EYE ON RBI: WILL IT WON'T IT
INFLATION: NO SIGNS OF SLOWING
India's inflation rate in May ticked up to 7.5% which is likely to make the RBI's task even more difficult in the backdrop of a weakening growth trajectory. The price of primary articles, which accounts for 20% of the index, rose 10.9% y/y. Food prices increased by 10.7% y/y, including a strong rise in the price of pulses (+16.6% y/y), vegetables (+49.4%), potatoes (+68.1%), and egg, meat, and fish (+17.9%). The only silver lining was that price growth in manufactured goods, which account for 65% of the index, continued to ease, up 5% y/y in May. India has an inflation problem. Wholesale price inflation reaccelerated in May and has now been on a steady uptrend since bottoming at 6.6% y/y in January. This is entirely due to supply-side factors and we can see this clearly in the WPI breakdown. In particular, the recent plunge in the rupee is pushing up the price of local goods, especially imported goods and commodities priced in U.S. dollars. The prices of food and metals accelerated in May, and the price of fuels no doubt would have accelerated if not dictated by the central government.
INDUSTRIAL OUTPUT SAGGING
Another miserable Indian statistic as industrial production growth stagnates in April. After bouncing around the turn of the year, growth momentum appears to have slipped back once again to a decidedly sub-par pace. A number of headwinds are restraining industrial production growth in India: sluggish export markets, the lagged impact of previous INR real overvaluation, policy (and demand) uncertainty and a high cost of capital exacerbated by excessively loose fiscal policy settings. Whatever the relative weight of these factors India’s industrial sector (and the broader economy) appears to have lost its way. The FY2012Q4 GDP report, which saw y/y GDP growth falling to a 9-year low of 5.3% y/y, also revealed that, after growing at a mere 4% annualised rate in 2011H2, GDP growth momentum actually firmed to around 7-7½% in the last quarter. Key manufacturing surveys such as the manufacturing PMI along with hard data such as auto sales and non-food bank credit had already signalled a momentum shift beginning in late 2011. However, all of the other indicators have shown renewed signs of softness since March as the external environment, especially Europe, has soured once again
READING BETWEEN THE LINES
"The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates".
RBI's April Policy Guidance
Wait and watch for June 18
INFLATION: NO SIGNS OF SLOWING
India's inflation rate in May ticked up to 7.5% which is likely to make the RBI's task even more difficult in the backdrop of a weakening growth trajectory. The price of primary articles, which accounts for 20% of the index, rose 10.9% y/y. Food prices increased by 10.7% y/y, including a strong rise in the price of pulses (+16.6% y/y), vegetables (+49.4%), potatoes (+68.1%), and egg, meat, and fish (+17.9%). The only silver lining was that price growth in manufactured goods, which account for 65% of the index, continued to ease, up 5% y/y in May. India has an inflation problem. Wholesale price inflation reaccelerated in May and has now been on a steady uptrend since bottoming at 6.6% y/y in January. This is entirely due to supply-side factors and we can see this clearly in the WPI breakdown. In particular, the recent plunge in the rupee is pushing up the price of local goods, especially imported goods and commodities priced in U.S. dollars. The prices of food and metals accelerated in May, and the price of fuels no doubt would have accelerated if not dictated by the central government.
INDUSTRIAL OUTPUT SAGGING
Another miserable Indian statistic as industrial production growth stagnates in April. After bouncing around the turn of the year, growth momentum appears to have slipped back once again to a decidedly sub-par pace. A number of headwinds are restraining industrial production growth in India: sluggish export markets, the lagged impact of previous INR real overvaluation, policy (and demand) uncertainty and a high cost of capital exacerbated by excessively loose fiscal policy settings. Whatever the relative weight of these factors India’s industrial sector (and the broader economy) appears to have lost its way. The FY2012Q4 GDP report, which saw y/y GDP growth falling to a 9-year low of 5.3% y/y, also revealed that, after growing at a mere 4% annualised rate in 2011H2, GDP growth momentum actually firmed to around 7-7½% in the last quarter. Key manufacturing surveys such as the manufacturing PMI along with hard data such as auto sales and non-food bank credit had already signalled a momentum shift beginning in late 2011. However, all of the other indicators have shown renewed signs of softness since March as the external environment, especially Europe, has soured once again
READING BETWEEN THE LINES
"The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates".
RBI's April Policy Guidance
Wait and watch for June 18
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