Last Day of Demonetisation: Final Goodbye to Rs 500 & Rs 1,000

As the year comes to an end, it is also time to bid adieu to the high value bank notes. Today is the last day to deposit old Rs 500 and Rs 1,000 notes in banks after 50 days of the announcement of demonetisation by the Prime Minister Narendra Modi on November 08, 2016. From December 31, 2016, onwards, anyone holding Rs 500 or Rs 1,000 notes could be levied hefty fines.

Even though the 50 days deadline now comes to an end, the daily struggle for lakhs and lakhs of people so far to get their money back from the ATMs or bank branches is not likely to end soon. Let's take a look at the positives and the weaknesses of demonetisation of notes on the people and the economy at large.

Since the decision to ban high value currency notes was taken in early November, the government has showed the sunnier side of the note ban and its benefits on the economy in the long run. From declaring war on black money to terror funding, from fake currency to corruption, and finally becoming a cashless economy, multiple reasons have been cited since the announcement of scraping Rs 500 and Rs 1,000 notes.

With this move, the government planned to keep a tight leash on the corruption front. This decision came in as a blow for the black money holders having trucks of money undeclared and who are enjoying life without paying any tax. The move has also emerged as a blow to funding of terror in Jammu & Kashmir as well as Left-wing extremist violence across several states. With this move, the hawala cash transfers to terrorists and separatist elements based in Kashmir, have come to an abrupt halt.

Through the demonetisation exercise, the government has been working hard to become a cashless economy and is inspiring more and more people to adopt the digital payments system for their transactions. Usage of cards – both credit and debit – has grown four-fold since the announcement of demonetisation on November 8. Also, average ticket size of card transactions has fallen, signalling that many Indians have started using cards for their daily purchases.

Impact of demonetisation is also clearly visible with tax collection figures witnessing double-digit growth. According to Finance Minister Arun Jaitley, there has been a 26.2 per cent increase in central indirect tax collection till November 30. This included robust growth in excise duty of 43.5 per cent, services tax 25.7 per cent and customs duty 5.6 per cent. Meanwhile, net direct tax collections till 19 December had increased 13.6 per cent.

While numerous advantages of demonetisation rolling into the economy could still be long way away, there are immediate challenges the economy is already gazing upon. Even though new currency notes have reached almost all parts of the country, bank branches are still not able to quench the cash requests of customers. Most banks have set withdrawal limits much below the mark prescribed by RBI which is Rs 24,000 per week.

Economic growth has also come off on account of low liquidity in the system. Inadequate currency supply, in an economy which is predominantly cash-driven, has reduced the buying power of people, and at a macro level, their consumption pattern.

However, the Modi Government’s bold gamble with note-bandi in the long run is expected to propel growth capital as large swathes of informal economy becomes formal. It is expected to significantly transform the domestic economy in due course in terms of greater inter-mediation, efficiency gains, accountability and transparency through increasing adoption of digital modes of payments.

Latin Manharlal Group

Demonetisation Effect: Inflation Cools to 2-yr Low in November

India's retail inflation eased significantly last month after Prime Minister Narendra Modi's shocking demonetization drive dented the consumer spending, fuelling hopes of an interest rate cut by the Reserve Bank of India at its next policy review in February 2017.

According to the data released by statistics office, consumer inflation, the benchmark price gauge of the RBI eased to its lowest level in two years to 3.63 per cent in November from 4.20 per cent in October. It was 5.41 per cent during the corresponding period last year.

The fall in in the inflation was primarily due to sharp slowdown in food prices which registered its fourth consecutive month of decline, coming in at 2.11 per cent in November from 3.32 per cent in October.

In addition, Inflation rate based on wholesale price index (WPI) also decelerated for the third consecutive month to 3.15 per cent in November from 3.39 per cent a month ago, as a squeeze in cash availability impacted prices of perishable commodities.

Prime Minister Narendra Modi's shocking move to cancel 500-rupee and 1,000-rupee banknotes, which accounts for 86 per cent of the cash circulating in Asia's third-largest economy, has disrupted daily life, discouraging consumer demand. The slow pace of replacing the old currency with the new Rs 500 and Rs 2,000 banknotes is expected to have led to the demand compression, which has eventually hit the small businesses.

November's reading is way below the Reserve Bank of India's (RBI) 5 per cent inflation target for March 2017 as well as the medium-term target of 4 per cent. The monetary policy committee headed by RBI Governor Urjit Patel had earlier this month held interest rates steady and said demonetisation of high value currency notes could lower prices of perishables and reduce CPI inflation by 10-15 basis points by December.

With this sharp slowdown in inflation, there is room for further rate cuts by RBI in the next policy meeting. However, before penciling in RBI's next move, the economists are eyeing the advance estimates of GDP and the December CPI numbers.  

Latin Manharlal Group

Demonetization: Short-Term Pain but Long-Term Gain

Taking the whole country by surprise, Narendra Modi has pulled off a shocking move to demonetize higher value currency notes as he waged war on the evil of black money in Asia’s third biggest economy.

While it’s hard not to overlook the short-term repercussions of wiping out Rs 500 and Rs 1000 notes which comprise 86 per cent of total value of currency in circulation, the long-term implications of demonetization are seen as positive.

Demonetization has sent out a strong message about the country’s anti-corruption drive which will improve investment sentiment in the long-run.

While the sudden cash crunch may have crippled the common man, demonetization marks a crucial step in India’s bid to transform into a cashless economy.

With cash-intensive sectors such as food, transport, real estate and restaurants likely to be severely hit, this fiscal’s GDP could be squeezed by 0.8 to 1 per cent. In the longer term, demonetization may help bolster economic growth as more and more of the informal economy becomes formal and the Goods and Services Tax comes into play.

Successful unearthing of unaccountable money could propel tax gains for the government, good news for India’s fiscal deficit.

An interest rate cut also looks likely on the cards in the coming months as a cash squeeze exerts downward pressure on consumer food prices amid lower purchases. Lower borrowing costs will augur well for India Inc. particularly rate-sensitive sectors such as auto and banking. Also, the withdrawal limits on cash will propel faster growth of bank deposits, supporting lower long-term deposit and lending rates.

 Looking beyond the long queues outside banks and ATMs, wobbly stock markets and short-term consumption & growth squeeze, Modi’s latest reform is a well-thought out one. The key to its success lies in its implementation.

The bottom line -No gain without pain!

Latin Manharlal Group

Uptick in Manufacturing PMI underpins India’s Economic Recovery

India’s factory activity expanded at its fastest pace in almost two years in October, with a robust rise in new orders as well as output, supporting the strong growth story of the Asia's third largest economy.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector spiked up to 54.4 in October, a 22-month high, from September's 52.1, marking the biggest monthly jump in almost five years, with a reading above 50 signaling expansion.

The manufacturers attributed the latest rise in production to solid growth of the new orders, which surged significantly in October, pointing towards the strength in the underlying demand.  While, foreign orders continued to contribute to the upturn in the total new work, the rate of growth in new businesses from overseas eased to a three-month low.  

Meanwhile, the output increased for the tenth straight month and at the quickest rate in nearly four years in October.  The output sub-index, which measures the overall production, was at 57.2 in October, the highest since December 2012, and up sharply from 53.3 in September, the report noted.

The survey showed that consumer goods producers outperformed their intermediate and investment goods counterparts, registering stronger rates of expansion for both output and new orders. Despite the robust growth in new work, employment sub-index was left unchanged. Meanwhile, buying levels grew at their strongest rate in 14 months, while stock levels increased at the fastest pace since July 2015.

Moving ahead, input costs grew at its fastest rate since August 2014, part of which was passed on to the consumers by way of higher selling prices. It is likely to continue on an upward trend. This shows that risk of inflation is gathering steam yet again which had cooled to a 13-month low in September due to moderating food prices.

The increase in the inflation rate will also affect the prospects of any further easing from the Reserve Bank of India (RBI), which earlier this month surprised markets by cutting its benchmark repo rate by 25 basis points to 6.25 per cent. The next meeting of the Monetary Policy Committee (MPC) is scheduled on December 6 and 7.

Latin Manharlal Group

Softening Inflation offers scope for another Rate Cut in FY’17.

Benign inflation numbers and likelihood of a dovish monetary policy committee stance leaves the door open for further monetary policy easing this fiscal. The move could fuel additional growth by supporting government’s effort to boost economic growth to above 8 per cent to create job opportunities.

The sharp retreat in consumer inflation to a 13-month low at 4.31 per cent in September 2016 from 5.05 per cent in August 2016 is indeed a good reason for cheer, particularly when the festival season is round the corner. Retail inflation, the RBI’s benchmark price gauge has fallen below the tolerance level, leaving scope for a reduction in policy rates. The government had recently notified an annual inflation target of 4 per cent plus or minus 2 percentage points.

Further, India's wholesale prices cooled in September after touching a two year high in August. WPI inflation in September was 3.57 per cent compared with 3.74 per cent in August. Similar to retail inflation, the drop in wholesale inflation is attributed to easing food prices. Good rains kept a lid on food prices as food inflation moderated to 5.75 per cent year-on-year in September 2016 and lower than 8.23 per cent in the previous month.

The recently formed Reserve Bank of India Monetary Policy Committee, under new Governor Urjit Patel, slashed the rates by 25 basis points to 6.25 per cent in a surprise move on October 4, 2016, after inflation hit a five-month low in August.

The change in the RBI’s policy position with respect to the cut in real interest to 1.25 per cent from the 1.5 per cent -2.0 per cent range along with expanding the time to achieve 4 per cent inflation by three years to March 2021 from March 2018 provides with additional room for monetary easing in the near-term.

Since the start of 2015, the RBI has cut 175 basis points from its key repo rate. But, after the next expected cut to 6 per cent, the central bank is now projected to hold rates steady for the rest of the 12-month survey horizon.

A rate cut from here-on would help the Indian government in its efforts to lift the economic growth to above 8 per cent. It was last measured at 7.1 per cent in the March-June quarter from 7.5 per cent in the year ago period.

Latin Manharlal

India’s factory activity moderates in September

India’s manufacturing activity has moderated in September indicating that the growth in the sector has lost some momentum, creating a case for a reduction in interest rates by the Reserve Bank of India.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector stood at 52.1 in September compared to 52.6 in August, with a reading above 50 signaling expansion in the manufacturing activity over the previous month.

The activity in the Indian manufacturing industry eased slightly in September but the output is still rising at a decent pace and the sector looks likely to have delivered a stronger contribution to the GDP growth in Q2 FY2016/17, with the quarterly reading for the PMI’s Output Index up from 51.4 during April-June to 53.6.

The biggest area of strength for factory growth was the external demand as firms witnessed robust surge in new export orders since July 2015, supported by the growth in output and purchasing activity, while new improved client demand also supported the upswing in order books.

As far as prices of manufacturing goods are concerned, the survey noted that the average purchase costs increased at a faster pace in September, but one that was weak compared to its long-run trend. Data implied that manufacturers attempted to protect profit margins as output charges were raised further.

Despite ticking higher, the rate of inflation was historically muted and it has given the central bank enough room to ease policy further. The Reserve Bank of India in its monetary policy review today slashed its key lending rate or the repo rate by 25 basis points to a six-year low of 6.25 per cent, from 6.5 per cent.

Consumer inflation in India cooled sharply to 5.05 per cent in August, almost at the RBI's March 2017 medium-term target of 5 per cent, and with favorable monsoon rains, it is expected to tread lower in the coming months.

Indian economy projected to grow 8%

Despite registering a tepid growth in the April-June quarter, Asia’s third biggest economy is expected to gain strength amid broadening of the domestic consumption base, maintaining its tag of the world's fastest growing large economy.

American rating agency, S&P Global Ratings, has projected that Indian economy will touch 8 per cent growth over the next few years supported by the ongoing momentum in India’s structural reforms, most recently with the passage of the goods and service tax (GST).

The newfound faith in the Indian economy is largely backed by the measures taken by the Modi government since taking office in May 2014. India has now successfully managed to improve its competitiveness and ease of doing business rankings. Reforms like passage of GST is expected to remove the cascading effects and the inefficiencies created by different layers of taxes across states and the central government.

Easing of restrictions on Foreign Direct Investment (FDI) will now foster productivity growth in some sectors. The bankruptcy law, improved access to bank accounts and measures aimed at easing business starts would surely push up the economic growth.

Further, a normal monsoon in fiscal 2017 is expected to give thrust to the agricultural growth, pushing it above the trend level, given the current low base due to two successive monsoon failures. This should lift the sagging rural consumption demand and boost the overall GDP growth. Fortunately for India, weather forecasters accord a higher probability for normal monsoon.

However, inflation still remains a risk, given the large weights on food, fuel, and other volatile items in the Reserve Bank of India's target basket. In terms of the monetary policy framework, the Government of India has notified a CPI inflation target of 4 per cent, within a tolerance band of 2 per cent-6 per cent until March 2021. Such a scenario would help to anchor inflationary expectations. In addition, a favourable base effect as well as an improved crop sowing dynamics will ensure that CPI inflation remains within this tolerance band in the near term.

Going forward, growth in fiscal 2017 will also find support from higher pensions announced by the government, coupled with above-average monsoon and lower interest rates.

Latin Manharlal

India’s Q1 GDP Growth Slows

Indian economy grew at its slowest pace in two years in the April to June quarter, amid sluggish investment and farm output, potentially making the government’s target of achieving 8 per cent growth this year more daunting.

Gross Domestic Product (GDP) in India rose by 7.1 per cent in the first quarter of FY 2016-17 from 7.5 per cent in the year ago period, data released by the statistics office showed.

The previous low was 6.6 per cent GDP growth recorded in the October-December quarter of the 2014-15 fiscal.

The slowdown was primarily attributed to lower activity in farm, mining and construction sectors. Mining dipped into negative territory (-0.4 per cent) and construction disappointed (1.5 per cent). During the same quarter last year, these sectors grew 8.5 per cent and 4.5 per cent, respectively.

The dwindling private investments also took a toll on India’s growth number. The Gross Fixed Capital Formation which is an indicator of investment activity in the economy, fell 3.1 per cent in real terms in the April-June quarter, signaling that the private investment sentiment remained weak. The decline in investment is despite government pushing public investment. This can be due to excess capacity in the private sector and a high level of debt in sectors such as construction and infrastructure.

Private consumption, the major driver of the country’s economy, also grew at a weaker pace of 6.7 per cent against 6.9 per cent, the year before. However, growth in this segment may improve over the next few months in the wake of a better monsoon and increase in the wages.

However, even with lower-than-expected growth, India remains the fastest growing major economy, with China registering 6.7 per cent growth during June quarter. The sectors that supported India’s economic growth included, manufacturing (9.1 per cent) and electricity (9.4 per cent), performing better than the same quarter a year ago. Agriculture and services more or less managed to stay in the positive zone.

Going ahead, good monsoons combined with pay hikes to the central government employees are likely to push economic growth in the remaining quarters of 2016-17.

Latin Manharlal

RBI’s New Boss & the Challenges Ahead

Ending months of speculation, the government has announced appointment of Urjit Patel as the Reserve Bank of India’s (RBI) 24th governor, filling the shoes of Raghuram Rajan whose three-year tenure ends on September 4, 2016.

By picking Patel as the new boss of RBI, the centre has signaled continuation of prudent monetary policy, which will act as a positive trigger for the investors, bolstering the outlook of Asia’s third biggest economy.

Unlike Rajan, who took over mid-crisis, the incoming governor will inherit an economy in much better shape, with GDP growing at 7.9 per cent, a stable currency and record foreign-exchange reserves. However, there are some immediate challenges that Patel will have to face as the new RBI governor.

First and foremost, after assuming office, the primary challenge in front of the new RBI chief will be to rein in inflation as it has started inching up, led by the food prices. The global commodity prices, particularly the oil, too have started surging. Annual consumer price increases have also topped 6 per cent, breaching the government’s target.

Besides controlling inflation, Patel will face another important task of carrying forward the clean-up exercise at the banks, particularly those in the public sector. Besides, he may see a new breed of players coming up in the banking sector.

Another big challenge for Patel will be to appoint a member on the Monetary Policy Committee (MPC) which will decide the interest rate and focus on maintaining the inflation at 4 per cent with a plus/minus margin of 2 per cent. Currently, the governor alone sets interest rates but now a new six-member panel will take over before October. Three members from the RBI including the governor and three external members appointed by the government will decide on the interest rates.

Urjit Patel would also be looking closely at the impending liquidity crisis in the market. Earlier, RBI had raised about USD 35 billion through FCNR (B) deposits in September-November 2013 and most of them are getting due this year. Consequently, a dollar outflow of approximately 20 billion is anticipated!  Thus, Patel is expected to tread the middle path and keep the domestic exchange rate stable.

Urjit Patel’s appointment as the successor for Rajan has been widely hailed by both industry and markets alike. Patel is known to be very close to Rajan, a fact that adds to the belief that the new governor will follow in the footsteps of his predecessor.

Patel is someone who is well versed with the changing dynamics of the Indian economy since early 1990s. Even during his tenure under Raghuram Rajan, the RBI governor-designate had helped India to shift to an inflation targeting regime for setting interest rates. Economist expects him to be a successful and effective Central Bank’s governor who could carry forward the good work done by Rajan and further liberalise the India’s financial system.

Raghuram Rajan maintains status quo in Final Innings

Reserve Bank of India Governor Raghuram Rajan refrained from tinkering with the key interest rates in his last monetary policy review, as soaring inflation over the past three months offered little room for monetary easing in Asia’s third biggest economy.

The RBI kept its benchmark repo rate (the rate at which banks borrow short-term funds from the central bank) unchanged at 6.5 per cent, the cash reserve rate that scheduled banks have to keep in the form of liquid funds also remained unchanged at 4 per cent and the reverse repo rate at 6 per cent at its third bi-monthly monetary policy review.

Retail inflation, the RBI’s benchmark gauge for prices, rose to 5.77 per cent in June 2016 from 5.76 per cent in May 2016 driven by higher food prices. Moreover, consumer inflation is also hovering pretty close to the government’s newly notified upper tolerance limit. The government has recently notified an annual inflation target of 4 per cent, plus or minus 2 percentage points. RBI is targeting to bring down inflation to 5 per cent by March 2017.

Further, a good monsoon is likely to bolster farm output and curb the surge in food prices, however, there are still some upside risks to inflation including a hike in wages for government employees that may push up consumption and hence put pressure on prices. 

Raghuram Rajan took over the reins of the Reserve Bank of India (RBI) at a time when the rupee was weakening and touched record lows, the current account deficit (CAD) had widened to alarming levels and India’s inflation rate was among the highest in the BRIC countries. Now, after three years, Rajan is leaving the Indian economy in a much stronger shape, evident by the country’s rising global prowess that includes it becoming the world’s fastest growing major economy. From January 2015 till date Rajan has lowered rates by 150 bps.

Prime Minister Narendra Modi's government is yet to pick a successor for Raghuram Rajan who will step down on September 4 after a three-year term, to return to academia in the United States.

LATIN MANHARLAL

Fate of GST Bill uncertain in Rajya Sabha.

With flagging jobs, private investment and exports, the Asia’s third biggest economy is in fragile shape despite robust growth, indicating the need for much delayed Goods and Services Tax (GST) Bill, which aims at changing India into a single common market with a unified tax structure and will create millions of formal sector jobs.

The GST Bill, which was initially scheduled to be introduced from April 1 this year, missed the deadline owing to the protests in the Opposition-dominated Rajya Sabha. The Bill is likely to be taken up for voting in Rajya Sabha during this week. The monsoon session of Parliament ends on August 12.

This uniform, indirect tax regime will no doubt benefit the industrial class by improving the ease of doing business. Integration of existing multiple taxes into single GST will significantly reduce cost of tax compliance and transaction cost. GST will also remove cascading effect of taxes imbedded in cost of production of goods and services.

But there seem to be some point of disagreement, which are preventing the Bill from passing through the Rajya Sabha where the BJP doesn’t have the requisite numbers to push the legislation through.

Although, there should be no fundamental opposition to the notion of having a unified tax structure, the states are still anxious about the total revenue loss that could result from such a levy. The Congress has demanded that the additional one per cent tax to compensate manufacturing States for possible loss of revenue should be scrapped.

The Opposition Congress party wants that a cap be fixed on the tax that can be levied under the GST and include this in the Constitution Amendment Bill. They are demanding that the overall GST rate should be capped at 18 per cent. It also wants an independent mechanism to resolve disputes between states over revenue sharing.

While GST is eagerly awaited by the industry, the legal process to implement the GST in India is quite long and complex. It is therefore very important that the Bill is passed in the current Monsson Session.

Latin Manharlal Group

Faltering services activity in India clouds growth outlook

Indian economy seems to have succumbed a little to the global slowdown as services activity in the country remained soft in June, raising fears over a sluggish recovery in Asia’s third biggest economy, strengthening the case for the Reserve Bank of India (RBI) to deliver another interest rate cut in the upcoming monetary policy review in August.

Signaling fresh signs of slowdown, a gauge of growth in India’s services sector cooled in June as new business failed to pick up amid tepid increase in fresh orders, indicating weak underlying demand in the Indian economy.

According to Markit Economics report, the Nikkei India Services Business Activity Index eased for a third straight month, coming in at 50.3 in June compared to 51 in May, with a reading above 50 indicating expansion in services activity over the previous month.

The softness in the services activity was primarily on the back of fragile global economic conditions and subdued pace of domestic activity. New work at services providers grew at the slowest pace in 11 months as competitive pressure limited greater gains.

However, its’ not all bad. The recent anemic growth was counterbalanced by manufacturing production, which surged to a three-month high in June, pushing the composite PMI that combines services and manufacturing from 50.9 in May to 51.1 last month.

Indian firms increased prices at a weaker pace last month, indicating that retail inflation could remain low in the coming months. Consumer inflation, at 5.76 per cent in May, is somewhat above the RBI's near-term target of five per cent, on higher food costs. According to analysts, country’s consumer inflation may have eased slightly to 5.6 per cent in June 2016 from 5.76 per cent surge in May, leaving a bit more scope for the RBI to cut interest rates, going forward.

The RBI has kept its benchmark interest rate unchanged at a five-year low of 6.50 per cent since April and is expected to cut rates one more time before Governor Raghuram Rajan's term ends in September, given that the inflationary pressures in the broader economy remain moderate.

Latin Manharlal

Will the Weather Gods be kind to Dalal Street?

At a time when Dalal Street traders are fretting over the potential impact of Britain’s shocking decision to exit the European Union, some help from the heavens above may quell the ongoing volatility at domestic bourses and offer a major boost to Asia’s third biggest economy.

Yes, the focus is firmly on the progress of the Southwest Monsoon which is set to pick up pace in the coming days, cheering farmers, lending a boost to agricultural output and signaling higher rural demand.

If the monsoon pans out as predicted, increased farm incomes will be welcome news  for shares of automobile, agro, cement,  consumer durable and FMCG companies as demand from rural India, that makes up for almost 70 per cent of the country’s population, strengthens.

The India Metrological Department (IMD) has forecasted an above-normal monsoon for 2016 at 106 per cent of the Long Period Average (LPA), a massive relief after two straight years of sub-par rainfall. In its latest prediction, the country’s weather office sees monsoon rains ending later than usual this year.

A strong monsoon will boost agricultural GDP, helping the sector perform to potential, while enabling India to consolidate its position as the world’s fastest growing major economy by pushing growth close to the 8 per cent mark in FY 2016-17, bolstering the appetite for the country’s financial assets including equities.

Further, above-normal rainfall may help rein in inflation as prices of key food items are kept in check, giving the RBI more room for monetary accommodation to bolster demand and growth.

RBI hits pause button on rate cuts

The Reserve Bank of India has refrained from lowering policy rates in its second bi-monthly monetary policy review on Tuesday as it is monitoring the progress of the monsoon rains for cues over near-term inflationary trend in Asia’s third biggest economy.

As expected, the central bank retained the repo rate at 6.5 per cent after cutting it by 25 basis points in its April meeting. Banks' cash reserve ratio or CRR, the ratio of net demand and time liabilities kept with RBI, has also been kept static at 4 per cent.

RBI has cut the policy rate by nearly 150 basis points since January 2014 when it stood at 8 per cent.

The RBI’s decision came in against a backdrop of higher retail inflation in April, prospect of the interest rate hike by the Fed later this month and on the timely outburst of the monsoons.

The country’s consumer inflation, the RBI’s benchmark inflation gauge, accelerated to 5.39 per cent in April 2016 from 4.83 per cent in March 2016, leaving lesser room for a further interest rate cut in the near-term. Despite that, RBI has retained the inflation projection at 5 per cent announced in the April policy statement, though with an upside bias.

Further, it is hoping that an above-normal monsoon may boost agricultural output and keep a lid on food prices.

The RBI is also weighing the impact of heightened global economic uncertainties including the lack of clarity over the next US Federal Reserve interest rate hike and a possibility of Brexit - events which may risk capital outflows from the emerging markets.

The central bank warned that while inflation risks were on the upside, it retained its forecast for India’s GDP growth for the current financial year at 7.6 per cent.

Going forward, RBI expects demand conditions to improve as consumer confidence is seen rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. 

Upbeat consumer confidence brightens India’s economic outlook.

Upbeat consumer confidence brightens India’s economic outlook

Indians are more confident about their jobs prospects, personal finances and ability to spend as consumer confidence in India surged to a nine-year high in the first quarter of 2016, indicating a pickup in the Asia’s third biggest economy.

India tops global consumer confidence leaderboard

According to a report by market research agency, Nielsen, the consumer confidence index score for India increased three points in the March quarter to 134, the highest since 2007. Consumer confidence levels above and below a baseline of 100 indicate degrees of optimism and pessimism, respectively.

According to the report, 83 per cent of the urban Indian respondents were confident about improved employment conditions in the country. Further, 85 per cent of urban Indian respondents remained hopeful about their personal finances, while 66 per cent Indians felt that it was a good time to spend.

Global consumer confidence remains stable

Consumer confidence at the global level remained stable in the first quarter but stood below the baseline score of 100, indicating pessimism. The score grew one index point to 98 in the March 2016 quarter compared to three months ended December 2015.

In the first quarter, Philippines (119) and Indonesia (117) stood at second and third position globally in terms of consumer confidence after India. Consumer confidence score surged 10 points to 110 in the US. Whereas, most of Europe (including UK and Germany), Latin America, Saudi Arabia, United Arab Emirates, Japan, Canada, China and Hong Kong witnessed quarter-on-quarter drop in the confidence level in Q1.

What’s driving consumer confidence in India?

The surge in the consumer confidence was primarily bolstered by the government’s vision to play the role of an enabler to ensure sustained growth. The government’s much campaigned ‘Make in India’ reform coupled with ‘start-up India’ campaign seems to have played a crucial role in improving the overall consumer sentiment through the promise of job creation.

The consumers also seem to have remained optimistic following the Budget announcements and government’s commitment to stick to its fiscal consolidation goals and its focus on inclusive & sustained growth.

Further, robust macroeconomic indicators including strong GDP growth and softening inflation, coupled with lower interest rates have also added to the cheerful mood of Indian consumers.

Latin Manharlal Group

Strengthening forex reserves to improve India’s economic outlook.

Amidst the fear of global economic slowdown and flight of funds from emerging countries, surge in India’s foreign exchange reserves has brought the much needed relief to the system, lifting the outlook for Asia’s third biggest economy.

Under the guidance of Reserve Bank of India (RBI) Governor, Raghuram Rajan, the foreign exchange reserves have surged from a three-year low in September 2013 as he stimulated inflows by offering discounted currency swaps to the banks.

Forex reserves at record high

Maintaining the uptrend of the past several weeks, India’s forex reserves soared by USD 1.52 billion to a record high of USD 363.12 billion in the week ended April 29, 2016, the Reserve Bank of India noted.

The country's forex reserves had gone up by USD 1.35 billion to USD 361.601 billion in the week before.

What’s driving the surge

The spike in foreign exchange reserves was primarily on account of rise in the value of foreign currency assets that constitute a major part of the overall reserves.

Foreign currency assets, which are expressed in dollar terms and comprises the effect of appreciation or depreciation of non US currencies such as euro, pound and yen held in reserves, grew from USD 337.537 billion to USD 339.02 billion in the week ended April 29, 2016.

Further, a surge in the Indian rupee amid a pick-up in dollar inflows into local equity and debt markets has given adequate opportunity to the RBI to purchase dollars in the currency market.

Forex reserve to help curb volatility

The central bank is increasing reserves to stand any volatility in outflows amid sluggish growth in China and forecasts that the Federal Reserve will consider raising US interest rates.

Earlier this month, Raghuram Rajan cut the benchmark interest rate and promised to end a prolonged funding squeeze in the financial system by infusing cash via bond repurchases. He said, the central bank would buy dollars and bonds to infuse funds into the banking system.

A strong forex reserves kitty will help the Indian economy overcome any possible volatility in foreign capital flows amidst heightened global economic uncertainty on account of weak commodity prices and worries over a China slowdown.   

Latin Manharlal  Group

Good monsoon to spur growth in Indian economy.

The concerns over the farm and economic growth are waning amid hopes of generous rainfall this year, which may significantly boost farm incomes, rural demand and the overall growth momentum in Asia’s third biggest economy.

In its initial projection, the India Meteorological Department (IMD) expects monsoon to be 106 per cent of the long period average (LPA) in 2016.

If the Met Department’s prediction of a good monsoon turns out to be right, India's economy could grow at 8-8.5 per cent in 2016-2017 from the projected 7-7.5 per cent.

Agriculture is one of the major sectors of the Indian economy and contributes about 17 per cent to the country’s GDP. Thus, a normal monsoon would be an encouraging supply shock, strengthening the rural demand by augmenting the supply of farm products, thereby significantly contributing to the India’s economic growth.

According to the SBI research report, agricultural GDP is most likely to see a robust performance in FY17 and may even touch 7-8 per cent mark if IMD’s prediction of a good monsoon comes true.

For the Modi government, which has bet big on rural India as the key economic growth driver and dreams of doubling the farm income by 2022, a good monsoon would bring a lot of respite. At the same time, it would augur well for Raghuram Rajan, who is tasked with keeping retail inflation within the 5 per cent, giving an adequate room to the Reserve Bank of India (RBI) to bolster monetary easing.

Going ahead, the stable microeconomic environment, forecast of an above-average monsoon, falling interest rates and higher public investments would boost the economy, despite a contraction in exports amid global slowdown.

Latin Manharlal Group.

Faster private sector growth bodes well for Indian economy

Amid the global slowdown, Indian economy seems to be gaining strength day by day, justifying the title of being the world’s fastest growing major economy, as strong macroeconomic fundamentals, favourable business sentiments and downward trend in interest rates are significantly supporting the Asia’s third biggest economy.

Indian services activity expanded at a quicker pace in the month of March driven by a marked acceleration in new business, signaling strong underlying demand in Asia’s third biggest economy which is withstanding a global slowdown.

The Nikkei India Services Business Activity Index climbed to 54.3 in March from 51.4 in February, with a reading above 50 signaling expansion.

Climbing to the highest level in 37 months, the composite gauge measuring manufacturing and services in India climbed at 54.3 in March from 51.2 in February driven by faster increases in both the sectors.

Further, the government’s vow to stick to its budget deficit goals, easing inflation and a recent reduction in the interest rates on small savings instruments gave the Reserve Bank of India (RBI) additional room to bolster monetary easing in a bid to buoy demand and encourage investments in the country’s economy.

As expected RBI delivered an interest rate cut, its first in six months while signaling a continued accommodative monetary policy stance to help power growth in Asia’s third biggest economy. The central bank lowered the repo rate by 25 basis points to the lowest level since March 2011 at 6.5 per cent from 6.75 per cent.

The RBI kept unchanged its gross-value added growth projection for FY 2017 at 7.6 per cent while inflation is expected to decelerate at a modest rate to hover around the 5 per cent mark through March 2017.

Going forward, policy reforms initiated by the government, lower interest rates and a surge in investment activity would be the key triggers in propelling the economy on an upward trajectory.

Latin Manharlal

RBI set to deliver another Rate Cut

The stage is set for the Reserve Bank of India (RBI) to cut interest rates in its first annual policy statement for FY17 to be announced on April 5, delivering a much needed boost to Asia’s third biggest economy at a time when a growing global gloom threatens to hurt exports.

The central bank is poised to cut the repo rate by 25 basis points as softening consumer inflation, coupled with the government’s decision to maintain fiscal prudence in the Union Budget leave more leeway for policy easing to help boost demand and revive investments.

The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.

Benign Inflation, fiscal prudence gives room for rate cut

The NDA government in its Union Budget 2016-17 maintained its fiscal deficit target at 3.5 per cent of the country’s GDP in FY 2016-17, the lowest since 2008, while that for the ongoing fiscal was retained at 3.9 per cent.

India’s wholesale inflation stayed in the negative terrain for the sixteenth straight month, as wholesale prices fell 0.91 per cent year on year in February 2016, compared to an annual drop of 0.90 per cent in January 2016. Moreover, the consumer inflation cooled to 5.18 per cent in February 2016 from 5.69 per cent in January 2016, paving the way for further softening of the borrowing costs.

The RBI in 2015 cut interest rates by an overall 125 basis points with the repo rate currently standing at 6.75 per cent. 

Latin Manharlal Group

IIP slump signals renewed economic recovery doubts

January’s 1.5 per cent plunge in industrial output, marking the third successive contraction, is reflective of a sluggish recovery in Asia’s third biggest economy, and presses the case for the Reserve Bank of India (RBI) to deliver another dosage of monetary stimulus in the form of an interest rate cut to help buoy demand and revive flagging investments.

Signaling fresh signs of distress in manufacturing, which makes up over two-third of the IIP, output in the sector shrank 2.8 per cent, year on year in January 2016. A 20.4 per cent contraction in capital goods output is indicative of weak business sentiment amid a global slowdown, a rising corporate debt burden and tepid credit growth as banks battle mounting bad loans.

Further, stagnation of consumer goods output in January is a big blow for the consumption driven Indian economy. With the ongoing global gloom unlikely to lift soon, there is an urgent need to lift domestic consumption, and a 25 bps rate cut by the RBI at its upcoming policy meet on April 5 would come in handy.

With wholesale inflation remaining in the negative territory and the government sticking to its vow of maintaining fiscal prudence in the Union Budget 2016-17 without compromising on development spending, the central bank has been provided with some leeway to ease policy and help power an economic acceleration.

A rate cut could support Dalal Street which has witnessed a handsome post- Budget rally with foreign funds returning after a two-month exodus as solid progress on the fiscal front and macroeconomic stability consolidated India’s position as a haven of stability amidst an uncertain global scenario.

Unprecedented easing measures from the European Central Bank (ECB) and further stimulus expected from the Bank of Japan (BOJ) this week and the diminishing likelihood of a Fed rate hike in the near-term, coupled with a recovery in oil prices could increase the lure for high yielding assets, supporting Indian equities.

Latin Manharlal Group

Will Sensex head northwards post the Budget?

Ever since the beginning of the year, Indian equity markets have been gripped by the Bears as devaluation of the Chinese currency in the beginning of the year rattled the markets. Meanwhile, interest rate hike by the US Federal Reserve, for first time in 9 years, further added to the investors’ anxiety.

The 30-share barometer, Sensex has fallen over 10 per cent from January 1 till Feb 17 and it has corrected by 20 per cent over the past one year.

The year has not gone as planned for the stock markets as heightened global economic uncertainty along with the diminished investor confidence triggered a substantial capital flight from the local equity markets. Overseas investors have pulled out around USD 2.3 billion from Indian equities till February 22, 2016.

In such a scenario, all eyes are set on the Union Budget 2016 announcements to be presented by Finance Minister Arun Jaitley on February 29 which would decide future movement of the Indian markets. 

What’s on the cards?

Budget 2016 is expected to include some deep-rooted structural economic reforms to bolster growth and incentivize investments that may help strengthen foreign and domestic investor sentiments.

Jaitley who will unveil the Budget on February 29, is expected to make key announcements with respect to the ‘Make in India’, ‘Digital India’, ‘Start up India’ and schemes such as the Pradhan Mantri Krishi Sinchai Yojana, etc. Goods and Services Tax (GST), Smart cities and Infrastructure reforms may also feature prominently in his budget speech. The Budget could definitely act as a roadmap to the Indian economy in the coming fiscal year.

Analysts expect markets to bounce back if the government presents an investor-friendly and growth-oriented Budget, as investors who are currently worried about the global market volatility, are likely to purchase stocks post the Budget.

Latin Manharlal Group