Macro-economic fundamentals

Consumer Price Inflation

12 June 2018

Retail inflation took another leap on anticipated lines and realized RBI fears of a further upswing, basis which the key policy rate was hiked by 25 basis points in the latest monetary policy meet. Pass through of fuel prices largely led to surge in inflation while core inflation added to pricing pressures with broad based movement recorded across miscellaneous category, especially across travel expenses, education, and health. Separately, food prices also showed some increase on account of food price hike, especially fruits and vegetables. However, they can be expected to stabilise on monsoon cues while core inflation can be expected to see further expansion if input costs remain on elevated levels. That said, crude prices continue to pose upside risks are is expected to touch USD 80 per barrel while other risks continue to come from normalization policy in the US, financial sector volatility, and rupee weakening. Some cushioning can come from favourable base effects in the period ahead as high base effects take shape. Overall, the larger risks of inflation should keep RBI focused on policy perspectives in the period ahead, with risks tilted to the upside for another 25 basis point rate increase by end of the year or early next year.

------Anis Chakravarty, Lead Economist and Partner, Deloitte India

Index of Industrial Production

12 June 2018

While last month’s deceleration in production data occurred on account of a negative base effect, the current reading is stronger basis an opposite base effect. The growth came largely on account of manufacturing, construction, and mining activities while non-durable and capital goods production remained healthy. Having said that, the absolute index presented some easing likely on account of a cyclical effect rather than any deceleration in domestic sentiment. That said, risks to factory output remain slightly to the upside on expectations of weakening rupee and higher input costs, however some balancing in data prints can be expected if pace of infrastructure and construction picks up as expected. Having said that, some negative impact may pass through to factory production on account of the recent rise in policy rates.

------Anis Chakravarty, Lead Economist and Partner, Deloitte India

Risks to growth in the coming year and the oil threat

4 June 2018

Currently, the Indian economy is in a sweet spot, with most macro-prints on the upside, especially seen in terms of broad-based industry growth, improving sales data, and positive sentiment as evidenced through the purchasing managers’ index (PMI). However, despite a general upside sentiment, the economy remains vulnerable to external risks, key among them is the anticipated rise in crude price and input costs. Risks to inflation remain and are likely to arise from factors such as fiscal slippage, higher crude and input costs and MSP hikes. Apart from inflationary risks, rising input costs can prevent a stronger production rebound. Risks to growth are further accentuated by the financial sector volatility and brewing trade wars. With this combination of upside risks, continued issues around the NPAs and hardening bond yields, RBI can be expected to continue to tread the path of caution. 

Oil prices started moving up since late 2017 and have now breached the USD 80 per barrel mark with expectations of further hike on account of stifled supply. For India, imports of crude oil accounts for more than 87% of the total crude oil demand, and a rise in prices would mean a rise in import bill. Further, a likely pass-through of crude price hike has become visible in a corresponding rise in petrol and diesel prices, which can only be expected to go up further. The spike is likely to put pressure on the finances of oil marketing companies, likely raising their debt levels and profitability. It can be expected that the oil marketing companies will have to absorb the underlying losses, at least to some extent, ultimately putting pressure on public finances.

------Anis Chakravarty, Lead Economist and Partner, Deloitte India

Expectation from the RBI policy stance and outlook on inflation

4 June 2018

The tone of the last monetary policy meet was largely positive on inflation expectations and were on anticipated lines. Surprisingly, soon after its Feb meeting, the committee revised inflation expectations downwards and in the lower range with the average expectation much below the 5% mark. The policy meet was positive with a hawkish tone, indicating that the MPC is expected to stay put on their monetary policy stance. Given the developments that are underway, especially the rising risks from oil price hike, we believe that the RBI is likely to take a more hawkish stance, but can be expected to stay put on rates. That said, more clarity is needed from data perspective as positive shoots in the statistics possibly remain affected by favourable base impacts. Separately, the extent of the impact of the MSPs, HRA hike and monsoon expectations may not have been fully captured and needs to be waited out for some time to come. On the other hand, the 10-year yield have remained at elevated levels and risks of a larger fiscal deficit may dissuade from a rate hike, at least until the market corrects itself. That said, rupee continues to remain under pressure and may see a downward spiral as the Fed and the European Central Bank are expected to tighten their monetary policy. This may mean that the Reserve Bank of India will adopt a more hawkish stance if financial market volatility increases. These developments could mean a sooner than expected rise in interest-rate. We expect that the committee will hold rates in the coming months in order to completely assess the macro conditions before going in for a rate hike.

------Richa Gupta, Senior Economist and Partner, Deloitte India

Expectations of revival in credit growth and banking sector vulnerability

4 June 2018

While the bad loan problem remain real, what can be seen is that the pace of growth in non-performing loans (NPAs) has slowed. Certainly, key government initiatives have supported in cleaning bank balance sheet problem, however cumulatively it remains at a huge INR 8.5 trillion as of Sep’17 and may likely reach INR 9 trillion mark by the fiscal year end. Now, in terms of credit offtake, there is a possibility of it going up, especially as the retail side is expected to continue to do well. However, it is largely the consumption led credit that is doing well, while credit off-take by industry remain at low levels. In this respect, the government’s capital infusion plan will probably enable banks to make loan provisions in an efficient way. That said, there is a fair argument that the NPA issue or the interest rates may not be the only things dampening the investment sentiment. Infrastructure sector may see a higher take off due to greater focus on infrastructure schemes, however there are sectors that either remain over-leverages or are short of opportunities. Overall, there remains room to be optimistic, however the process will be at best slow and one should not expect a rapid turnaround in banking sector’s or industry’s appetite for credit growth. 

------Anis Chakravarty, Lead Economist and Partner, Deloitte India

Consumer Price Inflation

14 May 2018

After two consecutive months of softening, retail inflation recorded some increase from 4.3% in Mar’18 to 4.6% in Apr’18. The hike was largely driven by an upswing in core inflation, especially with a broad based increase in services segment while marginal upside movements were seen in clothing and housing segments as well. Food prices remained largely flat with some increase in fruit prices and if monsoons plays out as expected, then the upside risks are likely to remain limited. In contrast, core inflation can be expected to remain under pressure due to expectations of higher crude oil prices. Overall global factors and the favorable base effect are likely to influence inflationary pressures in opposite directions. Given that the latest IIP data showed some easing, we believe that the MPC is likely to maintain status quo in June’s monetary policy meet and is likely to wait out further prints to assess such statistical effects while making monetary policy adjustments.

------ Richa Gupta, Senior Economist and Partner, Deloitte India

There is a buzz that with oil price rising, the rupee could touch 70 against USD. Do you see that happening, or do you see RBI’s intervention to contain it?

9 May 2018

The rupee is facing downside risks on account of crude price hike, concerns regarding fiscal deficit and current account deficit, and dollar strength. In the period ahead, these are the factors that may likely keep rupee to 67-70 levels. Generally, rupee depreciation can be expected to boost exports, all the more because in real terms, the rupee was overvalued as compared to some of India’s key export competitors. However if the outward shipments fail to take off at the desired levels and with imports bill inflating, continued depreciation may put further pressure on the twin deficits. RBI interventions in the past have helped stabilize rupee in such scenarios. We expect that any measures by RBI this time will be data driven, including forex reserves and possible impact on deficit and inflation.  

                                                            ---- Anis Chakravarty, Lead Economist and Partner, Deloitte India

Outlook on core sector growth

2 May 2018

Even though the infrastructure output has eased compared to the stronger prints over the last two months, it remains healthy on an average. Positive changes have largely been driven by healthy outputs of coal, and stability across steel and electricity that bodes well for industry output. It is important to note that the relative slowdown across core sectors have been beset by a negative base effect and the numbers show substantial improvement across all sectors in absolute terms. Even so, the likelihood of a further northward movement in crude prices can be expected to pull output of refinery products in the red and needs to be monitored. That said, the relative changes should not be a cause of concern and more data needs to be waited out to establish a definite direction for industry movement.

                                                     ------ Richa Gupta, Senior Economist and Partner, Deloitte India

Impact of rising crude oil prices on the economy

23 April 2018

Global crude prices have seen a sustained pickup and are currently moving around USD 74 per barrel rate. This has come largely on the back of tightening supplies and rising geopolitical risks. Commodity prices are on a rise and this is likely to reflect in output costs, particularly in the manufacturing sector which may become concerning for domestic industries that have only recently gained some traction. What may also become worrying is that the Indian currency has also showed a parallel downward trend since the beginning of 2018 which will make dollar cost of crude more expensive. Since fuel prices have been deregulated, the domestic price will be determined by global price movements with risks on inflation titled on the upside. India is a net oil importer and a sustained upside risk to crude price hike will likely have adverse macroeconomic implications, specifically in terms of a negative terms of trade shock worsening the current account deficit and the fiscal deficit. The MPC is likely to take into account such changes before making any monetary adjustments with an upside projection on interest rate toward the end of the year.

------ Anis Chakravarty, Lead Economist and Partner, Deloitte India

Index of Industrial Production

12 April 2018

Production prints reflected some slowdown over last month’s surprise gain, however, the lower print has likely come on the back of base impact and considerable deceleration in electricity. The factory output data still remains significantly healthy and production has largely marked a broad-based improvement for the fourth consecutive month. These effects have likely come in through strengthening domestic demand and a build-up in global trade activity. The enhanced manufacturing position has also been reflected in improved consumption demand, upswing in vehicle sales, cement and diesel production. Significant gains were made in capital goods production as well as consumer durables, which are likely to positively impact growth numbers. That said, more clarity is needed from data perspective as positive shoots in the statistics possibly remain affected by favourable base impacts and to some degree may be a result of restocking. As such, in order to maintain the momentum of recovery there is a need effectively implement structural and infrastructure related reforms.

------ Richa Gupta, Senior Economist and Partner, Deloitte India

Consumer Price Inflation

12 April 2018

On anticipated lines, the consumer price inflation recorded a further downward movement even as the absolute index remained largely flat, suggesting that favorable base impacts have continued to linger. The downward growth movement of food inflation has had a larger than expected role to play in easing inflation prints and improved monsoon prospects are likely to keep food inflation concerns at bay, at least for some time to come. Core inflation has continued to remain on the upside on the back of likely pass-through of input costs. In response to the comfortable inflationary position, the MPC maintained status quo albeit turning hawkish. As such, expectations of inflation for FY18-19 on average have been revised downwards against the estimations made in Feb’18. Despite the positive news on the food inflation front, we believe that inflationary pressures remain tilted to the upside and are likely to hover around the 5% mark in FY 2018-19. Expected risks may arise from fiscal slippage, higher input costs and MSP hikes while financial sector volatility with respect to the normalization policy in the US may cause further tension. Separately, geopolitical concerns have risen off late and inflationary pressures can be expected to become visible in the period ahead. Improved data prints enjoyed through oil-price declines have started to fade and the expected rise in crude prices will likely build inflationary pressures with a downward rupee bias.

------ Anis Chakravarty, Lead Economist and Partner, Deloitte India

What are the risks to inflation going ahead

12 April 2018

The outlook on inflation continue to remain data depended but risks remain largely to the upside, especially coming from expectation of crude oil price rise due to international output cuts, further hardening of domestic consumption, and continued impact of HRA increase. Even so, the policy has speculated food price inflation to remain within comfortable range and is likely to ease inflationary pressures to some extent. Separately, geopolitical risks have risen and the likely impact of this on crude oil prices may become visible sooner than expected. We expect that inflation expectations in the period ahead will possibly be shaped by oil price movement, impact of minimum support prices (MSP) inclusion, fiscal slippage as GST collections remain low, and monsoon forecasts. A greater challenge would be for the RBI to correctly set policy sentiments in the coming period as higher yields, inflationary pressures and election cycle in India and US both are likely to lead to market volatility. We expect inflation prints to hover around the 5% marks in FY18-19.

------ Anis Chakravarty, Lead Economist and Partner, Deloitte India

How long do you expect the RBI to stay on hold after this inflation number

12 April 2018

The tone of the recently concluded monetary policy meet was largely positive on inflation expectations and were on anticipated lines. Surprisingly, soon after its Feb meeting, the committee revised inflation expectations downwards and in the lower range with the average expectation much below the 5% mark. The outlook of the policy was largely positive with a hawkish tone, indicating that the MPC is expected to stay put on their monetary policy stance. However, we believe that more clarity is needed from data perspective as positive shoots in the statistics possibly remain affected by favourable base impacts. Separately, the extent of the impact of the MSPs, HRA hike and monsoon expectations may not have been fully captured and needs to be waited out for some time to come. Further, the 10-year yield have remained at elevated levels and risks of a larger fiscal deficit may dissuade from a rate hike, at least until the market corrects itself. We expect that the committee will hold rates in the coming months in order to completely assess the macro conditions before going in for a rate hike toward the end of the year.

------ Richa Gupta, Senior Economist and Partner, Deloitte India

Are there any concerns from core inflation going ahead

12 April 2018

The core inflation prints have seen continued marginal upticks but no significant up-shoots. We believe that inflation prints may not have fully captured HRA increase and the expectations of hardening domestic demand as visible through improvements in retail sales, vehicle sales and uptick in infrastructure index. We believe that expansionary fiscal policy, strengthening demand amid rising input prices among other factors is likely to translate into higher output cost in the manufacturing sector. This is likely to get reflected in higher core inflation which has remained sticky at 5.2%. Having said that, projections of further hardening in crude prices and input costs remain a major risk to inflation prints in the period ahead.

------ Anis Chakravarty, Lead Economist and Partner, Deloitte India

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