Download 31 Economic Growth Holding Up, Inflation Poised To Edge Higher

INDIA
to consumer prices going forward.
Gross Value Added (GVA) improved in Apr-Jun 2015
The signs from the inflation landscape seem to be
pointing to additional monetary policy easing from
the RBI as they certainly have the monetary room
to do so (current repurchase rate is 7.25%). However, we think that the period of low inflation may
be over soon.
Agri
Utilities
Mining
Construction
GVA
Manufacturing
Fin/Real Est/Prof Svc
Trade/Hotels/Tpt/Comms
-5
Apr-Jun 15
0
5
10
Jan-Mar 15
15
Source: CEIC
Economic Growth Holding Up,
Inflation Poised To Edge Higher
India’s Apr-Jun 2015 gross domestic product
(GDP) grew at a slower pace of 7.0% y/y, down
from the growth rate of 7.5% in Jan-Mar 2015. However, another measure of India’s economic growth
is gross value added (GVA) at basic prices, and it
showed the contrary – growth had accelerated to
7.1% (Apr-Jun), from 6.1% (Jan-Mar) earlier. The
key difference between both indicators is that GDP
is derived from adding GVA to net indirect taxes (ie:
gross indirect taxes minus subsidies). This meant
that the Indian government had given out more subsidies than receiving taxes in the latest quarter.
Although the Central Statistics Office (CSO) prefers
the GDP gauge, the Reserve Bank of India (RBI)
had been using GVA for making their economic
forecasts. According to the GVA computations, India’s agricultural sector grew 1.9% y/y, better than
the contraction of 1.4% y/y a quarter ago. Other industries such as manufacturing (+7.2% y/y), trade/
hotels/transport/comms (+12.8% y/y), and financial/
real estate/professional services (+8.8% y/y) continued to grow strongly, although at a slower pace
when compared to Jan-Mar 2015.
Indeed, although the RBI had been keeping an
eye over the economic growth numbers, it had
constantly emphasized the importance of bringing
down inflation as the key mandate. Inflation in India had been easing steadily to the latest 3.7% y/y
mark (in August), due mainly to falling food inflation, well within RBI’s target of 6% until Jan 2016.
Additionally, wholesale price inflation had also been
contracting for the tenth consecutive month in August (-5.0% y/y), weakening any price pass-through
First, concerns on a possible shortfall in the Southwest monsoon may drive food prices higher. The
weather estimated that India will receive only 84%
of the 50-year average rainfall in the second half
of the Jun-Sep monsoon season this year. The annual rain is the only source of irrigation for much of
India’s farmland and is a vital driver for producing a
plentiful harvest. Since food is the largest component (40%) in the average Indian consumption basket, should lower crop yields drive up food prices,
overall consumer prices will surprise on the upside.
Second, the favourable base effects helping to put
a lid on inflation will wane from September 2015
onwards.
As such, we are of the view that the RBI will likely
keep the current repurchase rates unchanged at
least until 3Q 2016. Moreover, the RBI had said that
previous rate cuts had not been fully transmitted to
lower interest rates by commercial banks. In addition, the INR had fallen 5% against the USD yearto-date. Should the US start their interest rate
normalization in this year, the INR may weaken
further and result in higher capital outflows. We
recall the period of capital outflow and the quick depreciation of the INR during May 2013 when the US
Fed started the ‘taper talk’.
Any further RBI rate cuts will only worsen the
outflow of capital. A quicker deprecation of the
INR will ensue, further eroding the purchasing
power of the INR and higher imported inflation will
add on to inflationary risks. Even without any further rate cuts in our forecasts, our expectations of
a stronger USD from the US interest rates normalization will likely see the USD/INR trading at 66.0/
USD by end of this year.
UOB Economic Projections
2013
2014
2015F 2016F
GDP
4.7
6.9
7.4
7.7
CPI (average, y/y %)
10.9
6.4
5.9
6.2
Unemployment rate (%)
9.1
8.6
8.4
8.4
Current account (% of GDP)
-2.6
-1.4
-1.5
-1.8
Fiscal balance (FY, % of GDP)
-5.9
-4.8
-4.3
-4.5
Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research
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