Tuesday, 18 October 2016

Softening Inflation offers scope for another Rate Cut in FY’17.

Benign inflation numbers and likelihood of a dovish monetary policy committee stance leaves the door open for further monetary policy easing this fiscal. The move could fuel additional growth by supporting government’s effort to boost economic growth to above 8 per cent to create job opportunities.

The sharp retreat in consumer inflation to a 13-month low at 4.31 per cent in September 2016 from 5.05 per cent in August 2016 is indeed a good reason for cheer, particularly when the festival season is round the corner. Retail inflation, the RBI’s benchmark price gauge has fallen below the tolerance level, leaving scope for a reduction in policy rates. The government had recently notified an annual inflation target of 4 per cent plus or minus 2 percentage points.

Further, India's wholesale prices cooled in September after touching a two year high in August. WPI inflation in September was 3.57 per cent compared with 3.74 per cent in August. Similar to retail inflation, the drop in wholesale inflation is attributed to easing food prices. Good rains kept a lid on food prices as food inflation moderated to 5.75 per cent year-on-year in September 2016 and lower than 8.23 per cent in the previous month.

The recently formed Reserve Bank of India Monetary Policy Committee, under new Governor Urjit Patel, slashed the rates by 25 basis points to 6.25 per cent in a surprise move on October 4, 2016, after inflation hit a five-month low in August.

The change in the RBI’s policy position with respect to the cut in real interest to 1.25 per cent from the 1.5 per cent -2.0 per cent range along with expanding the time to achieve 4 per cent inflation by three years to March 2021 from March 2018 provides with additional room for monetary easing in the near-term.
Since the start of 2015, the RBI has cut 175 basis points from its key repo rate. But, after the next expected cut to 6 per cent, the central bank is now projected to hold rates steady for the rest of the 12-month survey horizon.

A rate cut from here-on would help the Indian government in its efforts to lift the economic growth to above 8 per cent. It was last measured at 7.1 per cent in the March-June quarter from 7.5 per cent in the year ago period.

Latin Manharlal

Tuesday, 4 October 2016

India’s factory activity moderates in September

India’s manufacturing activity has moderated in September indicating that the growth in the sector has lost some momentum, creating a case for a reduction in interest rates by the Reserve Bank of India.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector stood at 52.1 in September compared to 52.6 in August, with a reading above 50 signaling expansion in the manufacturing activity over the previous month.

The activity in the Indian manufacturing industry eased slightly in September but the output is still rising at a decent pace and the sector looks likely to have delivered a stronger contribution to the GDP growth in Q2 FY2016/17, with the quarterly reading for the PMI’s Output Index up from 51.4 during April-June to 53.6.

The biggest area of strength for factory growth was the external demand as firms witnessed robust surge in new export orders since July 2015, supported by the growth in output and purchasing activity, while new improved client demand also supported the upswing in order books.

As far as prices of manufacturing goods are concerned, the survey noted that the average purchase costs increased at a faster pace in September, but one that was weak compared to its long-run trend. Data implied that manufacturers attempted to protect profit margins as output charges were raised further.

Despite ticking higher, the rate of inflation was historically muted and it has given the central bank enough room to ease policy further. The Reserve Bank of India in its monetary policy review today slashed its key lending rate or the repo rate by 25 basis points to a six-year low of 6.25 per cent, from 6.5 per cent.

Consumer inflation in India cooled sharply to 5.05 per cent in August, almost at the RBI's March 2017 medium-term target of 5 per cent, and with favorable monsoon rains, it is expected to tread lower in the coming months.

Tuesday, 20 September 2016

Indian economy projected to grow 8%

Despite registering a tepid growth in the April-June quarter, Asia’s third biggest economy is expected to gain strength amid broadening of the domestic consumption base, maintaining its tag of the world's fastest growing large economy.
American rating agency, S&P Global Ratings, has projected that Indian economy will touch 8 per cent growth over the next few years supported by the ongoing momentum in India’s structural reforms, most recently with the passage of the goods and service tax (GST).

The newfound faith in the Indian economy is largely backed by the measures taken by the Modi government since taking office in May 2014. India has now successfully managed to improve its competitiveness and ease of doing business rankings. Reforms like passage of GST is expected to remove the cascading effects and the inefficiencies created by different layers of taxes across states and the central government.
Easing of restrictions on Foreign Direct Investment (FDI) will now foster productivity growth in some sectors. The bankruptcy law, improved access to bank accounts and measures aimed at easing business starts would surely push up the economic growth.
Further, a normal monsoon in fiscal 2017 is expected to give thrust to the agricultural growth, pushing it above the trend level, given the current low base due to two successive monsoon failures. This should lift the sagging rural consumption demand and boost the overall GDP growth. Fortunately for India, weather forecasters accord a higher probability for normal monsoon.
However, inflation still remains a risk, given the large weights on food, fuel, and other volatile items in the Reserve Bank of India's target basket. In terms of the monetary policy framework, the Government of India has notified a CPI inflation target of 4 per cent, within a tolerance band of 2 per cent-6 per cent until March 2021. Such a scenario would help to anchor inflationary expectations. In addition, a favourable base effect as well as an improved crop sowing dynamics will ensure that CPI inflation remains within this tolerance band in the near term.

Going forward, growth in fiscal 2017 will also find support from higher pensions announced by the government, coupled with above-average monsoon and lower interest rates.
Latin Manharlal

Tuesday, 6 September 2016

India’s Q1 GDP Growth Slows

Indian economy grew at its slowest pace in two years in the April to June quarter, amid sluggish investment and farm output, potentially making the government’s target of achieving 8 per cent growth this year more daunting.

Gross Domestic Product (GDP) in India rose by 7.1 per cent in the first quarter of FY 2016-17 from 7.5 per cent in the year ago period, data released by the statistics office showed.

The previous low was 6.6 per cent GDP growth recorded in the October-December quarter of the 2014-15 fiscal.

The slowdown was primarily attributed to lower activity in farm, mining and construction sectors. Mining dipped into negative territory (-0.4 per cent) and construction disappointed (1.5 per cent). During the same quarter last year, these sectors grew 8.5 per cent and 4.5 per cent, respectively.

The dwindling private investments also took a toll on India’s growth number. The Gross Fixed Capital Formation which is an indicator of investment activity in the economy, fell 3.1 per cent in real terms in the April-June quarter, signaling that the private investment sentiment remained weak. The decline in investment is despite government pushing public investment. This can be due to excess capacity in the private sector and a high level of debt in sectors such as construction and infrastructure.

Private consumption, the major driver of the country’s economy, also grew at a weaker pace of 6.7 per cent against 6.9 per cent, the year before. However, growth in this segment may improve over the next few months in the wake of a better monsoon and increase in the wages.

However, even with lower-than-expected growth, India remains the fastest growing major economy, with China registering 6.7 per cent growth during June quarter. The sectors that supported India’s economic growth included, manufacturing (9.1 per cent) and electricity (9.4 per cent), performing better than the same quarter a year ago. Agriculture and services more or less managed to stay in the positive zone.

Going ahead, good monsoons combined with pay hikes to the central government employees are likely to push economic growth in the remaining quarters of 2016-17.

Latin Manharlal

Tuesday, 23 August 2016

RBI’s New Boss & the Challenges Ahead

Ending months of speculation, the government has announced appointment of Urjit Patel as the Reserve Bank of India’s (RBI) 24th governor, filling the shoes of Raghuram Rajan whose three-year tenure ends on September 4, 2016.

By picking Patel as the new boss of RBI, the centre has signaled continuation of prudent monetary policy, which will act as a positive trigger for the investors, bolstering the outlook of Asia’s third biggest economy.

Unlike Rajan, who took over mid-crisis, the incoming governor will inherit an economy in much better shape, with GDP growing at 7.9 per cent, a stable currency and record foreign-exchange reserves. However, there are some immediate challenges that Patel will have to face as the new RBI governor.
First and foremost, after assuming office, the primary challenge in front of the new RBI chief will be to rein in inflation as it has started inching up, led by the food prices. The global commodity prices, particularly the oil, too have started surging. Annual consumer price increases have also topped 6 per cent, breaching the government’s target.

Besides controlling inflation, Patel will face another important task of carrying forward the clean-up exercise at the banks, particularly those in the public sector. Besides, he may see a new breed of players coming up in the banking sector.

Another big challenge for Patel will be to appoint a member on the Monetary Policy Committee (MPC) which will decide the interest rate and focus on maintaining the inflation at 4 per cent with a plus/minus margin of 2 per cent. Currently, the governor alone sets interest rates but now a new six-member panel will take over before October. Three members from the RBI including the governor and three external members appointed by the government will decide on the interest rates.

Urjit Patel would also be looking closely at the impending liquidity crisis in the market. Earlier, RBI had raised about USD 35 billion through FCNR (B) deposits in September-November 2013 and most of them are getting due this year. Consequently, a dollar outflow of approximately 20 billion is anticipated!  Thus, Patel is expected to tread the middle path and keep the domestic exchange rate stable.

Urjit Patel’s appointment as the successor for Rajan has been widely hailed by both industry and markets alike. Patel is known to be very close to Rajan, a fact that adds to the belief that the new governor will follow in the footsteps of his predecessor.

Patel is someone who is well versed with the changing dynamics of the Indian economy since early 1990s. Even during his tenure under Raghuram Rajan, the RBI governor-designate had helped India to shift to an inflation targeting regime for setting interest rates. Economist expects him to be a successful and effective Central Bank’s governor who could carry forward the good work done by Rajan and further liberalise the India’s financial system.

Wednesday, 10 August 2016

Raghuram Rajan maintains status quo in Final Innings

Reserve Bank of India Governor Raghuram Rajan refrained from tinkering with the key interest rates in his last monetary policy review, as soaring inflation over the past three months offered little room for monetary easing in Asia’s third biggest economy.

The RBI kept its benchmark repo rate (the rate at which banks borrow short-term funds from the central bank) unchanged at 6.5 per cent, the cash reserve rate that scheduled banks have to keep in the form of liquid funds also remained unchanged at 4 per cent and the reverse repo rate at 6 per cent at its third bi-monthly monetary policy review.

Retail inflation, the RBI’s benchmark gauge for prices, rose to 5.77 per cent in June 2016 from 5.76 per cent in May 2016 driven by higher food prices. Moreover, consumer inflation is also hovering pretty close to the government’s newly notified upper tolerance limit. The government has recently notified an annual inflation target of 4 per cent, plus or minus 2 percentage points. RBI is targeting to bring down inflation to 5 per cent by March 2017.

Further, a good monsoon is likely to bolster farm output and curb the surge in food prices, however, there are still some upside risks to inflation including a hike in wages for government employees that may push up consumption and hence put pressure on prices. 

Raghuram Rajan took over the reins of the Reserve Bank of India (RBI) at a time when the rupee was weakening and touched record lows, the current account deficit (CAD) had widened to alarming levels and India’s inflation rate was among the highest in the BRIC countries. Now, after three years, Rajan is leaving the Indian economy in a much stronger shape, evident by the country’s rising global prowess that includes it becoming the world’s fastest growing major economy. From January 2015 till date Rajan has lowered rates by 150 bps.

Prime Minister Narendra Modi's government is yet to pick a successor for Raghuram Rajan who will step down on September 4 after a three-year term, to return to academia in the United States.


Wednesday, 27 July 2016

Fate of GST Bill uncertain in Rajya Sabha.

With flagging jobs, private investment and exports, the Asia’s third biggest economy is in fragile shape despite robust growth, indicating the need for much delayed Goods and Services Tax (GST) Bill, which aims at changing India into a single common market with a unified tax structure and will create millions of formal sector jobs.

The GST Bill, which was initially scheduled to be introduced from April 1 this year, missed the deadline owing to the protests in the Opposition-dominated Rajya Sabha. The Bill is likely to be taken up for voting in Rajya Sabha during this week. The monsoon session of Parliament ends on August 12.
This uniform, indirect tax regime will no doubt benefit the industrial class by improving the ease of doing business. Integration of existing multiple taxes into single GST will significantly 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.
But there seem to be some point of disagreement, which are preventing the Bill from passing through the Rajya Sabha where the BJP doesn’t have the requisite numbers to push the legislation through.

Although, there should be no fundamental opposition to the notion of having a unified tax structure, the states are still anxious about the total revenue loss that could result from such a levy. The Congress has demanded that the additional one per cent tax to compensate manufacturing States for possible loss of revenue should be scrapped.

The Opposition Congress party wants that a cap be fixed on the tax that can be levied under the GST and include this in the Constitution Amendment Bill. They are demanding that the overall GST rate should be capped at 18 per cent. It also wants an independent mechanism to resolve disputes between states over revenue sharing.

While GST is eagerly awaited by the industry, the legal process to implement the GST in India is quite long and complex. It is therefore very important that the Bill is passed in the current Monsson Session.
Latin Manharlal Group