India Economy in January 2016

Source: OPEC 1/30/2016, Location: Asia

The RBI kept the repo rate on hold at 6.75% at its December meeting. However, the policy statement was more aggressive than expected, with the bank retaining an accommodative stance in spite of rising inflation. Indeed, CPI inflation has increased in each of the last three months. Although most of this rise has been driven by food prices, it confirms that India’s disinflationary period has ended. Meanwhile, 3Q15 GDP data indicates that growth picked up, posting 7.4% for the quarter, driven by stronger manufacturing. This strength, however, is at odds with recent survey data indicating that trade has remained sluggish.

India’s CPI inflation accelerated to 5.4% y-o-y in November, up slightly from 5% in October, on the back of a jump in food prices (particularly eggs, oils, pulses and sugar). This rise underpinned a seasonally-adjusted 0.8% sequential m-o-m increase in headline prices, marking the strongest monthly momentum since February 2015. With the seasonal decline in food prices being less than what is typical – such that food prices are actually rising meaningfully on a seasonally-adjusted basis – the annual headline CPI continues to accelerate above 5.5%. Although it remains in line with the RBI's projections, Indian CPI is now approaching the bank’s inflation target of 6%, Meanwhile, the depreciation in the Indian rupee, triggered by a likely US Fed interest rate increase, combined with the Indian government's plans to raise the salaries of civil servants in 2016, could further intensify price pressures. Rising inflation will make it difficult for the RBI to cut interest rates further in order to stimulate the domestic economy, an action the bank has undertaken four times already during 2015.

The current account deficit in July–September 2015 stood at $8.2 bn, which was equivalent to 1.6% of GDP. RBI data showed that the current account stood at $10.9 bn in the previous year. The quarterly widening of the current account deficit mainly reflected an increase in the 3Q15 of gold imports to $10 bn from $7.5 bn in the 2Q. Meanwhile, oil and non-oil, non-gold imports remained broadly flat from the previous quarter. Aggregate exports (both merchandise and services) also remained unchanged as did remittances. Despite widening in the 3Q, the current account deficit has not raised financial stability concerns and is consistent with deficit forecasts of roughly 1% of GDP in FY16. This is the case in spite of a current account deficit forecast of 1.4% of GDP in the 1H of FY16. However, it seems the deficit may narrow sharply in the 2H on the back of the seasonal boost in exports in the last quarter of the fiscal year. India's current account deficit would then widen significantly, putting further pressure on the rupee in the near future.

The trade deficit remained, as expected, soft in November, posting $9.0 bn, more than the level in October. Exports fell by 24.4% y-o-y to $20 bn in November, while imports fell by an even stronger 30% to reach $29.8 bn. As a result, the trade deficit shrank from $16.2 bn to $9.8 bn in November. The decline in exports is mostly attributable to low global commodity prices.

Strong output in manufactured goods and consumer durables drove growth of India's industrial output to 9.8% y-o-y in October, the highest in five years. Although this was positive for growth, October's industry data has been largely inflated by strong base effects and should be interpreted with caution. In contrast to October 2014, when industrial output in India contracted 2.7% y-o-y, industrial output growth hit a five-year high of 9.8% y-o-y in October 2015, supported by strong base effects and a boost in consumer demand ahead of the major festival of Diwali.

India's factory output turned negative in December 2015, for the first time since October 2013, pulled back by declining new orders. The PMI slipped to 49.1, dropping further from the 50.3 level seen in November. In contrast to previous months, manufacturing weakness has largely stemmed from poor domestic orders, while the export orders sub-index increased marginally to 51.5 in December from 51.1 in November. On the price front, the inflation rates of both input costs and output charges were at a seven-month high. Meanwhile, an earlier release of core-sector data showed that India's infrastructure activity shrank in November, the first time in seven months.

The GDP growth expectations for 2015 and 2016 remain unchanged at 7.3% and 7.6%, respectively.

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