Happy weekend.
We're closing in on the halfway mark of the calendar year and things are comme ci, comme ça.
If you're a sunny-side-up kinda person, summer travel is back with a vengeance, movie nights in the theater are back, Friday evening plans are restored. If you are a worrier, then you are focused on the fact that everything is costing you more and maybe you should cut back to keep savings up.
Your dilemmas are reflected in economic data.
GDP data this week showed the economy grew 4.1% in the January-March quarter. For the full fiscal year, the economy grew 8.7%. While the recovery in 2021-22 has meant that the Indian economy has surpassed the levels it was at before the pandemic, cumulatively, growth over these two years is low. One segment — trade hotels, transport, communication and services related to broadcasting, remains 10.9% below pre-pandemic levels. Read here.
Sequentially there was some weakness visible in private consumption, because this was the quarter in which the third wave hit. Some of this pushed-back consumption may improve growth in the April-June quarter but we may feel the pinch of inflation instead.
According to NielsenIQ, the rural market already saw a 5.3% dip in consumption of fast-moving consumer goods between January and March. The combination of weak consumption, higher input cost pressures and the inability to pass them on has led to a "steady shrinking in the number of small manufacturers since the pandemic started," Nielsen said. "If January-March 2020 is considered as 100, the index on net count of manufacturers is 92 for January-March 2022," they said. That's noteworthy because it may hold clues to some of the stickiness in manufactured goods inflation.
Higher frequency data in the form of the IHS Markit PMI showed that services activity surged to an 11-year high. The manufacturing sector held up too. But both these indicators signal inflation coming down the pipes. For the services sector, the rate of inflation climbed to the highest in over sixteen years. For manufacturing, output prices increased at the fastest pace since October 2013.
Net, net, economists are now seeing growth at 7-7.5% this year. And, as Nomura's Sonal Varma writes in this piece, we could headed for an extended period of higher inflation.
Against that backdrop, the Monetary Policy Committee will meet this week and likely raise the policy repo rate again. Reserve Bank of India governor Shaktikanta Das called it a "no brainer" in an interview with CNBC-TV18 after the central bank raised the repo rate by 40 basis points in an emergency meet in May.
Consensus is that the central bank will look to bump up the repo rate to 5.15% — the level it was at when the pandemic struck, between the June and August meetings.
Most in the market believe the June rate hike could be anywhere between 35 and 50 basis points since the central bank, under Das, has abandoned the tradition of hiking in multiples of 25 basis points. All we can assure is that it won't be a 37.5 basis points hike, after committee member JR Varma took a sarcastic dig at the committee's choice of denomination for the emergency rate hike.
Another cash reserve ratio hike may not be immediately necessary as the liquidity surplus has reduced considerably.
Still, markets are on edge debating how much and how quickly the central bank will hike. Yields have already moved back towards 7.5% and Citi predicts that 8% on the benchmark 10-year can't be ruled out.
JP Morgan's Sajjid Chinoy, in a piece coming up on BQ Prime, will argue that one way to tame runaway rate hike expectations in the market would be to provide a more quantitative assessment of the likely rate hikes, sort of like the U.S. Federal Reserve does with its dot plots. Certainly better than the non-stance stance that the central bank is currently throwing our way.
Speaking of, this week saw former Fed chair and current U.S. treasury secretary Janet Yellen admit that she got inflation wrong. Will the RBI admit the same?
We'll keep you posted. In the meantime, if you are over 40, go watch Top Gun Maverick. You'll come away with a nostalgic grin on your face.
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