Market Roundup Domestic Macroeconomic Development The Monetary Policy Committee (MPC), in its bi-monthly Monetary Policy meeting in June, decided to increase the repo rate for the first time since January 2014, as inflationary pressures continued to rise, stoked by global commodity prices and risk of a second round impact of HRA revisions by various states. The Committee though maintained a neutral stance as inflationary risks remained evenly balanced. With the latest economic data supporting the committee's observation of a sustained revival in the economy, the members felt there was an adequate room for a policy hike, as the decision remained unanimous. India's national output (GDP) for the fourth quarter of FY 2017-18 grew by 7.74%, according to the data published by the Ministry of Statistics & Programme Implementation (MOSPI). Output for the entire financial year was estimated to grow at 6.68% (provisional estimate). Agricultural sector was estimated to have grown by 4.5% in the fourth quarter, as against 7.1% in the previous year. Erratic distribution of the South-West Monsoon disrupted both Rabi and Kharif crop harvest during the year, impacting agricultural output. Farmer protests across the nation against sub-par return from the Government under minimum support price mechanism (MSP) also added to the supply disruptions. Industrial output grew at a faster pace though, registering a growth of 8.8% during Q4, as against 5% in FY 2016-17. Resurgence in manufacturing (9.1% vs 6.1%) and construction sector (11.5% vs. -3.9%) evened out the drastic deceleration in mining output growth (2.7% vs. 18.8%). The services segment was propped up by Government spending throughout the fiscal, and once again was the lone segment with double digit growth (13.3% vs 16.4%) in the fourth quarter. While the financial services, real estate and professional services sector did register higher growth compared to the previous year, it was still the lowest growth in the last four quarters. Same was the case for Trade, Hotels, Transport, Communication and Broadcasting Services (6.8% vs 5.5%), which decelerated after an average growth of 8.5% during the previous three quarters. 34
Table M1: India's Economic Activity Profile (Sector-wise Growth (Y/Y) Rates (%) Sectors 2015-16 2016-17 2017-18 (PE) 2017-18: Q2 The growth in eight core industries increased marginally to 4.7% (4.4% in March), led by coal (16%) and cement (16.6%). Production of Natural gas also rebounded to 7.4%, after three consecutive months of zero growth. Crude oil production remained in decline (-0.8%). Seven out of eight industries reported a positive growth in production, with only steel and electricity decelerating from previous month. 2017-18: Q3 2017-18: Q4 Agriculture, Forestry & Fishing 0.57 6.29 3.37 2.65 3.12 4.49 Mining & Quarrying 11.79 12.97 2.94 6.94 1.36 2.72 Manufacturing 12.39 7.90 5.74 7.09 8.50 9.07 Electricity, Gas, Water Supply & Other Utility 4.89 9.25 7.17 7.70 6.10 7.74 Construction 3.37 1.35 5.74 3.13 6.57 11.52 Industry 9.31 6.78 5.54 6.13 7.09 8.79 Trade, Hotels, Transport, Communication & Broadcasting Services 10.70 7.20 7.98 8.50 8.51 6.76 Financial, Real Estate & Professional Services 10.81 6.00 6.65 6.07 6.92 4.95 Public Administration, Defense, & Other Services 6.29 10.68 10.02 6.08 7.66 13.29 Services 9.70 7.50 7.92 6.84 7.70 7.72 GVA at Basic Price (at 2011-12 Prices) 8.07 7.09 6.48 6.13 6.62 7.56 GDP @ 2011-12 8.06 7.11 6.68 6.32 6.97 7.74 Source: Central Statistical Office (CSO) & CCIL Research GVA: Gross Value Added, AE: Advance Estimate, PE: Provisional Estimate Chart M1: Sector-wise Growth Rate (%) in Production (%) 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0-20.0-25.0-30.0 9.1 16.0-3.3 Coal -0.6 Crude Oil -0.8-1.6 2.0 0.9 7.4 Natural Gas 1.1 0.2 Petroleum Products Apr-17 2.7 6.2 3.2 Fertilizers 4.6 Mar-18 9.0 4.7 3.5 Steel Apr-18 Cement -5.2 13.0 16.6 5.3 Electricity 6.0 2.2 Overall 2.6 4.4 4.7 35
India's industrial output climbed higher in the month of April, on account of higher production in mining (especially coal), manufacturing and capital goods. Capital goods rebounded strongly after a surprise slump in March (-5.72%), to grow by 13.05%. Excluding March, this is the fourth straight month of double digit growth in the segment, and it sends positive signals about the growth prospects in the coming fiscal. Mining too rebounded after a stagnant period since October 2017, on account of lower demand and excavation of coal. However, demand has picked up since March and has resurrected the mining sector. Growth in consumer durables increased marginally to 4.26% (4.06% in March). Despite the resurgence in the production in coal, electricity generation surprisingly decelerated (2.06% vs 5.95%). Thermal power accounts for nearly 65% of total electricity generation in India, out of which coal contributes nearly 58%. Overall growth in annual electricity generation in India has been decelerating since 2014-15, leading to an average power deficit of 4458 MW during peak hours. Deficit though has come down drastically from 38,138 MW in 2014-15, to just 8567 MW in 2017-18. Growth (Y/Y) Rate (%) Table M2: Indian Inflation (Y/Y) Rate (%) Environment Growth (Y/Y) Rate on Use-Based (Goods) Classification Period Mining MFG Electricity IIP Primary Capital Intermediate Infrastructure/ Construction Consumer Durables Consumer Non- Durables 2016-17 5.34 4.91 5.83 5.05 4.91 1.94 2.96 3.82 6.15 9.01 2017-18 2.30 4.50 5.40 4.30 3.70 4.40 2.20 5.50 0.60 10.30 Jul-17 4.52-0.08 6.60 1.03 2.21-1.13-2.76 4.27-2.42 4.06 Aug-17 9.33 3.76 8.29 4.81 7.09 7.28-0.49 2.72 4.32 7.18 Sep-17 7.64 3.80 3.37 4.15 6.56 8.69 2.15 0.48-4.06 10.49 Oct-17-0.20 1.98 3.24 1.83 2.43 3.50 0.25 5.77-8.95 8.19 Nov-17 1.41 10.37 3.85 8.54 3.33 5.67 6.54 13.72 3.13 23.73 Dec-17 1.23 8.73 4.43 7.31 3.81 13.16 7.47 6.52 2.14 16.83 Jan-18 0.26 8.69 7.63 7.47 5.90 12.45 5.41 7.46 7.63 10.69 Feb-18-0.36 8.52 4.53 6.96 3.73 19.53 3.23 12.56 7.45 7.33 Mar-18 3.05 4.67 5.95 4.58 3.02-5.72 2.31 8.92 4.06 12.70 Apr-18 5.06 5.20 2.06 4.86 3.09 13.05 1.59 7.51 4.26 7.04 Source: MOSPI & CCIL Research Price levels continued to rise in the economy, under duress from global volatility in the commodity market. Consumer price inflation rose to 4.87% in May, from 4.58% in the previous month. CPI Inflation was 2.18% in May 2017. Price levels rose across all major categories, led by Housing (8.40% vs 8.50% in April), Pan, Tobacco & Intoxicants (8% vs 7.91%) and Fuel & Light (5.80% vs 5.16%). CPI inflation was higher in rural areas (4.88%) compared to urban areas (4.72%). This was primarily due to a higher impact of the segment 'Fuel & Light' on the rural segment (6.89% vs 6.52%) than on the urban segment (3.83% vs 2.64%). 36
Wholesale prices also rose, as indicated by the growth in WPI inflation, which stood at 4.43% (3.18% in April). Price rise was the highest in Fuel (11.22% vs 7.85%), followed by Primary Articles (3.16% vs 1.41%) and Manufactured Products (3.73% vs 3.11%). Type WPI Inflation Rate (New Series) Items Table M3: Indian Inflation (Y/Y) Rate (%) Environment May'18: P Apr'18: R/F 3 Months Ago: R 6 Months Ago: R 1 Year Ago: R Primary -1.71 5.59 0.79 1.41 3.16 Fuel & Power 11.81 8.36 4.55 7.85 11.22 Manufacturing 2.55 2.70 3.31 3.11 3.73 WPI 2.26 4.02 2.74 3.18 4.43 FOOD -5.04 0.35-2.12 0.67 1.12 CPI-Rural 2.30 4.79 4.45 4.67 4.88 CPI Inflation Rate CPI-Urban 2.13 4.90 4.52 4.42 4.72 CPI-Combined 2.18 4.88 4.44 4.58 4.87 India's current account deficit widened to 1.9% of GDP in the fourth quarter of FY 2017-18, from 0.4% in the previous year. Merchandise imports grew to US$ 41.6 billion in the reported quarter, as against US$ 29.7 billion in the previous year. Services receipt increased to US$ 20.2 billion, from US$ 17.6 billion in Q4 FY 2016-17. Foreign direct investment (FDI) declined to US$ 8.6 billion, while net portfolio investment also declined to US$ 2.3 billion, from US$ 10.8 billion in the previous year. There was a deficit in the capital account balance to the tune of US$ 42 million, as compared to a surplus of US$ 23.5 million in the previous year. CFPI (C) -1.05 4.35 3.26 2.80 3.10 Source: Office of the Economic Advisor & MOSPI, CFPI : Consumer Food Price Index (Combined), * P: Provisional; R: Revised for WPI; F: Final for CPI; Table M4: India's Balance of Payment (BPM6 Basis) Profile Net ($ Billion) 2017-18 (P) Jan - Mar 2018 Jan - Mar 2017 April - Mar 2018 April - Mar 2017 Current Account Balance -48.66-13.05-3.43-48.66-14.40 Goods -160.04-41.62-29.72-160.04-112.44 Services 77.56 20.16 17.64 77.56 67.46 Primary Income -28.68-7.82-5.55-28.68-26.29 Secondary Income 62.49 16.23 14.20 62.49 56.05 Capital Account Balance -0.03-0.04 0.02-0.03 0.15 Financial Account Balance 47.79 11.81 3.04 47.79 14.72 FDI 39.43 8.61 9.14 39.43 42.21 Portfolio Investment 22.11 2.28 10.80 22.11 7.61 Errors & Omissions 0.90 1.28 0.37 0.90 0.36 Current Account Deficit (CAD) (as % of GDP) -1.9% -1.9% -0.4% -1.9% -0.6% Source: RBI & CCIL Research 37
The Central Government's revenue receipts grew by 101.4% in the month of April, on account of a higher tax revenue collection (150% Y-o-Y). Capital expenditure too grew by 62.8% to `46,703 crore. Revenue expenditure, on the other hand, was lower by 17.2%. Fiscal deficit for the first month of the fiscal was estimated to be `1,51,967 crore, which was 24.34% of the budgeted amount for the fiscal. Table M5: Central Government's Income - Expenditure Details 2017-18: PR 2018-19: BE Apr-18 Apr-17 Growth (%) ( ` Crore) Cumulative Actuals / BE (%) Revenue Receipts 1435185 1725738 70657 35081 101.41% 4.09% Non-Debt Capital Receipts 115819 92199 793 1448-45.23% 0.86% Total Receipts 1551004 1817937 71450 36529 95.60% 3.93% Revenue Expenditure 1878963 2142283 176714 213464-17.22% 8.25% Capital Expenditure 263704 299930 46703 28687 62.80% 15.57% Total Expenditure 2142667 2442213 223417 242151-7.74% 9.15% Fiscal Deficit 591663 624276 151967 205622-26.09% 24.34% Revenue Deficit 443778 416545 106057 178383-40.55% 25.46% Primary Deficit 62420 48481 136349 186200-26.77% - Source: Controller General of Accounts (CGA) BE: Budget Estimate, RE: Revised Estimate, PR: Provisional Estimate Indian exports grew by 20% (in dollar terms) over previous year in the month of May, buoyed by a significant growth in the export of petroleum products (104.5%). Other segments exhibiting positive growth included Organic & Inorganic Chemicals (34.2%) and Drugs & Pharmaceuticals (25.7%). Non-petroleum and nongems and jewellery exports exhibited a growth of 13.9% for the reported month. 12 Chart M2: Trade Balance & Exchange Rate 68.0 US$ Mn 7 2-3 -8-13 -18 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 67.5 67.0 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 INR/USD Merchandise Trade Balance ($ bn) Services Trade Balance ($ bn) Ex. Rate 38
In the import segment, total imports grew by 14.9% in dollar terms over the previous year. Petroleum, Crude and products (49.5%) formed almost half of the import basket, followed by Machinery, electrical and nonelectrical (30.9%) and Organic & Inorganic Chemicals (28.3%). Oil imports were valued at US$11.50 billion in May, which was 49.5% higher over previous year, while the cumulative oil imports for the new fiscal was up by 45.6%. Global Brent prices have also increased by 50.7% since May 2017, according to data by World Bank, adding bulk to the growth levels. Table M6: India's Trade (Merchandise & Services) Profile (US$ Billion) Merchandise Trade Services Trade* Period Exports Imports Oil Imports Non Oil Imports Total Trade Balance Exports Imports Balance 2016-17 274.65 86.46 293.91 380.37-105.72 146.50 87.20 59.30 2017-18 302.84 109.11 350.56 459.67-156.83 157.93 94.93 63.00 Growth (%) 10.27 26.20 19.27 20.85 48.34 7.80 8.86 6.24 May'17 24.01 7.69 30.16 37.86-27.09 12.90 7.22 5.68 May'18 28.86 11.50 31.98 43.48-28.34 17.56 10.92 6.64 Growth (%) 20.18 49.49 6.02 14.86 4.61 36.08 51.20 16.86 Source: Department of Commerce / Trade Statistics; * Services Trade Data with 1 Month Lag from Reported Month Global Economic Development Global recovery remained steady, amidst commodity market turmoil and signs of geopolitical tensions calming down. Developed economies experienced a bit of a cooling off in the first quarter of the calendar year, as economic activity grew slower, with most of them being burdened by high energy prices. This caused consumer price inflation to surge across all economies. Industrial activity spiked in Brazil to 8.90%, a record high since February 2013. Industrial production rose higher in India, China, Russia and South Africa as well; while amongst the developed economies, only Japan experienced a growth in activity. Table M7: Major Global Macroeconomic Indicators GDP Growth Inflation IIP Growth 10-Y Sovereign Bond Yield Economy (Q1:2018) May-18 Apr-18 M-END: May'18 Eurozone 2.50 1.90 1.70 0.34 US 2.80 2.80 3.50 2.86 UK 1.20 2.40 1.80 1.23 Japan* 1.10 0.60 2.60 0.05 China 6.80 1.80 7.00 3.65 India# (Q4) 7.74 4.87 4.86 7.83 Russia 1.30 2.40 3.70 7.36 Brazil 1.20 2.86 8.90 11.22 South Africa* 0.80 4.50 1.10 8.57 Source: Respective Country Data Source, IMF, World Bank, OECD, M - END: Month End #India follows an Apr-Mar Financial year *Inflation data at a 1 month lag 39
The Federal Reserve raised the target range for the federal funds rate by 25 bps to a range between 1.75% and 2% in its June meeting. The Federal Open Market Committee (FOMC) observed that since the last meeting, labor market has continued to strengthen and economic activity has risen at a solid rate. Inflation has moved closer to the target level of 2%. In this scenario, the Committee believed that a rate hike was necessary to sustain the price level movement towards the target level, supported by sustained economic activity. The stance of the Committee remained accommodative, but it signaled that further rate hike(s) during the course of the year remained a distinct possibility. Consumer prices in the US increased by 2.8% in May, from 2.5% in April 2018. This was the highest CPI growth since February 2012, and primarily came about due to rising prices for gasoline and shelter. Price rose faster for fuel oil (25.3% vs 22.6% in April), gasoline (21.8% vs 13.4%) and shelter (3.5% vs 3.4%). On the other hand, prices eased for food (1.2% vs 1.4%), electricity (1% vs 1.2%) and transportation services (3.8% vs 4.1%). Core inflation though edged up to 2.2% (2.1% earlier). The European Central Bank (ECB) kept its benchmark refinancing rate unchanged at 0% in its June meeting, stating that the monthly pace of net asset purchases (or quantitative easing) will be reduced to 15 billion from September to December 2018, and will then end. It also signaled that the key rates are expected to remain unchanged at least through the summer of 2019. The ECB cut its growth forecast for 2018 to 2.1% (2. 4% in March projection), while inflation expectations were raised to 1.7% for 2018 and 2019 (1.4% earlier). The ECB observed that the output growth in the first quarter of 2018 moderated on account of uncertainty in the domestic as well as external sector. Private consumption however remained steady on account of employment gains and increasing private wealth. Inflation is estimated to have increased on account of higher energy prices, and upward pressure is expected to persist on account of higher capacity utlilisation, tightening labour market and higher wages. The Bank of Japan kept its key short term interest rate unchanged at -0.1% in its June meeting. The 10-year benchmark Government bond yield target was also kept unchanged at around 0%, but the inflation expectation was lowered to a range of 0.5-1% for the fiscal year 2018. In its assessment, the Monetary Policy Committee observed that the economy is expanding moderately, with exports on an upward trend due to global expansion. Business fixed investment has also improved, buoyed by corporate profits and positive business sentiment. Steady improvement in income and employment situation has boosted private consumption. Downside risks to the economy stem from US trade policies, the fallout from the Brexit referendum, developments in commodity-exporting countries and other geopolitical risks. The Central Bank vowed to continue on a path of quantitative easing and negative interest rate, aimed to reach the price stability target of 2%. The Bank of Russia also kept its benchmark one week repo rate unchanged at 7.25% in its June meeting, after revising its inflation forecast upwards to 3.5-4% due to a planned increase in value added tax in 2019.First quarter GDP growth in 2018 was lower than the bank's March forecast due to lower growth in fixed capital investment, including a decline in construction, though industrial activity increased in April.GDP growth came in at 1.3% on account of a strong show in the services sector. Higher growth was observed in the 40
financial and insurance activities (5.9% vs 5.3% in Q4 2017), real estate activities (3.9% vs 2.4%) and professional, scientific and technical activities (2.8% from 2.2%). Within industrial activity, output recovered for manufacturing (1.9 % from -2.8%); mining and quarrying (0.7% from -0.9%), and electricity, gas and steam, air conditioning (2.1% from -4.1%). The Central Bank kept its GDP forecast for 2018 unchanged at 1.5-2%, but pointed out that if the tax reforms are carried out successfully, growth may exceed the baseline forecast. The South African economy grew by 0.8% in the first quarter of 2018, down from 1.5% observed in the previous quarter. This was the weakest growth since the second quarter of 2016. Growth slowed in manufacturing (0.6% vs 2.5% in Q4), agriculture (-8.5% vs 1.1%) and mining (-0.7% vs 4.9%). Stronger activity was observed in transport, storage and communication (1.8% vs 1.6%), personal services (1.3% vs 0.8%); while finance, real estate and business services grew at the same pace as in the previous quarter (2.1%). Output (GDP) in Brazil grew by 1.2% annually in the first quarter, lower than the 2.1% growth observed in the previous quarter. From the expenditure side, fixed investment rose by 3.5% (3.8% in Q4), on account of uncertainty around elections to be held in October this year, while government spending contracted further (- 0.8% vs -0.4%). Imports increased by 7.7% while exports increased by 6%, resulting in a wider trade deficit. The sole positive was that household spending grew by 2.8%, which was its strongest rise in the second quarter of 2014. In the production side, services grew slower (1.5% vs 1.7%) as did manufacturing activity (1.6% vs 2.7%). The agriculture sector shrunk to the lowest since the second quarter of 2016 (2.6% vs 6.1%). Market data for the month of May shows that most of the economies are experiencing a slowdown in activity with rising inflation expectations most likely restricting domestic demand. The US however experienced a pickup in activity, as the spike in its composite PMI illustrates. Chart M3: Markit's PMI (Composite): A Measure of Economic Activity 60 50 54.00 56.60 Dotted Line No Change in Economic Activity 54.10 51.70 52.30 53.40 50.40 49.70 50.00 40 30 20 53.80 Global Economy 54.90 55.10 53.10 52.30 US Eurozone Japan China India Russia Brazil South Africa 51.90 54.90 Apr-18 May-18 Neutral Line 50.60 50.40 41