Thursday, 13 July 2017

Cooling Inflation Bolsters Rate Cut Hopes

India’s consumer price inflation has eased to its slowest pace in more than five years, raising demands for the interest rate cut by the Reserve Bank of India (RBI) at its policy meet scheduled in August, in order to stimulate growth in Asia’s third biggest economy.

According to Central Statistics Office (CSO) data released, consumer inflation eased to a record low of 1.53 per cent in June from 2.18 per cent in May. It was 5.77 per cent during the corresponding period last year.

With inflation number below the RBI’s mid-term target of 4 per cent for the past eight months, industry participants and the government are batting for a cut in interest rates to support economic expansion. The central bank now expects retail inflation to come in a 2.0-3.5 per cent range for the first half of FY 18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Deflation in vegetables and pulses continues to bring down the headline numbers as food and beverage price index, which accounts for 45 per cent of the consumer price index basket, contracted 1.17 per cent in June. Vegetables prices slipped 16.53 per cent during the reporting month from last year, while price of pulses declined nearly 22 per cent. Analysts expect these prices to remain subdued for few more months aided by an excess supply, good monsoons and low prices globally.

On the other hand, industrial output rose 1.7 per cent in May after rising 3.1 per cent in April owing to weaker performances in manufacturing, mining and power generation. The tepid factory output data could further strengthen the case for RBI rate cut in August to support India's economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.

While the recent data may put pressure on RBI to consider a token 25 basis point rate-cut, it is not a given. Monsoons, HRA increase under the Seventh Pay Commission, temporary impact of GST, base effect trickling in, and fiscal risks coming from farm loan waivers by States can still exert upside pressure on inflation in the second half of this fiscal.

Latin Manharlal Group

Wednesday, 28 June 2017

GST Rollout to Support India’s Growth Story

After a long wait of 17 years, the goods and services tax (GST) is all set to become a reality from the midnight of June 30.  GST is expected to provide the much-needed stimulant for the economic growth in India by transforming the existing base of indirect taxation towards the free flow of goods and services.
GST is the indirect tax reform that will replace several taxes levied by the central and state governments and change India into a single common market with a unified tax structure. It was introduced as the Constitution (122nd Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. Under GST umbrella, goods and services will be taxed at 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent.
GST, a uniform, indirect tax regime, will no doubt benefit the industrial class by improving the ease of doing business. Integration of current multiple taxes into single GST will reduce cost of tax compliance and transaction cost. GST will also remove cascading effect of taxes imbedded in cost of production of goods and services.

According to economists, lower GST rates may lead to a decline in inflation, however, the economic growth may not improve significantly in the short term even though it will benefit both India Inc and the government in the medium term. However, GST, which will be rolled out in July, will help raise India's medium-term growth to above 8 per cent, as it will enhance production and the movement of goods and services across Indian states.

With the implementation of GST, the flow of Foreign Direct Investments (FDI) may rise as the existing multiple tax laws are one of the reasons foreign companies are wary of coming to India.

In addition, India’s overall revenue is also expected to shoot up by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.

GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production that incudes land labour and capital.

The introduction of the Goods and Services Tax will be a very noteworthy step in the field of indirect tax reforms in India. The GST, because of its transparent character, will be easier to administer. The proposed taxation system holds great promise in terms of sustaining growth for the Indian economy.

Latin Manharlal Group

Wednesday, 14 June 2017

Record Low Inflation in May Spurs Rate Cut Hopes by RBI

India’s retail inflation gauge slumped further in May, hitting a record low amid a sharp drop in kitchen staples, leaving lingering doubts about whether the Reserve Bank of India (RBI) tightened its monetary policy stance too early.

According to the data released by the statistics office, consumer inflation, the benchmark price gauge of the RBI, eased to a record low of 2.18 per cent in May from 2.99 per cent in April. It was 5.76 per cent during the corresponding period last year.

The data would confirm expectations that inflation is running well below the central bank's estimates, adding pressure on the RBI to reduce interest rates during its next policy meeting in August to boost economic growth.

The RBI last week kept the benchmark repurchase rate unchanged at 6.25 per cent in a policy review and slashed its inflation forecasts, acknowledging that price pressures were weaker-than-anticipated, but declined to ease its 'neutral' policy stance amid concerns that inflation may rebound and move close to its 4 per cent medium-term target by the end of the year.

Asia’s third-largest economy is facing a decline in inflation amid cooling food prices. The consumer food price index declined 1.05 per cent in May, compared to a year ago period, led by an almost 20 per cent fall in the prices of pulses and products. Price of vegetables too fell 13.4 per cent from a year ago.

Further, India's wholesale prices also cooled in May. WPI inflation in May was 2.17 per cent compared with 3.85 per cent in April. Similar to retail inflation, the drop in the wholesale inflation is attributed to easing food prices.

Going forward, a good monsoon is expected to keep a lid on food prices and overall inflation, which may force RBI to shift its attention to growth. India's GDP growth slipped to 6.1 per cent in quarter ended March, the lowest in more than two years, as the economy struggled with the effects of November's demonetisation. 
Latin Manharlal

Tuesday, 30 May 2017

Indian Markets on a Roll Amid Improving Sentiments

The euphoria in the Indian equity markets seems to be gaining strength day by day as the equity benchmarks continue to scale new lifetime highs. Buoyed by encouraging corporate earnings and a string of government reforms, including NPA resolution and steel policy, domestic markets are in no mood to look back.

The two prominent Indian market indices, the benchmark 30-share Sensex index and the Nifty 50 index, scaled record highs on 26th May, 2017. Stock benchmarks soared almost 1 per cent to all-time highs with the Sensex closing above 31000 and Nifty touching 9600 for the first time.

Sentiments of investors remained upbeat on a sustained pick-up in the economy and corporate earnings, backed by reforms such as the goods and services tax (GST) and tackling of bad loans. The governing Narendra Modi-led Bharatiya Janata Party (BJP)’s smart victory in the 2017 Uttar Pradesh assembly elections has raised the probability that it could come back to rule at the centre for the second term, further boosting the investors sentiments.

Meanwhile, continuous purchase by domestic institutions has kept the momentum going. Adding to this, the fact that other forms of investments such as property and gold have not provided adequate returns, have also made equities look more attractive in the year 2017.

The Indian markets are also relieved by the timely arrival of the southwest monsoons. Analyst pointed out that FMCG heavyweights such as Hindustan Unilever and ITC got a boost after the India Meteorological Department (IMD) predicted the timely arrival of the southwest monsoon rains.

Positive global cues also played a vital role in the D-street clocking 31-k mark, after the Federal Reserve’s latest meeting showed that the policymakers were cautious about a fresh rate hike. According to the minutes of the May 2-3 meeting, the Fed members decided that they should hold off an interest rate hike until they were confident the recent US economic slowdown was temporary.

Going forward, the outlook for the coming months looks promising and the Indian markets are expected to strengthen further with the indices expected to clock new highs in the current fiscal as the macroeconomic backdrop remains favorable. 

Latin Manharlal Group

Tuesday, 16 May 2017

India’s Growth Projected to Bounce Back to 7.2% in FY18

With the fading impact of note ban announced by the Modi government in November last year, Asia’s third biggest economy is expected to gain strength, maintaining its tag of the world's fastest growing economy.

International Monetary Fund (IMF), the international organization headquartered in Washington, has projected that the Indian economy will rebound to 7.2 per cent in this current fiscal year and rise to 7.7 per cent in the next, in 2018-2019.

The hurdles caused by demonetisation resulted into the lack of ready cash available with spenders. However, with the government’s remonetisation exercise, this problem is expected to gradually dissipate in 2017.

Other than remonetisation, a good monsoon season and developments in removal of supply-side problems will also help in balancing this disruption.

According to the report, improving productivity in the agriculture sector, which is the most labour-intensive sector and employs nearly half of Indian workers, remains a key challenge. Farmers require more flexibility in distributing and marketing their crops as this will help improve competitiveness, efficiency, and transparency, it added.

Further, a favourable monsoon could put an end to the almost continuous earnings downgrades that the domestic market has been witnessing in the past several quarters. According to the latest prediction of India Meteorological Department (IMD), the monsoon this year could be normal and bring 100 per cent rainfall instead of 96 per cent as predicted earlier.

Looking at the Asia as a whole, the IMF report estimates that the growth will accelerate to 5.5 per cent this year from 5.3 per cent in last fiscal. However, it warned that the near-term outlook for the region is clouded with significant uncertainty, adding that medium-term growth faced difficulties from a slowdown in productivity growth in both advanced economies and China.

Going forward, on the back of reforms initiatives being taken by the government, India’s growth rate will improve further. Stronger consumption and fiscal reforms are expected to improve business confidence and investment confidence in the country.

Latin Manharlal Group

Wednesday, 26 April 2017

Normal Rains Expected to Revive Indian Economy

India is likely to be lucky for second year in a row as the normal monsoon forecast of the India Meteorological Department brings the promise of a year of growth and good health for India’s economy and ecology.
In the first prediction for this monsoon season, the rainfall during June to September, is likely to be normal between 96-104 per cent of the 50-year average rainfall of 89 cms, the Indian Meteorological Department said.

If the forecast holds, it will revive rural demand, give a much-needed boost to the agricultural produce and help in taming inflation pressures. This could lead to the lowering of the food prices, strengthening of the agricultural incomes and eventually putting more purchasing power in the hands of the rural population. The forecast is also critical to the government’s hopes of achieving an expected growth rate of more than 7.5 per cent.

Two-thirds of India’s population depends on farm income and nearly 60 per cent of summer sown areas do not have assured irrigation facilities. Summer crops account for nearly half of India’s food output, including rice, lentils, sugar, spices, mangoes and oilseeds.

Moreover, IMD’s projection of 38 per cent rainfall, which is considered normal, would largely benefit water reservoirs, hydro-power projects and irrigation facilities for good harvesting. Industries such as FMCG, tractor and auto sector are also expectedto witness improved sales.

Further, IMD also flags the risk of El Nino in the latter part of the season. This does not necessarily mean a monsoon failure, as only a third of El Nino years are drought years.El Nino is a climatic phenomenon which is the warm phase of the cycle of warm and cold temperatures in the Pacific Ocean that also impacts the monsoon.

IMD, however, said weak El Nino and positive Indian Ocean Dipole (IOD) are presently combining to give a positive monsoon scenario for India in 2017.

Going forward, the growth in Asia’s third biggest economy would depend on the spread and the extent of the monsoon rains in the months ahead and impact of the Goods and Services Tax (GST) once it is rolled out.

Wednesday, 5 April 2017

Manufacturing Activity Recovers From Demonetisation Shock

India’s factory activity has fully recovered from the demonetisation setback with manufacturing sector expanding for the third straight month in March, taking activity back to the levels before demonetisation.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector rose to 52.5 in March from 50.7 in February, rising at the fastest pace in five months, with a reading above 50 signaling expansion.

The manufacturers attributed the latest rise in production to solid growth in domestic as well as export work orders. The new orders index rose to a 5-month high of 53.6 from 51.3 the previous month.

The manufacturing PMI had declined sharply following the government’s decision to withdraw notes of Rs 500 and Rs 1,000 on November 8. The move caused huge trouble to daily life and businesses in the largely cash-based economy. In December, manufacturing activity levels hit a low of 49.6, indicating a contraction in the manufacturing sector. However, as the cash crunch eased, the world's fastest growing major economy has largely recovered from Prime Minister Narendra Modi's shock decision.

The survey also showed encouraging signs on the inflation front, which has come squarely back on the central bank's radar in recent months. Input prices grew at a slower pace compared to February, and there was a corresponding slowdown in the pace of output price rises as well, which likely helped increase demand.

Indian inflation picked up pace in February to 3.65 per cent, after slowing in the previous month to 3.17 per cent, its lowest in at least five years, but it was still below the central bank’s 4 per cent target.

The Reserve Bank of India shifted its policy stance from accommodative to neutral and kept the policy repo rate unchanged at 6.25 per cent in its February meeting, opting to wait for more clarity on inflation trends and the impact of demonetization. The experts believe the central bank is unlikely to cut interest rates in its monetary policy review on April 06, 2017.

Going ahead, the survey projected a bullish outlook as business confidence among manufacturers improved in March, with almost one-fifth of the panelists expecting output levels at their units to be higher in 12 months’ time.

Latin Manharlal Group