INSUBCONTINENT EXCLUSIVE:
CPI inflation for August rose six basis points to 3.2 per cent year-on-year
Core inflation remained broadly flat at 4.4 per cent, the same as July
Vegetable prices and fuel prices charted opposite trajectories, thus counterbalancing any impact on headline number
Vegetable prices index strengthened 400 basis points MoM, primarily led by urban series
Fuel and light series eased by 141 basis points.
Meanwhile, July IIP data surprised with 4.3 per cent YoY growth, signalling a strengthening
trend on moving average basis
Both 6-month and 3-month moving average series, exhibited a strengthening trend for headline number
On the economic activity side, manufacturing and mining exhibited strength, while on usage side, strength was led by consumer non-durables
Consumer durables and capital goods continued to be weak though.
We have attributed the current economic slowdown to: a) lingering effect of
demonetisation - GST dislocations, b) global trade disturbances, resulting in deflation in commodity prices, c) restrictions in government
spending due to tax revenue shortfall and d) the NBFC crisis.
These factors have also kept the headline CPI inflation at sub-4 per cent,
despite the gradual rise since early 2019.
We believe some of these factors are changing
First, over the past one month, the government has taken measures to improve cash flows, especially for the MSME sector.
The Centre has
The Reserve Bank of India and the government have actively worked to hasten the transmission of the front loaded cumulative 110 basis points
rate cut to 5.4 per cent.
In addition, there is an improvement in terms of trade for the agri-sector, which reflects in rising relative
primary food prices (including in WPI) vs rest of the components
This suggests that as government begins to spend on rural (another area of policy focus), there should be improvement in rural demand
against deceleration seen in the past few quarters.
Also, from the global standpoint, improving prospects of trade talks between the US and
China are reflected in improvement in sentiment, which is a conditional positive for global growth and commodity prices
If it continues in that direction, a major portion of pessimism can start to wane
We caveat this outlook in the realms of recent back and forth position taken by the US on trade policies.
Overall, we maintain our view that
H2FY20 holds a better prospect compared with the very pessimistic situation that has panned out in H1 and since December 2018
We expect the simulative measures taken by RBI and the government to pan out effectively over the next six months.
We maintain earlier
thesis on G-sec yields hardening, details at bull flattening trade exaggerated, Jul 26 2019.
India G-sec yield curve has steepened after the
last 35 basis point rate cut by RBI to 5.40 per cent with 10-year rising to 6.67 per cent, up from 6.30 per cent in July.
The 30-year
benchmark hardened even more by 45 basis points to 7.1 per cent
We see fair possibility of 10-year inching closer to 7 per cent in a few months.
Given that RBI has already frontloaded the rate easing
(~110 bps) and that the real rate at 1 per cent (repo rate at 5.4 per cent and core CPI inflation at 4.4 per cent) is fairly accommodative
and only marginally higher than for the US at 0.65 per cent
Hence, additional 25-bp rate easing will be more calibrated, i.e
it will be utilised if the stimulative actions do not result in demand revival.
In the near term, RBI will assess the impact of benchmarking
of lending rates to repo rate, which is yet to work its way through the banking sector and the economy at large.
Consequently, we expect
both fiscal and monetary positioning to remain accommodative
We expect the demand triggers to improve more from fiscal measures, lagged impact of recent rupee depreciation - rate easing and improvement
