4.9 3.1

Industry 28.5 9.5 3.4 9.7 8.7 8.2

Mining 2.4 3.9 1.6 10.6 7.0 6.1

Manufacturing 16.1 10.3 3.0 10.7 9.0 8.0

Electricity 1.9 8.5 3.9 6.5 5.4 7.5

Construction 8.1 10.0 4.4 8.4 9.5 9.4

Services 58.0 10.5 9.7 8.5 9.6 9.2

Trade, transport & communication 27.9 10.7 7.4 9.2 11.4 10.9

Financing, real estate & biz services 17.7 13.2 10.2 9.6 9.2 10.4

Community services 12.4 6.7 13.9 5.6 6.5 4.0

Memo: Non-agriculture GDP 86.5 10.2 7.5 8.9 9.3 8.9

4

7

10

13

98

100

102

104

Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

Non-agriculture GDP (2qma), rhs

Nomura's composite leading index, lhs

Index % y-o-y

*June 2011 estimate is based on preliminary data for Q4 2010.

Source: CEIC and Nomura Global Economics estimates. Source: CEIC and Nomura Global Economics.

We expect real GDP growth to

moderate to 8% in FY12…

…due to slower agriculture,

manufacturing and government

services

Lead indicators show a

consolidation, not a severe

slowdown


3

Investment cycle to move towards trend

The infrastructure, real estate and services sectors should drive capex in FY12. Manufacturing faces supply constraints

Despite India’s impressive V-shaped recovery in FY11, concerns persist about

lacklustre investment growth and whether rising interest rates will derail

investments. In our view, below-trend investment growth should not be surprising.

Looking at the investment cycle historically, it takes around three to four years for

investment to get back to trend after it snaps below trend (Figure 3). By this metric,

investment should revert back to trend in FY12. We forecast real fixed investment

GDP growth of 14.0% y-o-y in FY12 compared to an average of 8.2% between

FY09 and FY11.

Interest rates matter for investment, but availability of other sources of financing,

sustainability of demand and the policy environment are as important. We do not

think financing will be a constraint as retained earnings, equity and overseas

financing are availa le Demand also looks sustainable: both domestic

consumption and exports are robust. However, regulatory delays, governance

issues and corruption are bigger risks.

While manufacturing spearheaded the capex revival in 2003-07, we now expect

the non-manufacturing sector to play a bigger role in driving investment (Figure 4).

We remain bullish on infrastructure activity led by power and roads construction

activity. In our equity research team, our power analyst expects electricity capacity

to rise by 12% to 196GW in FY12, while our construction analyst expects annual

national highways road construction of 3,500-4,000km in FY12 compared to 2,500-

3,000km in FY11. Furthermore, as residential property sales have improved over

the last 18 months, our real estate analyst expects construction activity and

execution to be higher in FY12 than in the previous two years.

We also believe that the increasingly important role of the services sector (which

accounted for 45% of total investment in FY09) in driving capex is generally not

fully appreciated. This is similar to the situation in China, where the tertiary sector

accounted for 54% of total fixed asset investment in 2009. During the financial

crisis, India saw strong services sector investment growth, which was one of the

reasons why overall investment did not collapse: real manufacturing capex

contracted 22% y-o-y in FY09, while capital formation in the services sectors rose

13.3%, cushioning an otherwise sharp fall in total investment. This trend has

continued. Recent data on projects under investment in the services sector show a

healthy pipeline of investment in health services, wholesale & retail trading,

transport services and information technology.

Investment takes three to four

years to revert back to trend

Policy is a bigger risk than

interest rates

Non-manufacturing sector to play

a bigger role in capex

Services sector investment

remains on track


4

Figure 3: Real investment cycles*

Figure 4: Share in projects under implementation*

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Real investment cycle Trend

Index

*The shaded bars are the periods of sub-trend investment growth i.e. periods where investments are below their trend. Trend investment has been estimated using the Hodrick-Prescott filter.

Manu-

facturing

Infra-

structure Services

Construction

& real estate Total

FY05 43.2 57.7 -2.1 1.2 100

FY06 44.3 60.0 -4.6 0.3 100

FY07 39.2 31.3 7.6 21.9 100

FY08 23.4 41.1 8.5 27.0 100

FY09 14.0 62.5 10.2 13.3 100

FY10 13.8 54.0 14.1 18.1 100

FY11

(Apr-Dec) 7.0 63.4 13.5 16.1 100 *Share in incremental projects under investment.

Source: CEIC and Nomura Global Economics estimates. Source: CMIE and Nomura Global Economics.

The outlook for manufacturing sector capex in India is mixed. We see two key

constraining factors. One is that “domestic su stitution” is a growing threat, with

imports replacing domestic capacity in certain segments. In some cases such as in

coal and oil, it is due to resource constraints, but where capacity can be

augmented – such as in metals, project goods, chemicals, wood products and

textiles – there is a growing threat of imported products potentially displacing

domestic production (Figures 5 and 6). While cheap imports will benefit consumers

and increase competitive pressures, they can inhibit manufacturing sector

development, which is critical in increasing the economy’s employment capacity.

The second constraint is delays in land acquisition and in mineral allocation (for

steel), which is beginning to hinder the manufacturing sector’s a ility to continue to

expand. While access to new technologies and greater market access have played

a role, we believe that another reason for the rapid surge in outward FDI from India

in recent years (Figure 7) is the growing domestic supply-side constraints and the

need to source raw materials (which are then imported back to India).

That said, we also see two tailwinds for manufacturing sector capex. First, the

fundamental reasons for investing are in place: domestic consumption demand

remains robust, the capacity utilization rate is rising and business confidence is

gradually improving. Second, global demand uncertainties should gradually ease.

While manufacturing exports account for only 15% of total manufacturing output,

select sectors such as leather, chemicals and textiles have a much higher share of

exports in total production (Figure 8). Manufacturing exports contracted 15% y-o-y

in 2009, but rose 23.2% in 2010 (Jan-Aug), adding to strength in overall demand

(Figure 9).

The relationship between manufacturing GDP and manufacturing capex is very

tight. With manufacturing output growth likely to moderate in FY12, we expect real

manufacturing capital formation of around 8% y-o-y in FY12, below the peak

expansion phase of 20% y-o-y during FY06-FY08 (Figure 10). Overall, therefore,

we expect investment to inch closer to trend, led mainly by the non-manufacturing

sector in FY12. Once manufacturing capex accelerates – likely in FY13 – we

believe that the investment cycle will also move above trend.

Domestic substitution may be

constraining capex

Land acquisition and resource

availability are constraints

Rising manufacturing exports and

strong domestic consumption

demand are tailwinds


5

A picture book on Indian investment

Figure 5. Import versus production of capital goods

Figure 6. Manufacture of metals: import versus production

-20

0

20

40

60-100

0

100

200

300

400

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Project good imports, lhs

Project good domestic production (inverted), rhs

% y-o-y % y-o-y

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0-60

-40

-20

0

20

40

60

80

100

120


Metal manufactures imports, lhs

Metal manufactures domestic production (inverted), rhs

% y-o-y % y-o-y

Source: CEIC and Nomura Global Economics. Source: CEIC and Nomura Global Economics.

Figure 7. Outward FDI

Figure 8. Manufacturing exports (% of output)*

-1

1

2

3

4

5

1991 1994 1997 2000 2003 2006 2009

China India

% of GDP

Exports

(% of output)

Leather & leather manufactures 59.0

Chemicals & related products 20.4

Engineering goods 15.0

Textiles & readymade garments 38.2

Other manufactured goods 8.7

Total manufacturing 14.8 * Based on FY08 data.

Source: UNCTAD and Nomura Global Economics. Source: CMIE, RBI, ASI and Nomura Global Economics.

Figure 9. Manufacturing: capex versus exports*

Figure 10. Manufacturing capex versus manufacturing GDP

-25

-15

-5

5

15

25

35

-10

0

10

20

30

40

50

FY93 FY96 FY99 FY02 FY05 FY08 FY11

Manufacturing exports, lhs

Nominal capital formation in mfg, rhs

% y-o-y % y-o-y

*Manufacturing exports for FY11 are for Apr-Aug.

-30

-20

-10

0

10

20

30

-10

0

10

20

FY91 FY95 FY99 FY03 FY07 FY11

Real manufacturing GDP, lhs

Real capital formation in manufacturing, rhs

% y-o-y % y-o-y

Source: CEIC and Nomura Global Economics. Source: CEIC and Nomura Global Economics.


6

Inflation to stay stubbornly high

WPI inflation to average 7.5% in FY12, due to rising food and commodity prices and elevated inflation expectations

Inflationary concerns dominated policymaking in 2010 and the headline inflation

rate fell from 11% y-o-y in April 2010 to 8.4% in December. However, the structural

nature of food inflation, higher commodity prices and a closing output gap suggests

that this relief will only be transitory. We expect inflation to remain a ove the RBI’s

comfort zone of 5.0-5.5% throughout FY12. To illustrate the downward rigidity, or

“stickiness”, we expect wholesale price index (WPI) inflation to average 7.5% y-o-y

in FY12 from 8.5% in FY11.

Food price inflation has become structural in India. Recent research by the

Reserve Bank of India (RBI) identifies a structural rise in the price of proteins –

pulses, milk, egg, meat & fish – due to rising demand and low per-capita availability.

However, the trend increase in food prices is not restricted to India. Globally, rising

incomes in developing countries, supply constraints, climate change, interventionist

policies and increasing use of bio-fuels are all likely to contribute to a sharp rise in

food prices in years ahead (please see our Special Report: The coming surge in

food prices, September 2009).

A breakdown of the inflation sub-components into seasonal, cyclical and trend

series, confirms that trend inflation has shifted higher for a number of components

(Figure 11). Within food, the trend inflation is higher for inputs such as protein-rich

items, sugar and condiments & spices, resulting in higher output prices for bakery

products, canning, preserving & processing of food, dairy products, processed

manufactured products and tea & coffee processing. In non-food components, the

trend is higher in fibres, wood, hides, rubber, fodder and tobacco, resulting in

higher output price of textiles, wood products and beverage & tobacco products.

Therefore, while we expect the cyclical WPI inflation rate to remain in line with

historical averages, the components with higher trend inflation are unlikely to come

off sharply, adding to the downward rigidity of overall inflation (Figure 12).

Figure 11. Trend inflation in select WPI components*

Figure 12. Inflation: structural versus cyclical components

(y-y %) Weight in

WPI (%)

2005 2010

Food componentsBakery products 0.4 1.6 6.6

Canning, processing of food 0.4 1.4 7.6

Dairy products 0.6 2.8 10.8

Egg, meat & f ish 2.4 4.8 20.1

Milk 3.2 3.3 17.1

Other manufacturing (processed) 0.9 2.5 9.6

Condiments & Spices 0.6 12.5 20

Sugar, Khandsari and Gur 2.1 0.7 21.4

Tea & Coffee Processing 0.7 1.8 10.2

Non-food components

Fibres 0.9 0.1 11.6

Other non-food articles 1.4 4.6 16.1

Textile products 7.3 0.1 5.2

Wood & w ood products 0.6 5.9 7.5

Beverage & tobacco 1.8 5.2 6.8

* We have eliminated the cyclical component of each component to estimate the trend in the series.

-5

0

5

10

15

20

25

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10

Structural WPI (higher trend inflation)

Cyclical WPI (no change in trend)

% y-o-y

Source: CEIC and Nomura Global Economics estimates. Source: CEIC and Nomura Global Economics estimates.

Inflation to remain above the

RBI’s comfort zone

Food inflation is becoming

structural, globally

Trend inflation has shifted higher

in a number of products

http://www.nomura.com/research/getpub.aspx?pid=390252

http://www.nomura.com/research/getpub.aspx?pid=390252


7

Moreover, the gap between input and output price indices of the manufacturing

PMI index has widened (Figure 13), suggesting that firms are experiencing margin

cost pressures. If this margin pressure continues, as we expect, a natural response

will be for firms to pass on some of their higher costs to consumers. In addition,

despite the moderation of headline WPI inflation, households’ inflation expectations

have been rising, which could result in second-round inflation effects through wage

inflation (Figure 14). In fact, the recent increase in minimum wages by 17-30%

across different states under the National Rural Employment Guarantee Act, while

good for rural incomes, is likely to further add to inflationary pressures. Already, the

shortage of skilled manpower is pushing up urban wages. Finally, higher oil prices

have increased fuel subsidies, and a rise in domestic fuel price is likely even if

inflation subsides.

Our high inflation forecasts are reinforced by regression analysis on the WPI

(Figure 15). Our fitted WPI inflation rate tracks actual inflation closely. The results

show a high persistence of inflation and the statistically significant role of

commodity prices in driving WPI inflation. We expect the output gap to close, real

effective INR appreciation and a 15% rise in the Reuters Jefferies CRB index by

Q1 2012 to 365, compared to an average of around 307 in Q4 2010.

The scenario analysis provides three implications. First, unless commodity prices

remain unchanged at Q4 2010 levels for the next 12 months, headline inflation is

unlikely to fall below 6.0% (Figure 16). Second, inflation is likely to trough in Q1

2011 due to base effects and start rising thereafter. This is also reinforced by our

pulse inflation measure – the % 3m-o-3m seasonally adjusted annualised rate –

which turned up in September and has historically led the % y-o-y rate of WPI

inflation by three to four months (Figure 17). Third, adverse base effects, higher

commodity prices and downward rigidity in the structural components of inflation

are likely to push inflation back to above-8% by H2 2011. We expect food inflation

(primary and manufactured) to surge back above 10% y-o-y and non-food

manufactured inflation to rise above the medium-term average of 4.5% by June

2011 (Figure 18).

Rising inflation expectations risk

a wage-price spiral

Our pulse inflation measures have

turned higher


8

A picture book on Indian inflation

Figure 13. Input and output price index: manufacturing PMI

Figure 14. Households’ inflation expectations

35

40

45

50

55

60

65

70

Dec-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10

Input prices Output prices

IndexIndex

0

2

4

6

8

10

12

14

16

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Current

3 Months ahead

Inflation expectations: 1-year ahead

% y-o-y

Expectation period

Source: DataStream and Nomura Global Economics. Source: RBI and Nomura Global Economics.

Figure 15. WPI inflation regression results

Figure 16. WPI model-based forecast scenarios

-4

-2

0

2

4

6

8

10

12

Dec-98 Dec-01 Dec-04 Dec-07 Dec-10

Actual Fitted Residual% y-o-y

Note: Independent variables include lagged output gap, auto regressive component of WPI, money supply, Reuters Jefferies commodity price index (CRB index) and REER. Regression estimated using data from Q2 1996 to Q4 2010 with an adjusted R-square of 0.81.

0

2

4

6

8

10

12

Mar-09 Mar-10 Mar-11 Mar-12

Baseline: 15% CRB rise in 2011

10% CRB rise

5% CRB rise

Unchanged CRB

% y-o-y

Source: CEIC and Nomura Global Economics estimates. Source: Nomura Global Economics estimates.

Figure 17. WPI inflation momentum indicator

Figure 18. WPI inflation forecast by key categories

-10

-5

0

5

10

15

20

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

% y-o-y

% 3m-o-3m sa, annualised

-4

-2

0

2

4

6

8

10

-5

0

5

10

15

20

25


WPI, lhsFood inflation, lhsNon-food manufactured inflation, rhs

% y-o-y % y-o-y

Source: CEIC and Nomura Global Economics. Source: Nomura Global Economics estimates.


9

Interest rate cycle moves to a tightening phase

The RBI’s repurchase rate is to remain the operative interest rate. We expect 100bp of further rate hikes by March 2012

The re-emergence of inflationary pressures amid still-strong growth suggests that

inflation will remain the RBI’s top policy priority Inflation is partly due to structural

bottlenecks, which require a supply-side response. However, with no long-term

concrete plan to resolve these constraints and food price inflation a political hot

potato, the RBI will have its work cut out in fighting inflation.

Recent resurgence in food inflation due to unseasonal rains and higher mark up

(as reflected in widening retail and wholesale prices) raises the risk of a much-

higher inflation and of rate hikes being front loaded. Food inflation requires a

supply-side response and the government has announced measures such as

stringent action against hoarders, importing onions, intensifying purchases of

essential commodities for public distribution, among others. However, since

perishables are not held in public stocks and cannot always be imported,

containing food inflation will be difficult. We expect the RBI to maintain its hawkish

tone and hike policy rates by 25bp on 25 January. In FY12, we believe inflation will

prove sticky, prompting 75bp of further hikes in the repo rate to 7.25% by March

2012 (Figure 19).

At 6.25% currently, the repo rate is close to neutral. However, sticky inflation

suggests that interest rates have to move from neutral to the tightening phase - a

process we expect over the course of the next 12 months. Despite the hikes, real

policy rates will remain lower than their historical averages (Figure 20). In our view,

the RBI will have to tolerate higher inflation because it cannot influence food prices,

it may risk derailing the investment cycle and because it runs the risk of attracting

higher net capital inflows.

Commercial interest rates can also be expected to move higher. So far, banks

have increased their base lending rates by around 70bp and prime lending rates by

around 90bp, compared to a 125bp hike in deposit rates in H2 2010 (Figure 21).

With further rate hikes in the offing, this suggests that the transmission of higher

funding costs to lending rates will further occur over the next few quarters. Higher

deposit rates should propel deposit growth to 18-19% in FY12 from 16.5% in

December 2010, but we expect credit growth to moderate to around 20% from

24.4% in December 2010 due to crowding out from fiscal deficit financing and

substitution from external financing (Figure 22).

Slow deposit accretion and faster credit growth was one of the structural reasons

for tight liquidity in FY11. High currency leakage was another reason for tight

liquidity. The gap between credit and deposit growth is currently at 8 percentage

points (pp) compared to an average of 3.8pp during 2001-2009. In FY12, we

expect the credit-deposit growth gap to narrow and less currency leakage due to

higher deposit rates, partly easing the structural drag on liquidity (Figure 23).

However, we believe that the RBI will keep liquidity in a deficit and maintain the

repo rate as the operative rate as inflation averages a much higher 7.5% y-o-y in

FY12 (Figure 24). We also expect the RBI to continue to distinguish between

liquidity management and monetary policy management. If liquidity deficit

continues to exceed its comfort zone (of upto -1% of net time and demand

liabilities), then we would expect the RBI to announce liquidity easing measures to

ensure credit is not completely choked off. However, monetary policy tightening will

continue.

Inflation to remain the top policy

priority

We expect 100bp of rate hikes

between now and March 2012

Lending rates to respond with a

lag to higher deposit costs

Liquidity deficit to ease, but repo

to remain the operative rate


10

A picture book on Indian monetary policy

Figure 19. WPI inflation and repo rate projections

Figure 20. Real interest rates*

-2

0

2

4

6

8

10

12

4

5

6

7

8

9

10

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Repo rate, lhs

WPI inflation, rhs

% % y-o-y

-8

-6

-4

-2

0

2

4

6


Real repo rateReal overnight rateAverage real repo rateAverage real overnight rate

%

*Average real rates estimated using monthly data from 2001 to 2008. WPI inflation and repo rate values beyond December 2010 are Nomura estimates. Overnight rate assumed to be 25bp over repo rate.

Source: CEIC and Nomura Global Economics estimates. Source: CEIC, Bloomberg and Nomura Global Economics

estimates.

Figure 21. Deposit and lending rates

Figure 22. Credit and deposit growth forecasts

13.5

13.9

14.3

14.7

6.0

6.5

7.0

7.5

8.0

8.5

Jul-10 Sep-10 Nov-10 Jan-11

Base rate (lending), lhs

Deposit rate (1-yr), lhs

Prime lending rate, rhs

%%

+70bp

+125bp

+90bp

10

15

20

25

30

35

40


Credit growth

Deposit growth

% y-o-y

Source: CEIC, Bloomberg and Nomura Global Economics. Source: CEIC and Nomura Global Economics estimates.

Figure 23. Incremental credit-deposit ratio and liquidity

Figure 24. Policy and overnight rate

0

20

40

60

80

100

120

140-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

Mar-06 Mar-08 Mar-10 Mar-12

Liquidity adjustment facility, lhs

Incremental CD ratio (inverted), rhs

INRbn %

0

2

4

6

8

10

12

14

16


Repo rate

Overnight rate

Reverse repo rate

%

Source: CEIC, Bloomberg and Nomura Global Economics. Source: CEIC and Nomura Global Economics.


11

Fiscal slippage likely in FY12

Fiscal deficit to be higher led by increased expenditure. RBI to continue to support bonds through open market operations.

After the one-off revenue bonanza gained from asset sales in FY11, we expect the

central government’s fiscal deficit to widen to 5.2% of GDP in FY12, exceeding the

4.8% target stipulated in the Fiscal Responsibility and Budget Management Act

(FRBM).

High inflation should benefit the government through robust tax revenues, but

given the unavailability of 3G revenues next year (they fetched 1.5% of GDP in

FY11), measures to garner more revenues will be necessary. Against this

backdrop, a reversal of indirect tax cuts (excise and services tax rates) that were

announced after the onset of the global financial crisis and a widening of the

services tax net are measures that may be announced in the next budget (due to

be unveiled on 28 February). We pencil in a robust 21.6% y-o-y rise in gross tax

revenue collection in FY12 compared to an estimated 21.8% in FY11. We also

pencil in 0.6% of GDP (INR500bn) as revenue from disinvestment (asset sales) in

FY12 (Figure 25).

Figure 25: Fiscal forecasts at a glance

INR bn FY10 FY11 FY11 FY12

RE BE Nomura Nomura

Revenue receipts 5773 6822 7711 7951

Gross Tax Revenue 6331 7467 7712 9376

Corporation tax 2551 3013 3058 3822

Income tax 1250 1206 1394 1673

Customs 845 1150 1112 1390

Excise Duties 1020 1320 1361 1565

Service Tax 580 680 690 828

Non -Tax Revenue 1122 1481 2193 1245

Disinvestment 260 400 400 500

Total expenditure 10215 11087 12032 13068

Plan expenditure 3152 3731 3969 4531

Non-plan expenditure 7064 7357 8063 8537

Interest payments 2195 2487 2487 2778

Defense expenditure 1363 1473 1473 1520

Subsidies 1310 1162 1633 1741

Food 560 556 656 650

Fertiliser 530 500 600 660

Petroleum subsidy 150 31 302 425

Fiscal Deficit 4140 3814 3869 4567

Revenue balance (% of GDP) -5.2 -4.0 -3.7 -4.1

Fiscal balance (% of GDP) -6.6 -5.5 -5.2 -5.2

Primary balance (% of GDP) -3.0 -1.9 -1.8 -2.0

Source: CEIC and Nomura Global Economics estimates.

Fiscal deficit likely at 5.2% of GDP

in FY12 versus target of 4.8%

Post crisis stimulus measures will

have to be withdrawn


12

Despite our admittedly optimistic assumptions on the revenue front, our concern

over fiscal finances emanates from continued pressure on expenditure. To attain

the government’s fiscal deficit target of 4.8% of GDP, nominal expenditure has to

rise by around 5.3% y-o-y in FY12, compared to an average increase of 20% y-o-y

in FY07-10. While nominal expenditure was budgeted to rise by only 8.5% y-o-y in

FY11, two supplementary grants were passed during the year, resulting in close to

an 18% y-o-y rise in total.

In FY12, we see a risk of similar slippage. Historically, growth in nominal revenue

expenditure (defined as expenses that are routine in nature and do not generate

any assets, such as expenditure on interest payment, subsidies, wages), which

accounts for 86% of total expenditure, has not been lower than the consumer price

index inflation (CPI) rate (Figure 26). With inflationary pressure likely to stay firm,

total expenditure will remain high. We also expect subsidies to remain elevated. On

our assumption of an average oil price of US$90/bbl in FY12, we expect the oil

subsidy bill alone to total 0.5% of GDP. Rising fertilizer prices suggest a higher

fertilizer subsidy bill. High food inflation also risks fuelling the food subsidy bill,

especially if the National Food Security Act is implemented. Overall, we pencil in a

9.7% y-o-y rise in revenue expenditure for the year.

Moreover, a sharp cut in plan expenditure (money spent through the Planning

Commission) will be difficult. FY12 is the last year of the 11th five-year plan (FY08-

12) and a 13% increase in gross budgetary support is required to meet the

expenditure projections set in the mid-term appraisal. Historically, too, the last year

of previous five-year plans have seen a strong surge in plan expenditure to make

up for any shortfall in earlier years (Figure 27). The implication is that government’s

capex will be lower; we expect the government to cut its capex allocations in FY12

and assume no growth in that area.

Figure 26. Revenue expenditure and inflation

Figure 27. Plan expenditure over the decade

0

5

10

15

20

25

30

35


Nominal revenue expenditure

CPI inflation

% y-o-y

-5

0

5

10

15

20

25

30

35

40

45


% y-o-y

Last year of 8th FYP

Last year of 9th FYP Last year

of 10th

FYP

Last year of

11th FYP

Note: FYP = Five year plan.

Source: CEIC and Nomura Global Economics. Source: Budget documents and Nomura Global Economics.

Due to large revenue gains in FY11, the government has a surplus cash balance

and we believe it will be difficult to spend it all in FY11. Instead, we expect around

INR300bn to be carried into FY12 to help finance the fiscal deficit. Taking this into

account, we estimate the central government’s net market orrowing at INR3 74trn

– 8.4% higher than in FY11 (Figure 28). This number is dependent on the ability of

the government to raise funds through disinvestment (asset sales). If the

government manages to raise only INR300bn, instead of INR500bn that we are

forecasting, then net market borrowings would be closer to INR4trn.

Curtailing expenditure will be

difficult

High inflation will increase

revenue expenditure

Plan expenditure will remain

robust

We estimate net market borrowing

at INR3.74tr in FY12


13

To meet the current statutory liquidity ratio (SLR), Indian banks have to invest 24%

of their net demand and time liabilities (NDTL) in government bonds. We expect

robust deposit growth of 18-19% y-o-y in FY12 due to the steep deposit rate

increases announced by banks, thereby creating inherent demand for government

securities from banks. However, despite accounting for the incremental SLR

demand from banks and other financial institutions, the gap between the total

supply of bonds and total demand will remain in FY12, suggesting that the RBI will

have to continue to support the bond market by conducting open market operations

throughout the year (Figure 29). With RBI’s FX intervention also likely to be limited

due to a lower balance of payment surplus, open market operations will also be an

important source of primary liquidity injection.

Taking into account the demand-supply mismatches, the expected RBI support for

government securities and the inflation trajectory, our interest rate strategy team

expects the 10-year government bond yield at 8.2% by March 2012 from 7.9% in

December 2010.

Figure 28. Central government’s borrowing

Figure 29. Demand and supply of government bonds

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Gross market borrowing

Net market borrowing

INR bn

0

1,000

2,000

3,000

4,000

5,000

Banks Insurance Provident funds

FII Gap

INRbn

Total supply of bonds

Source: CEIC and Nomura Global Economics estimates. Source: Nomura Global Economics estimates.

Excess bond supply will require

RBI support through open market

operations

We expect the 10-year bond yield

at 8.2% by March 2012


14

Dependence on net capital inflows to rise

An all-time high current account deficit means increasing dependence on net capital inflows

In an environment of prolonged weak global growth but strong domestic demand,

India’s current account deficit is secularly widening, another symptom of demand

running ahead of supply. One reason for the large current account deficit is the

increasing dependence on commodity imports. While oil is India’s biggest import,

the share of non-oil commodities such as coal, fertilizers and metals is also rising

(Figure 30). On our assumption of a continued rise in global commodity prices, we

expect the current account deficit to widen to 4% of GDP in FY12 (Figure 31).

Imports are now 1.7x exports and a massive export boom is required to improve

this deficit. In addition, with global demand still subdued and lower interest rates

abroad, India’s non-software services exports (business and financial services) and

investment income are falling.

Figure 30. Commodity imports (% of total imports)

Figure 31. Balance of payment forecast

15

20

25

30

35

0

4

8

12

16

20

2000 2002 2004 2006 2008 2010

Coal FertiliserMinerals SteelNon-ferrous Crude oil, rhs

US$ bn FY10 FY11F FY12F

Current account -38.4 -55.9 -77.7

Merchandise -118.4 -139.8 -172.9

Oil balance -56.2 -64.9 -76.2

Non-oil balance -62.2 -74.9 -96.7

Invisibles 80.0 83.9 95.2

Softw are services 48.2 52.1 57.3

Non-softw are -12.5 -8.9 -6.6

Transfer 52.3 52.7 54.5

Investment income -8.0 -12.0 -10.0

Capital account 53.4 73.5 89.1

Net FDI 18.8 11.0 14.0

Portfolio investment 32.4 40.0 30.0

Commercial borrow ings 2.8 11.0 14.0

Short term loans 7.6 14.0 15.0

Banking capital 2.1 5.0 8.3

Other capital -10.2 -7.6 7.8

Overall Balance 13.4 17.6 11.4

CA deficit (% of GDP) -2.9 -3.5 -4.0 Source: CMIE and Nomura Global Economics. Source: Nomura Global Economics estimates.

Financing the current account deficit has not been a concern so far. India’s

favorable interest rate and growth differentials have been an important driver of

debt inflows and we expect this trend to be reinforced in 2011 due to elevated local

financing costs (Figure 32). We expect net capital inflows of USD89bn in FY12,

inching close to the all-time highs of FY08, but resulting in a much lower balance of

payment surplus this time (due to the larger current account deficit).

India’s USD295bn worth of FX reserves provides a cushion, but the rise in debt-

related capital inflows is also a risk. Short-term debt with residual maturity of less

than one year (comprises principal repayments due during a year under long-term

loans together with short-term debt of original maturity of one year or less) stood at

USD116bn, or 42% of total external debt in June 2010 (versus 30% a year ago).

This highlights the rising external financing needs of the economy over the next

year. Turmoil in global financial markets could reduce the ability to rollover debt,

Current account deficit to widen

to 4% of GDP in FY12

Growth-interest rate differentials

should attract capital inflows

India’s external vulnerability is

rising


15

increasing India’s vulnera ility (Figure 33). The ratio of FX reserves to total external

debt has also fallen from a peak of 138% in FY08 to 99% in Q3 2010.

We think India’s policymakers should tighten domestic macro policies to avoid

aggregate demand running too far ahead of supply, thereby helping to reduce the

large current account deficit and high inflation. Our FX strategy team expects

INR/USD to appreciate to 42.3 by December 2011, on the assumption of continued

strong net capital inflows. However, we see a rising risk of Indian policymakers

focusing more on economic growth than the increasing symptoms of overheating,

and hence not tightening macro policies, particularly fiscal policy, sufficiently. The

danger here is that at some point investors’ shift their focus from the rewards of

high growth to the risks of deteriorating economic fundamentals, triggering a

sudden stop in capital inflows.

Figure 32. Debt inflows and rate differentials

Figure 33. Short-term debt by residual maturity

0

2

4

6

8

10

-10

0

10

20

30

40

Dec-02 Nov-04 Nov-06 Nov-08 Nov-10

Debt inflows, 2q rolling sum, lhs

Interest differentials (India -US), rhs

US$bn %

10

15

20

25

30

35

40

45

0

20

40

60

80

100

120

140

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Jun-10

Short-term debt < 1yr residual maturity, lhs

% of total external debt, rhs

US$b%

Source: CEIC, Bloomberg and Nomura Global Economics. Source: Finance Ministry, CEIC and Nomura Global Economics.


16

India economic outlook Sonal VarmaKetaki Sharma

The consolidation year We expect economic growth to consolidate in FY12 after a strong rebound in FY11. Inflation is likely to

remain above the RBI’s comfort zone, prompting 100bp of rate hikes between now and March 2012.

Activity: We expect real GDP growth to moderate to 8% y-o-y in FY12 after a strong 8.7% in FY11 due to

slower growth in agriculture, increased margin pressure from rising cost to manufacturers, adverse base

effects and lagged effects of policy tightening. A sharp moderation in industrial output growth and a

contraction in imports over recent months have raised concerns that the economy may be slowing

significantly. In our view, industrial activity has suffered because of high raw material costs and sluggish

investment. However, we do see tailwinds to growth from robust consumption demand and recent signs of a

resurgence of exports. Overall, we expect the economy to enter a period of consolidation.

Inflation: WPI inflation has rebounded to 8.4% y-o-y in December, from 7.5% in November. We believe that

underlying price pressures are building due to higher global commodity prices, a resurgence in local food

prices, higher minimum wages in rural areas and rising input cost pressures. We see inflation remaining

stubbornly high due to a structural rise in commodity prices and domestic supply-side constraints. Elevated

inflation expectations, a rise in rural wages and a shortage of skilled manpower also risk a wage price spiral.

We expect headline WPI inflation to remain high, averaging 7.5% y-o-y in FY12 from 8.5% in FY11.

Policy: We expect inflation to persistently exceed the Reserve Bank of India’s (RBI) comfort zone of 5 0-

5.5%, prompting 100bp of rate hikes between now and March 2012, the first being a 25bp hike on 25

January. Following the aggressive 150bp of hikes in 2010, this will take the monetary policy stance to

modestly tight. On the fiscal front, with less scope for proceeds from asset sales and a higher subsidy burden,

we see risks of fiscal slippage We expect the central government’s fiscal deficit to remain unchanged at

5.2% of GDP in FY12 (year ending March 2012), higher than the 4.8% target under the Fiscal Responsibility

and Budget Management Act.

Risks: A reversal in capital inflows, lack of an investment revival, and surging commodity prices are

downside risks to our growth outlook. A key upside risk is a sharper-than-expected global rebound.

Details of the forecast

% y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 FY11 FY12

Real GDP (sa, % q-o-q, annualized) 10.7 4.6 8.1 8.5 8.5 8.1 8.6 9.0

Real GDP 8.9 8.9 8.1 7.9 7.6 8.2 8.4 8.6 8.7 8.0

Private consumption 9.3 9.5 10.0 7.0 7.0 8.0 7.0 8.5 9.2 7.3

Government consumption 9.2 2.0 3.0 2.5 2.5 2.0 4.0 5.0 5.4 2.8

Fixed investment 11.1 11.5 9.5 12.0 15.0 15.5 13.5 15.3 12.5 14.0

Exports (goods & services) 9.7 10.0 10.5 14.0 15.5 13.5 14.0 12.0 10.2 14.2

Imports (goods & services) 6.5 11.0 11.5 12.0 17.0 15.0 15.5 14.0 9.9 14.9

Contributions to GDP (% points):

Domestic final sales 8.5 9.7 8.1 8.1 9.0 9.5 8.7 9.7

Inventories 0.2 0.1 0.1 0.1 0.1 0.0 0.1 0.1

Net trade (goods & services) 0.2 -0.9 -0.2 -0.3 -1.5 -1.4 -0.3 -1.2

Wholesale price index 9.3 8.3 6.6 6.8 7.7 7.9 7.5 6.9 8.5 7.5

Consumer price index 10.3 9.0 7.4 8.3 9.2 8.8 9.8 9.8 10.0 9.0

Current account balance (% GDP) -3.5 -4.0

Fiscal balance (% GDP) -5.2 -5.2

Repo rate (%) 6.00 6.25 6.50 6.50 6.75 7.00 7.25 7.50 6.50 7.25

Reverse repo rate (%) 5.00 5.25 5.50 5.50 5.75 6.00 6.25 6.50 5.50 6.25

Cash reserve ratio (%) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

10-year bond yield (%) 7.90 7.92 7.90 7.70 7.90 8.10 8.20 8.25 7.90 8.20

Exchange rate (INR/USD) 45.9 44.7 44.1 43.4 42.9 42.3 41.8 41.3 44.1 41.8

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are

period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, eg, 2010 is for year ending

March 2011. Table reflects data available as of 14 January 2011.

Source: CEIC and Nomura Global Economics.

Nomura Global Economics 17

Asia Special Report | India’s 2011 outlook: Rising symptoms of a supply-constrained economy

14 January 2011

ANALYST CERTIFICATIONS

We, Sonal Varma and Ketaki Sharma, hereby certify (1) that the views expressed in this report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Online availability of research and additional conflict-of-interest disclosures:

Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG.

Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.

DISCLAIMERS

This publication contains material that has been prepared by the Nomura entity identified on the banner at the top or the bottom of page

1 herein and, if applicable, with the contributions of one or more Nomura entities whose employees and their respective affiliations are

specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively,

the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc, United Kingdom; Nomura

Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd., Hong Kong; Nomura Financial Investment

(Korea) Co , Ltd , Korea (Information on Nomura analysts registered with the Korea Financial Investment Association (“KOFIA”) can e

found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd., Singapore (Registration number 197201440E, regulated

by the Monetary Authority of Singapore); Nomura Securities Singapore Pte Ltd., Singapore (Registration number 198702521E,

regulated by the Monetary Authority of Singapore); Nomura Australia Ltd., Australia (ABN 48 003 032 513), regulated by the Australian

Securities and Investment Commission and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia,

Indonesia; Nomura Securities Malaysia Sdn. Bhd., Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch, Taiwan; Nomura

Financial Advisory and Securities (India) Private Limited, Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F,

Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE

INB231299034, INF231299034, INE 231299034).

This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to

sell or a solicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon

information that we consider reliable. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS

ACCURATE, COMPLETE, RELIABLE, FIT FOR ANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT

LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA.

TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY

EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE, MISUSE, OR DISTRIBUTION OF THIS

INFORMATION.

Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including

the opinions contained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as

applicable, NSI's investment banking relationships, investment banking and non-investment banking compensation and securities

ownership (identified in this report as 'Disclosures Required in the United States'), if any, are specified in disclaimers and related

disclosures in this report. In addition, other members of the Nomura Group may from time to time perform investment banking or other

services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned

herein. Further, the Nomura Group, and/or its officers, directors and employees, including persons, without limitation, involved in the

preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have long or short positions in,

and buy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options) thereof, of companies

mentioned herein, or related securities or derivatives. In addition, the Nomura Group, excluding NSI, may act as a market maker and

principal, willing to buy and sell certain of the securities of companies mentioned herein. Further, the Nomura Group may buy and sell

certain of the securities of companies mentioned herein, as agent for its clients.

Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be

viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the

further disclaimers in the disclosure information on companies covered by Nomura analysts available at www.nomura.com/research

under the 'Disclosure' tab. Nomura Group produces a number of different types of research product including, among others,

fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product

may differ from recommendations contained in other types of research product, whether as a result of differing time horizons,

methodologies or otherwise; it is possible that individual employees of Nomura may have different perspectives to this publication.

NSC and other non-US members of the Nomura Group (i.e. excluding NSI), their officers, directors and employees may, to the extent it

relates to non-US issuers and is permitted by applicable law, have acted upon or used this material prior to, or immediately following, its

publication.


http://dis.kofia.or.kr/


Nomura Global Economics 18

Asia Special Report | India’s 2011 outlook: Rising symptoms of a supply-constrained economy

14 January 2011

Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or

price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by

foreign currencies, effectively assume currency risk.

The securities described herein may not have been registered under the US Securities Act of 1933, and, in such case, may not be

offered or sold in the United States or to US persons unless they have been registered under such Act, or except in compliance with an

exemption from the registration requirements of such Act. Unless governing law permits otherwise, you must contact a Nomura entity in

your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material.

This publication has been approved for distribution in the United Kingdom and European Union as investment research by Nomura

International plc ('NIPlc'), which is authorized and regulated by the UK Financial Services Authority ('FSA') and is a member of the

London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular

investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible

counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the

FSA. This publication may be distributed in Germany via Nomura Bank (Deutschland) GmbH, which is authorized and regulated in

Germany by the Federal Financial Supervisory Authority ('BaFin'). This publication has been approved by Nomura International (Hong

Kong) Ltd. ('NIHK'), which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK.

This publication has been approved for distribution in Australia by Nomura Australia Ltd, which is authorized and regulated in Australia

by the Australian Securities and Investment Commission ('ASIC'). This publication has also been approved for distribution in Malaysia

by Nomura Securities Malaysia Sdn Bhd. In Singapore, this publication has been distributed by Nomura Singapore Limited ('NSL').

Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States, by

Nomura Securities International, Inc., a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the

provisions of Rule 15a-6, under the US Securities Exchange Act of 1934.

This publication has not been approved for distribution in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the

United Arab Emirates by Nomura Saudi Arabia, Nomura International plc or any other member of the Nomura Group, as the case may

be. Neither this publication nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other

than those authorised to do so into the Kingdom of Saudi Arabia or in the United Arab Emirates or to any person located in the Kingdom

of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates. By accepting to receive this publication, you

represent that you are not located in the Kingdom of Saudi Arabia or that you are a 'professional client' in the United Arab Emirates and

agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the

Kingdom of Saudi Arabia or the United Arab Emirates.

No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means; or (ii) redistributed without the prior

written consent of the Nomura Group member identified in the banner on page 1 of this report. Further information on any of the

securities mentioned herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as

e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost,

destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the

contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy

version.

Additional information available upon request. NIPlc and other Nomura Group entities manage conflicts identified through the following: their Chinese Wall, confidentiality and independence policies, maintenance of a Stop List and a Watch List, personal account dealing rules, policies and procedures for managing conflicts of interest arising from the allocation and pricing of securities and impartial investment research and disclosure to clients via client documentation.

Disclosure information is available at the Nomura Disclosure web page: http://www.nomura.com/research/pages/disclosures/disclosures.aspx

Nomura Financial Advisory and Securities (India) Private Limited Tel: +91 22 4037 4037 Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai - 400 018, India , Fax: +91 22 4037 4111

Caring for the environment: to receive only the electronic versions of our research, please contact your sales representative.

http://www.nomura.com/research/pages/disclosures/disclosures.aspx

asia special report mgm mirage - home | nomura€¦ · nomura | iga’ 2011 rxworrn: rvlqj v\pswrp...

Documents