The sharp rise in CPI (Consumer Price Index) to its all time high of 11.24% year on year in November 2013 from levels of 10.17% seen in October 2013 will prompt the RBI to raise the repo rate by 25bps in its 18th December 2013 policy review. A 25bps repo rate hike will take the repo rate to 8% and will be the third consecutive rate hike by the central bank. The repo rate stood at 7.25% in August 2013.
The question is will this be the last of the rate hikes given the state of the economy? India’s GDP grew by 4.8% in the second quarter of fiscal 2013-14 against a growth rate of 4.4% seen in the first quarter. GDP growth will either stay at 2012-13 levels of 5% or will fall below 5% levels and the 5% growth level is a decade low growth rate for the economy.
Data from IIP (Index of Industrial Production) growth to tax collections indicate deep structural slowdown in the economy. IIP growth for the April – October 2013 period was zero percent while manufacturing growth was negative 0.3%. Direct tax collections for April-November 2013 period showed a growth of 13.18% against a budgeted growth rate of 17.5%. Indirect tax collections for April – October 2013 period showed a growth of just 5.3% against budgeted levels of 17.5%.
Vehicle sales data shows that except for two wheelers all other segments have shown negative growth in the April – November 2013 period. Bank credit growth has come off from 17.9% levels seen in September 2013 to 14.24% levels as of November 2013.
The only positive data in the economy is the trade data that shows exports grew by 6.3% and imports fell by 5.4% and trade deficit fell by 22.9% in the April-November 2013 period. However the fall in imports was largely driven by fall of 23% in gold and silver imports that fell on the back of restrictions on credit and imposition of duties.
India’s current account balance for fiscal 2013-14 is expected to drop to levels of USD 56 billion from levels of USD 87 billions, a fall of 36%. The fall in CAD is positive for the Indian Rupee that saw record low levels of Rs 68.80 in August 2013 before regaining strength by 10% to levels of Rs 62 as of December 2013.
The country is facing election in April – May 2014 and until then economic and business sentiments will stay down. The government will be unable to do much to push for growth given that it will only go for a vote on account in January 2014 to run the country until the elections.
RBI while raising the repo rate by 25bps in its December 2013 policy review may put on hold further rate increases until a new government unveils its budget. In the meanwhile, further economic slowdown coupled with vegetable prices easing (vegetable price rise of 60% has contributed much to high CPI inflation) could bring down inflation expectations.
Fed tapering is becoming more certain
US revised its third quarter 2013 economic growth to 3.8% from initial estimates of 2.8%, largely on the back of rise in inventories. The US economy grew at 1.1% and 2.5% in the first two quarters. US economy added 203,000 jobs in November 2013 against expectations of 180,000 job additions. Unemployment rate in the US fell to five year low levels of 7% in November against 7.3% levels seen in October. CPI fell 0.1% in October 2013 indicating that inflation is not acting up despite economic gains. US manufacturing PMI (Purchasing Managers Index) rose to ten month high in November while retail sales rose the most in five months. US economy is showing signs of strength and the Fed would have enough confidence to start tapering its USD 85 billion a month asset purchase program staring December 2013 or first quarter of 2014.
Eurozone PMI fell in November to a three month low but stayed above contraction levels of 50 and below. Eurozone unemployment rate fell for the first time since February 2011 to 12.1% in October while CPI rose to 0.9% in November from 0.7% seen in October 2013. Eurozone economy is showing signs of recovery albeit extremely sluggish recovery and the ECB is expected to keep rates at record low levels of 0.25% to help the economy grow.
China PMI rose to an eighteen month high in November while exports rose 12.7% against estimates of 7%. Exports rose 5.6% in October from a drop of 0.3% in September. CPI rose 3% in November against a rise of 3.2% seen in October. China has promised reforms to its financial system in 2014 and that has led to higher interest rates in the economy. China economic prospects hinge on the country taming its asset price bubbles and adjusting to a market driven economy.
Japan’s PMI expanded at the fastest pace in over seven years in November while inflation for October rose to its highest level in fifteen years. The country however revised downwards its July-September 2013 GDP growth from 1.9% to 1.1% annualized. Japan is benefitting from its expansionary policies with the Bank of Japan targeting 2% inflation rate. The Yen is trading at multi year lows against the USD and the Euro and is helping the export driven economy.
Table 1: India Macroeconomic Data November 2013