Thinkpad: Stress; De-Stress

Happy Sunday.

As the first half of the calendar year and the first quarter of the financial year comes to a close, the economy has almost been through a full cycle. A January-March quarter when demand was on a strong rebound. An April-June quarter, when hit by a ferocious second Covid-19 wave, the nation and the economy hunkered down. And now, perhaps, a July-September quarter, when we start to re-emerge from that latest blow.

Most high-frequency indicators at the end of June were materially better than April-May. But it still isn't a slam-dunk rebound.

Take, for instance, the DART Index compiled by QuantEco Research. The index shows activity improved for the sixth consecutive week at the end of June but with each week the pace of improvement is dropping. This, even before we hit activity levels seen before the second wave. The index, which had moved past pre-Covid levels in February and March, is currently 15% below it.

Sort of like "long Covid"—recovering but not completely.

Individual indicators are a little all over the place right now. Daily electricity demand hit an all-time high in the last few days of June. Recovery apart, it's getting hot up in the North! E-way bills have recovered compared to May but are still below March levels. Electronic payments are hitting record highs again. Government finances for April-May are looking surprisingly strong.

Then there was the manufacturing PMI, a survey based indicator, which suggested contraction in activity in June. But auto sales at the factory gate showed good growth across segments compared to a month ago. Non-oil, non-gold imports rose 15% in June compared to May.

So, as we enter July, the best we can say is the economy is starting to breathe out, after taking a sharp breath in.

HSBC's chief India economist Pranjul Bhandari invoked the 1967 Beatles' song “Hello, Goodbye" to describe the current economic scenario. "Second wave says goodbye, inflation says hello," she wrote in her note this week.

We've spoken about this before so we won't dwell on it much except to prepare you for a possibly ugly inflation reveal on July 12. Kaushik Das, chief India economist at Deutsche Bank, warns that CPI inflation may come close to 7%.

Inflation (and you can argue it's supply side yada yada....) is hitting from obvious and not-so-obvious corners. Take, for instance, shipping costs. As Pallavi Nahata detailed this week, soaring freight costs are one more added component to inflation. We also heard this week of an increase in milk prices, which will feed into costs across a number of categories. On the flip side, the government imposed stock limits on pulses to cool prices in that category and also cut duties on edible oil inputs.

We'll see if the Indian central bank and monetary policy committee start humming the inflation control tune in August.

So far though, their (now unhealthy) obsession with bond markets continues. This week, the RBI switched auction rules to keep yields and bond sale failures in check. Bloomberg also reported that the RBI is guiding primary dealers than any bid which is more than 2 basis points beyond trading levels in the secondary markets will be seen as an outlier.

As Arvind Chari of Quantum Advisors' said, “the RBI risks losing market signals and feedback in their maniacal quest to try and keep bond yields at around 6%."

Yes, we realise that all central banks globally have near forgotten about that concept but, here in India, if inflation hits, the unwind of crisis-time measures could be sharp and unruly. Sort of like a really tightly wound spring, suddenly let go.

Time for you to unwind, let go and enjoy your Sunday.

Till next week.