India’s macros: Mixed signals

• HDFC securities
• 07 Jun 2018
• Knowledge Centre

Over and above the upcoming elections, India’s weak macroeconomic picture is a crucial factor driving investor sentiment as of now. Foreign portfolio investments witnessed a net outflow of Rs 32,077 crore in the January-May 2018 period, as compared to Rs 1,18,251 crore in the corresponding period of the previous year. Future investment decisions would also be based on an improvement in or worsening of India’s macroeconomic indicators.

 

In an otherwise grim situation, there was a breather in the form of data released on 31st May 2018. India's Gross Domestic Product (GDP) grew by 7.7% in the fourth quarter of FY18, according to data released by the Central Statistics Office (CSO). However, annual growth stood at a 4-year low of 6.7% in FY18, lower than 7.1% in the previous fiscal.

 

The Jan-Mar-2018 figure for GDP released reaffirms faith in the ‘India Growth Story’ and supports the premise that the country’s economy is on the road to recovery. This figure for the quarter is higher than that of China’s GDP growth at 6.8% for the same period and helps India retain the tag of being the world's fastest-growing major economy.

 

According to CSO data, India’s fiscal deficit for the previous fiscal came in at 3.53% of GDP, in line with revised estimates. The country’s fiscal deficit was revised from 3.2% of GDP to 3.5% for FY18. In the current financial year, the Government plans to lower the deficit to 3.3% of the GDP.

 

Poor Numbers

 

India’s Current Account Deficit (CAD) widened to 2% (US$ 13.5bn) in Oct-Dec-2017, up from 1.4% (US$ 8bn) in the corresponding period of the previous year as per the figures released on 16th March 2018. The main reasons for this were a higher trade deficit and increasing crude oil prices. According to a report, crude oil prices could rise further in the coming months, owing to which India's CAD is expected to touch 2.4% in FY19.

 

The report states, “Our commodities team expects oil prices to continue to rise over the course of this summer, before moderating slightly at the end of the year. We recently increased our 2018-19 Current Account Deficit forecast to 2.4% of GDP from 2% earlier.’ During April-December last year, CAD jumped to 1.9% of GDP, as compared to 0.7% during the same period in the previous year. This was mainly owing to a higher trade deficit and increased oil prices.

 

Crude plays villain

 

Going forward, the country’s CAD figure is expected to worsen if international oil prices continue to surge. Brent crude oil future prices have risen to US$ 80 a barrel this year from ~US$ 46 a barrel in June 2017.

 

The country’s trade deficit (gap between exports and imports) widened 28.5% from the year-ago period, to stand at US$13.7 bn in March 2018. This resulted in the annual deficit figure to come in at US$ 87.2 bn, according to data released by the Commerce Ministry. The trade deficit stood at US$ 47.7 bn in the year ended March 2017. The import of petroleum and crude oil continued to be the largest contributor to India’s trade deficit.

 

The increase in prices of petrol and diesel also resulted in retail inflation touching a 4-month high of 3.18% in April 2018. According to data from the Ministry of Statistics, India’s Consumer Price Index (CPI) rose to 4.58% in April 2018, owing to the rise in global crude oil price. In the past year, crude oil price (Indian basket) has risen by 32%.

 

Rate hike expected

 

In this backdrop, expectations of a rate hike by the RBI in its upcoming monetary policy review on 5th June 2018 are high.

 

With India’s macroeconomic figures giving out conflicting signals, the question of how much they would impact inflows of funds from foreign investors and market sentiment cannot evoke an immediate answer.

 

“Globally, India is recognized as the fastest growing economy. We think that the country’s macro journey over the next few quarters could be choppy, partly influenced by global developments. However, the overall direction continues to be positive, driven by the policy measures of various ministries and the RBI,” Mr. Deepak Jasani, Head of Retail Research, HDFC Securities Ltd concluded.