Excitement on GST implementation is palpable. Tax rates for goods and services announced by the GST council suggest that it has attempted to minimize the impact on revenues and inflation (which we expected), but has also sweetened the deal to some extent.
There are several areas where clarity is still missing, like in tobacco, textiles, footwear and gold. For most of these, we should have clarity on 3 June when the GST council meets next. From 1 June, the GSTN system will once again open up for registration. This is crucial since only 54 lac of 80 lac businesses had registered for GST until 31 March. Alongside, we will also have states passing their own SGST laws. We will need atleast 19 states to pass these laws, and only ~12 have completed this to date. All-inall, it feels like a rush towards 1 July 2017 implementation, but it seems doable.
The USD/INR breached 64 levels and also nearly reached 65 within the same week! Trump-fade (the opposite of Trumpflation) and benign inflation data helped the currency on Monday, while EM risk off triggered by allegations of graft in Brazil weakened the INR on a Thursday.
We expect the USD/INR to remain range bound between 63 and 66 over the next 12-18 months (~5% corridor) driven by sentiment, and moving closer to 65.5 by March 2018 and then 1.5% depreciation to 66.5 in March 2019.
We also don’t see a structural call for steady INR appreciation yet, though the ingredients are in the making. We think the SavingsInvestment gap is compressed due to the weak investment cycle, and that gap will widen as growth picks up. Initially due to fall in savings as consumption picks up, and later as investments rise.
Watch out for: Clarity on GST rates around 3 June, Mar Qtr GDP (31 May) and further news on monsoons.