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.

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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.   

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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.

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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.

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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