Interest Rate: Wholesale Inflation Drops On Back of Softer Oil Prices
Interest Rate: Wholesale Inflation Drops On Back of Softer Oil Prices
Interest Rate: Wholesale Inflation Drops On Back of Softer Oil Prices
met.
"The
revised CPI inflation series significantly undershooting RBI's envisaged trajectory should give
RBI the comfort to ease its monetary policy by an incremental 50 bps in FY16, in our opinion,"
she said. Industry renewed calls for a rate cut.
"Given the continuing trend of moderate inflation both at the wholesale and retail level and the
fact that a durable recovery in the industrial sector is still out of sight, we hope that the central
bank would continue with the policy rate cut cycle after the forthcoming budget," the Federation
of Indian Chambers of Commerce and Industry said in a statement.
The demand for rate cuts had become blunted after numbers based on a new series showed the
economy growing by a strong 7.4% in the current fiscal.
However, with December's industrial growth coming in at a weak 1.7%, the case for a rate cut
was strengthened.
To be sure, crude oil has jumped from a low of about $45 per barrel in January to more than $60
on Monday while food prices have inched up. Inflation in vegetables shot up to 19.74% in
January, snapping seven months of a deflationary trend, and wholesale inflation in food articles
climbed to 8% in January from 5.2% in December.
"The increase in the price of the Indian crude oil basket and retail prices of diesel and petrol is
expected to push up the WPI index on a month-on-month basis," said Adityi Nayar, senior
economist, ICRA.
However, some economists are more worried about falling manufactured product prices,
signaling weak demand. Manufactured product inflation eased further to 1.05% in January.
In line with this trend, core inflation, which measures inflation after excluding volatile food and
fuel elements and is considered a measure of demand, moderated further to 0.9% in January
compared with 1.58% in December, the lowest since November 2009.
Fuel and power deflation deepened to 10.69% in January compared with 7.82% in December.
The sharp recovery in global crude oil prices may likely reverse the deflationary trend in
domestic fuel. Petrol and diesel prices were hiked by 82 paise and 61 paise a litre, respectively,
on Sunday.
The rate cut outlook will depend on what the RBI makes of all the latest data, including the
growth numbers.
Four reasons why the scales are tilting towards India
Global investors should turn their attention to India. Heres why
Stock prices have soared over the past year and the bellwether indices have gained more than 40
per cent. But earnings of Indian companies are faltering.
Have stock markets rallied too early and is there a strong case for prices to decline from these
levels? While the turnaround in the profitability of India Inc is taking time, there are a number of
factors that are in favour of the Indian economy at this juncture.
These will eventually translate into better financial performance of Indian companies and better
returns on investor holdings over the next couple of years.
Fall in commodity prices
Commodity prices have been trending lower for almost three years now as global economic
growth slowed and China re-balanced its economy. The Thomson Reuters core commodity
index, one of the gauges to measure global commodity prices, is down 38 per cent since its peak
value in mid-2011.
But the sharper decline took place from June 2014; the index has lost 27 per cent since then. This
is largely due to the halving of the price of crude oil since last June. Petroleum-based products
contribute to 33 per cent of the index weight.
The fall in commodity prices is a blessing for Indian companies that are net importers. The
impact was already felt in the December quarter earnings with raw material cost as a proportion
of sales recording a decline over the same period a year ago. Unless companies decide to pass on
these benefits to customers, this will help them improve their profitability in the coming quarters.
Strong economic growth
According to the IMFs world economic outlook report, India is set to report one of the highest
GDP growth rates in 2016, thanks to the boost to the terms of trade from lower oil prices and a
pick-up in industrial and investment activity after policy reforms. Indian growth is expected to
reach 6.5 per cent in 2016. This is higher than Chinas 6.3 per cent and the global average of 3.7
per cent growth.
Many of the other emerging economies that were vying for a share of the global investment pie
have been hit hard by the plunge in commodity prices, since they are commodity exporters.
Growth in Russia, Brazil and South Africa is expected to contract by -2.5, -0.7, and -0.3 in 2016.
With India set to record a far superior growth when compared with other economies, foreign
investors, both foreign portfolio investors as well as those bringing money into FDI, are likely to
prefer investing in India, thus supporting the Indian stock market and the economy.
Real rates turning positive
The decline in commodity prices has been a godsend for Indias inflation too. Consumer price
inflation is down to 5.1 per cent in January 2015. Fall in inflation is good for companies since it
means saving on input costs and higher demand due to larger surplus in the hands of the
consumer.
From an investment perspective too, the declining inflation spells good news since some of the
surplus will be ploughed into savings. Again, with the Reserve Bank of India going slow with its
policy rate cuts, the real rates in the economy are currently more than 2.5 per cent. These rates
are among the best in the world and are certain to act as a draw for global investors in debt
securities.
Foreign investors have already purchased close to $4.7 billion of Indian debt since the beginning
of 2015.
The positive real yield will also result in household savings which was moving into physical
assets such as real estate and gold over the last few years moving into financial assets. With
the RBI announcing its intention that the rate cycle has reversed downward, stocks are likely to
generate greater interest than fixed income.
Rupee on a strong wicket
Despite intense volatility in foreign currency market in recent months with dollar surging and
euro caving in, the rupee has proved quite resilient, moving between 60 and 64 against the dollar.
With the decline in crude prices, the current account deficit is no longer a threat. While declining
growth in exports is adding some pressure on the currency, healthy interest from foreign
portfolio investors as well as foreign direct investment is helping keep the rupee stable. FDI
flows in the period between April and November 2014 are up 22 per cent over the same period a
year ago.
The recent monetary policy statement of the RBI indicates that the central bank is expecting the
fund inflow to continue in the months ahead, thanks to the 1.1-billion stimulus announced by
the European Central Bank to shore up European economies. Foreign investors searching for a
country with good economic growth and positive real rates are likely to continue pumping
money into India. With interest rate cycle reversing downwards, debt-laden companies in India
are expected to get a reprieve. The joker in the pack is the implementation of policy reforms that
is needed to get stalled projects going, make fuel available for our power sector and encourage
foreign investment into the country.
If the Modi government delivers on this front, India can exceed the growth projected by the IMF
in 2016.
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6.9% growth? World laughing at this bad joke
Former central bank governor Dr Y V Reddy once quipped to me that while the future is
always uncertain, in India even the past is uncertain, given how often the government
revises economic data. Even by that standard, however, the dramatic upward revision of
the GDP growth rate is a bad joke, smashing Indias credibility and making its statistics
bureau a laughing stock in global financial circles.
The new and not-so-funny numbers show that the Indian economy grew at a pace of 6.9% in the
last fiscal year, a claim that is fantastic in the extreme. Many Indian economists have set out to
show that the new growth numbers for the economy as a whole simply dont add up, as a sum of
the parts. Every piece of data from the tepid increase in corporate revenues to imports, credit,
rail freight and auto sales points to a much lower growth figure, probably closer to the old
estimate of 5%.
Surprisingly, for a country obsessed with its GDP growth rate, there is not much outrage at this
travesty, either in public or at cocktail parties. In the past, Indias habit of revising economic data
was confined to relatively minor tweaks, but this latest update is a wholesale rewriting of history.
In the international financial community, no one had questioned the veracity of Indias economic
numbers, until now.
This makes India look bad even compared to China, which many analysts have long suspected of
massaging GDP figures to show steady growth. But the same sceptical analysts admit that when
China manipulates its numbers, it does so carefully and only when the actual growth rate falls
below its official target, as it has of late. The authorities seem to know exactly what they are
doing. Indias new GDP data clashes even with the pronouncements of some government and
central bank officials, suggesting that the left arm doesnt seem to know what the right arm is
doing.
The whole episode is reinforcing the bad rap India gets for poor governance standards. To be
sure, many emerging nations including Turkey and Nigeria have issued flattering upward
revisions of their growth data in recent years, but generally without eliciting peals of laughter.
Last year, Nigeria issued a revision showing that the economy was nearly twice as large as
previously reported, but it was widely accepted because the new methodology was well
explained and had the endorsement of the International Monetary Fund.
The IMF in fact recommends that, every five years, countries update the base year they use to
calculate the pace of growth in the economy. The idea is to capture the impact of new growing
industries, and Nigeria hadnt updated its base year since 1990. Indias last revision came in
2010, so this one came on schedule. Only the statistics bureau clearly rushed it into print, without
conducting even an elementary smell test to ensure that the new numbers square with the reality
on ground. One clear sign of the bureaus haste to publish is the fact that it released revised data
for only the last two years, making it impossible to see the long-term trend for Indias growth
rate.
Nobody really believes that the Indian economy grew at anywhere close to 7% last year, and
shockingly no one is willing to put an end to this nonsense. When India delivers its budget on
February 28, officials are likely to claim that economic growth in the coming year will accelerate
to around 8% a figure based on the new series. A forecast based on dodgy numbers will only
cast doubt on Indias claim to be the worlds fastest-growing large emerging market, though that
claim could easily prove true in a couple of years, based on credible numbers.
At a time when the world economy has slowed to a pace of just 2.5%, close to the level that feels
like a global recession, many analysts cite India as one of the few economies in which the growth
outlook could brighten. If Indias growth rate accelerates, legitimately, from the current rate of
around 5% to a rate of 6 to 7%, it will be widely hailed as a remarkable achievement, particularly
when most emerging nations including China are slowing down sharply. Instead, serious analysts
are left scratching their heads over the statistics departments new data, and every story about
Indias economy now includes at least a jarring footnote about its not-so-funny numbers. The
government needs to resist the temptation to celebrate Indias economic success, based on this
dubious data. The better part of political and economic wisdom would be to say that until more
details are available, and until the new data meets more global standards, the government will
continue to use the old series. Good governance is based on credibility, not a willing suspension
of disbelief.
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Indian economy seen growing 7.8 per cent next fiscal: DBS
NEW DELHI: The Indian economy has bottomed out and it is expected to grow at about 7.5-7.8
per cent in next fiscal beginning April 2015, DBS Group Research said today.
"Implications of this revised set of data (on GDP and inflation) on other economic aspects are
ascertained. Nonetheless, lead indicators affirm that the economy has bottomed out and is bound
to improve from here on.
"GDP growth in 2015/16 could be in the range of 7.5-7.8 per cent, lifted by a firm manufacturing
sector and robust domestic demand," the Singapore-based research firm said.
It said interpretation of new set of data by Reserve Bank and Finance Ministry will be watched
closely, specially for monetary policy and fiscal policy guidance.
India recently rebased and revised its Gross Domestic Product (GDP) growth numbers. Apart
from a change in base year, the revised methodology includes private corporate performance as
well as sales and service taxes, which have lifted growth for industrial and service sectors.
On inflation, the researcher said there is a room for rate cuts as prices have been falling.
"Given the prospect of sub 6 per cent CPI (Consumer Price Index) inflation in 2015-16..., there is
room to cut another 50 basis points by June quarter."
RBI in a surprise move in January, slashed the policy rate by 0.25 per cent to 7.75 per cent after
having maintained a hawkish monetary stance for over one-and-half year.
However, RBI is still to factor in the revised growth estimates, which might alter the policy
stance, it added.
Speaking with reporters at a conference here on the performance of NDA-led government so far,
DBS Bank India Managing Director and Head of Treasury & Markets Vijayan Subramani said,
""Upto now they have done everything positive in terms of governance. I would view it as
positive. I don't think there are too many choices."
On Union Budget 2015-16 to be unveiled on Saturday, he said it can be a sensible budget without
expecting too many histrionics.
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priorthe lowest to print since August 2009. The underlying sequential momentum also
remained soft, tracking ~(-)6.7% qoq, saar.
The deceleration in the headline number was largely led by the deflation seen in non-food
primary, minerals and energy componentsall of which are directly linked to the global
commodity cycle. Specifically, non-food primary goods contracted for the fourth consecutive
month by 4.07% yoy, largely reflecting sharp correction seen in global fiber and oilseeds prices.
Meanwhile, minerals deflated by 13.75% after (-)8.15% previously. Both of these subcomponents contributed (-)0.6 ppt to headline print. Primary food inflation, on the other hand,
picked up to 8% from 5.20% previously, with pulses providing the upside on a sequential basis.
2. Energy inflation falls in line with softer global crude prices
The decline in domestic fuel products broadly reflects the decline seen in global crude oil prices,
helping yoy energy inflation contract by 10.69%a significant correction from the ~7% average
inflation seen in 1HFY15.
The sub-group contributed (-)1.89 ppt to headline print. With global crude prices trending up
from the low levels seen in January and INRs mild depreciation bias recently, the downward
bias from the energy side onto the headline numbers are unlikely to be as strong in February.
3. Core inflation softens further
Core manufactured inflation also continued with its secular decline, printing 0.9% in January
after 1.6% in December, partly reflecting soft global commodity prices.
More encouragingly, the underlying momentum has remained benign, and is currently tracking at
~(-)2.2% qoq, saar (Exhibit 1). Among the key components, chemicals and chemical products
(crude derivative) eased 0.7% while basic metals and alloys contracted further by 0.9%.
Our core WPI inflation trajectory hints at further correction in the coming months with
expectations of relatively soft commodity prices amid only a mild INR depreciation.
4. Penciling in 50-75 bps rate cut in FY2016
Consistent decline in the inflation matrices hints that disinflationary trends are likely to sustain.
Corrections in WPI (directly a resultant of global commodity cycle) should be passed onto the
retail inflation side with a lag, hinting at a continuing soft bias for headline CPI.
The recent revisions in CPI (and GDP), as per the new methodologies, have added some
confusion around their trend inferences. However, even as forecasting headline CPI with no
back-casted history becomes difficult, there seems almost a 30-40 bps downward bias to the new
CPI on an average basis over the old CPI.
Thus, we continue to expect the RBI being on a monetary accommodation path, easing by an
additional 50-75 bps in FY2016.
By: Indranil Pan, Chief Economist, Kotak Mahindra Bank