Tuesday, 22 November 2016

Demonetization: Short-Term Pain but Long-Term Gain

Taking the whole country by surprise, Narendra Modi has pulled off a shocking move to demonetize higher value currency notes as he waged war on the evil of black money in Asia’s third biggest economy.

While it’s hard not to overlook the short-term repercussions of wiping out Rs 500 and Rs 1000 notes which comprise 86 per cent of total value of currency in circulation, the long-term implications of demonetization are seen as positive.

Demonetization has sent out a strong message about the country’s anti-corruption drive which will improve investment sentiment in the long-run.

While the sudden cash crunch may have crippled the common man, demonetization marks a crucial step in India’s bid to transform into a cashless economy.

With cash-intensive sectors such as food, transport, real estate and restaurants likely to be severely hit, this fiscal’s GDP could be squeezed by 0.8 to 1 per cent. In the longer term, demonetization may help bolster economic growth as more and more of the informal economy becomes formal and the Goods and Services Tax comes into play.

Successful unearthing of unaccountable money could propel tax gains for the government, good news for India’s fiscal deficit.

An interest rate cut also looks likely on the cards in the coming months as a cash squeeze exerts downward pressure on consumer food prices amid lower purchases. Lower borrowing costs will augur well for India Inc. particularly rate-sensitive sectors such as auto and banking. Also, the withdrawal limits on cash will propel faster growth of bank deposits, supporting lower long-term deposit and lending rates.

 Looking beyond the long queues outside banks and ATMs, wobbly stock markets and short-term consumption & growth squeeze, Modi’s latest reform is a well-thought out one. The key to its success lies in its implementation.


The bottom line -No gain without pain!

Latin Manharlal Group

Wednesday, 2 November 2016

Uptick in Manufacturing PMI underpins India’s Economic Recovery

India’s factory activity expanded at its fastest pace in almost two years in October, with a robust rise in new orders as well as output, supporting the strong growth story of the Asia's third largest economy.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector spiked up to 54.4 in October, a 22-month high, from September's 52.1, marking the biggest monthly jump in almost five years, with a reading above 50 signaling expansion.
The manufacturers attributed the latest rise in production to solid growth of the new orders, which surged significantly in October, pointing towards the strength in the underlying demand.  While, foreign orders continued to contribute to the upturn in the total new work, the rate of growth in new businesses from overseas eased to a three-month low.  

Meanwhile, the output increased for the tenth straight month and at the quickest rate in nearly four years in October.  The output sub-index, which measures the overall production, was at 57.2 in October, the highest since December 2012, and up sharply from 53.3 in September, the report noted.

The survey showed that consumer goods producers outperformed their intermediate and investment goods counterparts, registering stronger rates of expansion for both output and new orders. Despite the robust growth in new work, employment sub-index was left unchanged. Meanwhile, buying levels grew at their strongest rate in 14 months, while stock levels increased at the fastest pace since July 2015.
Moving ahead, input costs grew at its fastest rate since August 2014, part of which was passed on to the consumers by way of higher selling prices. It is likely to continue on an upward trend. This shows that risk of inflation is gathering steam yet again which had cooled to a 13-month low in September due to moderating food prices.


The increase in the inflation rate will also affect the prospects of any further easing from the Reserve Bank of India (RBI), which earlier this month surprised markets by cutting its benchmark repo rate by 25 basis points to 6.25 per cent. The next meeting of the Monetary Policy Committee (MPC) is scheduled on December 6 and 7.
Latin Manharlal Group

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.