FINCLUSION Newsletter No. 31 (dated 14th May 2014). Contact us at

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1 As highlighted in a previous newsletter, the macroeconomic indicators for the Indian economy have shown substantial improvement over the past year. In this newsletter, we provide an update on the frequently revised macroeconomic indicators as part of our Macroeconomic Dashboard on the Indian Economy. Internal Sector Highlights Inflation, as measured by both CPI and WPI, have shown a declining trend since the start of the calendar year RBI is expected to hold rates in its June policy review. Though inflation has moderates and shows a declining trend, it is still above RBI s target level for the central bank to bring down interest rates GDP is expected to expand by 5.5% in the current fiscal (IMF forecast), up from 4.9% in the previous fiscal year Fiscal deficit for the both the Central and the State governments have declined. The Central government s fiscal deficit for the previous fiscal is expected to be 4.5% Inflation as measured by both WPI and CPI has declined over the past few months with the trend indicators suggesting a downward trajectory. WPI for the month of March 2014 has declined to below 6.0 percent and currently stands at 5.7 percent while CPI has declined from a high of percent in November 2013 to 8.59 percent in April The decline in inflation has taken off substantial pressure to hike interest rates. After tightening interest rates for a sustained period from mid-2013 onwards, RBI has held constant the repo rate over the past four months. In the June policy review, it is expected that RBI will continue to hold constant the policy interest rates. Though inflation has moderated, it is still above RBI s target levels, leaving little room for decline in interest rates. India s GDP growth has declined from 8.9 percent in to 4.9 percent in It is expected that this slowdown in growth is at its trough and the current fiscal will witness growth in excess of 5.5 percent. High interest rates have prevented a rebound in industrial growth with both the Index of Industrial Production (IIP) and Purchasing Managers Index (PMI) showing a broad slowdown. India s IIP has shown two consecutive months of negative growth. HSBC s PMI for Indian manufacturing has declined from a high of 52.5 in February 2014 to 51.3 in April 2014, though it is still in the expansion stage (a reading of above 50 in the PMI indicates an expansion while a reading below 50 indicates decline in manufacturing activity). India s public finances appear to be in good health, with both the Central and State governments fiscal deficit declining. While fiscal deficit is expected to decline from a high of 5.8% in to 4.5% in , the State government s fiscal deficit has declined from 3.0% in to 2.2% in

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3 External Sector Highlights Rupee at a 10 month high Foreign exchange reserves continue to increase and provide cover for more than three times the short term external debt FII flows have crossed USD 1 bn in the first half of May 2014 FDI flows for the financial year (with March data yet to be released) at USD 21 bn crosses the flows recorded in financial year Current account deficit expected to fall to 2.0% in , down from 4.8% in The INR-USD exchange rate has stabilized at close to 60 and is currently at a 10 month high. Foreign exchange reserves have crossed USD 300 billion and provide a substantial buffer to the short term component of India s external debt, which stands at a little over USD 90 billion. Thus, the foreign exchange reserves are more than three times the short term component of external debt. Foreign investment, in terms of both portfolio flows (FII) and direct investments (FDI), have been strong and reflects the growing confidence of investors in the Indian growth story. FII flows have already exceeded USD 1 bn in the first 12 days of the current month while FDI flows for the previous fiscal ( ) has already crossed the level recorded in even though one month data for the period is yet to be released. The current account deficit (CAD) for the just concluded fiscal year is projected to be around 2.0 percent, a large decline from a deficit of 4.8 percent in the previous fiscal year. The CAD for the quarter ended December 2013 fell to an eight year low of 0.9% from 6.5% in the corresponding previous year period. The CAD for the first 9 months of the previous fiscal year (for the period April 2013 to December 2013) stands at 2.3% of the GDP, down from 5.2% for the same period earlier.

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