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