Macro-economic fundamentals: archives

Pre May 2018

• MPC (5 April 2018): On anticipated lines, the Monetary Policy Committee (MPC) in its first bi-monthly policy statement of FY 2018-19 kept the policy rate steady on domestic and global cues. While presenting a positive view on the consumption front, the Reserve Bank of India (RBI) also suggested risks on the inflation front. The RBI has expectedly taken a hawkish stance and is likely to stick with its objective to keep inflation within the (4 +/- 2) % range. As rightly pointed  out by the policy statement, financial sector volatility and brewing trade wars are likely to becoming cause of further tension yielding less than favourable results for domestic trade activity as well as capital markets.
  
  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. Considering this, inflationary expectations have been revised downwards to 4.7-5.1% in H1 and 4.4% in H2 of the next fiscal year with risks tilted to the upside. 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. That said, the RBI will face a greater challenge in shaping up policy perspective in the coming months as higher yields, inflationary pressures and election cycle in India and US both are likely to lead to market volatility. The projected easing in inflation in the second half of the coming fiscal should prompt the MPC to stay on hold in the coming months. As such, we would like to reiterate that risks on monetary policy are tilted to the upside and an interest rate hike may come through toward the end of the year.
  ~ Anis Chakravarty
• IIP (12 Feb 2018): "Industrial production has performed well for the second month in a row with all the major components showing growth. Encouragingly, capital goods production has now grown for the fifth month while consumer durables has also printed in positive territory signaling that demand may be coming back into the system. While growth was expected to be around the high single digit range, the breakup shows that overall growth in the economy has bottomed out and is slowly improving. The trend suggests that the impact of GST has most likely waned away."
  ~ Anis Chakravarty
• CPI (12 Feb 2018): "Headline inflation has remained broadly at the same level from last month declining marginally. The slight cooling off in inflation numbers was essentially on the back of moderating food prices as signalled from the last month’s wholesale inflation print. Importantly, core inflation has accelerated during the last month as housing inflation, clothing and footwear prices gained momentum. Inflation in personal care and effects also rose mainly due to higher taxes on services under the goods and services tax regime. As such, inflation is likely to accelerate in the coming months before coming down over the second half of the year. We continue to reiterate our stance that there remains a possibility of some monetary tightening later in the year." 
  ~ Anis Chakravarty
• RBI Monetary Policy (7 Feb 2018): "In its last monetary policy meeting for fiscal 2017-18, the Reserve Bank of India (RBI presented a somewhat balanced view of the economy adding caution on the inflation front. While the central bank continued to maintain its neutral stance, keeping the policy rate unchanged, the tone turned hawkish.Looking at the forecasts for inflation, the RBI has put out a forecast of 5.1-5.6% in H1 and 4.5-4.6% in H2 of the next fiscal year with risks tilted to the upside. The policy statement clearly lays out the risks in form of higher oil prices, revised MSPs, increase in customs duty, normalisation of monetary policy by global central banks and fiscal slippage by the government. This suggests that while the current stance is neutral, there is scope for some upward movement in policy rates if inflation increases beyond the stipulated range. The possibility of higher rates towards the end of the year is further buttressed by the fact that the RBI expects growth to move up above the 7% mark in the next fiscal year. Overall, any monetary action in the period ahead is likely to be data dependent, however, sustained upside prints for oil prices, input costs, and global policy movements may tilt the scales in favour of monetary policy tightening in FY19."
  ~ Anis Chakravarty
• Union Budget: "The latest budget represents prudent management as the focus clearly is on enhancing the health and overall status of the workforce. The stress on creating a budget that enables broader participation of the public has continued by giving a push to rural infrastructure along with trying to ensure that farmers get the right price for their produce. The focus on infrastructure creation continues and bodes well for the overall growth momentum in the economy. The decision to give higher MSPs is clearly a positive for the agriculture sector though it could lead to some inflationary pressures building up in the system. Importantly, the government is not cutting back on expenditure for the current fiscal that should give some support to the economy in the last quarter and hence the figure of 3.5% of GDP for FY18.That said, while the bond markets were expecting some amount of slippage, the final print represents a slight negative for fixed income markets.  The figure for the next year seems credible at the moment, though we await the fine print. At this juncture the plan to hit 3% by FY21 is important to ensure that the government retains fiscal credibility. Broadly the expenditure and revenue assumptions seem credible and should be achievable given the growth assumptions. The disinvestment story is clearly a positive and there could be a positive surprise for the next year if the broader market sentiment holds positive.
  ~ Anis Chakravarty
• Union Budget Quote: "The FM, unlike last year, did not discuss the headwinds that may impact the economy in 2018. The impact on inflation due to rising crude prices and higher in MSPs may make the central bank more hawkish as it would like to analyse the final impact of these variables. As such, this increases the likelihood of some kind of tightening towards the end of the current calendar year."
  ~ Richa Gupta

• Union Budget: "The FM appears to have accepted the need to have a more proactive fiscal policy. The target for the next year has been relaxed to 3.3% for fiscal deficit, even though there is an expectation of stabilizing GST revenues along with buoyant disinvestment proceeds. In a scenario of rising crude oil prices and rising MSPs, it becomes critical that all schemes are implemented timely and the projection of better incomes and growth is realized."
  ~ Richa Gupta

• CPI: "Consumer price inflation has moved up on expected lines and is likely to inch up in the coming months. As such, inflation has risen on the back of a base effect as the overall index has fallen from the previous month’s level. The current print is unlikely to lead to any major change in the RBI’s stance in the near term as inflation is likely to head downwards in the second half of the year once the unfavorable base effects wane. That said, energy and commodity prices could exert some pressure if global growth momentum pricks up from current levels."
  ~ Richa Gupta
• Mid-year economic survey: "The mid-year projections are more in line with our forecasts as we are expecting growth to print in the 7-7.3% handle for the full year. As such, some disruption in economic activity was expected on account of the new taxation regime and the economy would take some time to return back to full steam. On the inflation front, expect the Central Bank to be data dependent with the next few months being crucial in gauging price pressures in the economy. We can expect some more policy action if inflation numbers continue to undershoot the RBI’s estimates." 
  ~ Anis Chakravarty