India inflation as measured by the WPI or Wholesale Price Inflation for the month of September 2011 came in at 9.72% as against a level of 9.78% seen in August 2011. Inflation rose 0.59% month on month. Inflation has been trending at over 9% levels since May 2011 and the question is will inflation fall on the back of slowing economic growth? There are indications that inflation is peaking out at current levels and while end March 2012 forecasts point to inflation at 7%, the markets will look at inflation trends. A falling trend in inflation from peaks will allow RBI to ease off policy tightening and given the current uncertainty of both domestic and global economy there is a good possibility that markets start to factor in a more neutral monetary policy.
Central banks across the World are becoming cautious on policy tightening, despite inflation trending at higher levels. Brazil was the first to cut rates in August. Indonesia cut rates in October 2011 on worries of global economic slowdown. Central banks from Singapore to Israel are all abandoning inflation targeting on worries of threat to economic growth.
Domestic economy showing signs of cooling off
The Indian economy is showing signs of cooling off. The latest round of data indicates that domestic as well as global pressures are being felt on the economy. On the domestic side, Industrial Production grew by 4.1% for the month of August 2011, taking the April-August 2011 growth to 5.8% against a growth rate of 7.8% seen in the April-August 2010 period.
Manufacturing growth contracted month on month, the fourth monthly contraction in the five month period of April-August 2011. The Indian PMI (Purchasing Managers Index) for manufacturing fell month on month to touch its lowest levels since March 2009. The manufacturing PMI came in at 50.4, just above the 50 mark, below which manufacturing is said to contract. The service sector PMI contracted in September, reading at below 50 levels indicating weakness in the economy.
Credit growth slowed from 20.5% growth to 19.5% growth on a year on year basis from August 2011 to September 2011. Credit growth is still above RBI’s threshold of 18% year on year growth for 2011-12, but given rising interest rates through RBI rate hike actions and worries of non performing assets after the recent downgrade of SBI by Moody’s, credit growth is likely to slow down further in the coming months.
India’s imports contracted by close to 10% month on month, highlighting the domestic economy weakness. Exports grew marginally at just over 2% month on month and the trade deficit dropped 30.5% due to fall in imports.
Global economy slowing but not in recession
On the global front, economic date was mixed. US job numbers for September 2011 came in at 103,000 jobs added, though unemployment stayed static at 9.1%. Manufacturing for the month of September contracted in the Eurozone while it came close to contraction in Germany. China’s manufacturing contracted for the month of September. Exports for August 2011 rose for the first time in three month for Germany while exports for China dipped marginally while staying close to record levels. Japanese exports for August rose by 2.8% much below expectations of an 8% rise indicating the impact of a strong yen on the economy. The Japanese Yen has gained over 10% against the Euro and USD over the last eight months. Global economic date confirms a slowdown in growth but does not signal a recession.