2Q GDP data growth disappointed at 7.1% y-y growth, 110 bp lower than previous quarter. The GVA (Gross Value Added) also declined by an equivalent 110bp to 6.9%. The internals shows weakness in services and mining growth while growth in electricity, manufacturing, construction and agriculture was decent. On demand side estimate, growth continued to be robust in investments with gross fixed capital formation growing at double digits for the third successive quarter. Government final consumption expenditure and exports was robust, while private consumption and imports were drag on GDP numbers.
Other high frequency data continued to be fairly healthy, except for weakness in PV sales. Composite PMI for November was at 2 year high of 54.5 with strong reading both in manufacturing and services. Headline IIP for September was stable at decent 4.5% y-y despite adverse base, with decent growth in manufacturing and electricity. Infrastructure index for October continued to healthy with strong growth in cement, electricity and coal.
Freight traffic continued to remain healthy in railways, airport and cargo. Airport passenger traffic growth also remained strong in mid-teens. However, there was moderation in fuel consumption and PV sales. Banking sector non-food credit growth continues to inch up and is at highest level since November 2013. Strong growth in banking credit would also likely be partially due to shift to banks from crisis ridden NBFC sector. While the credit growth is still being largely driven by services and personal loans, industrial credit growth is beginning to inch up. We would be closely watching for impact of recent NBFC crisis on growth numbers in upcoming months.
CPI inflation once again surprised positively with October reading coming further lower at 3.3%. The steadily declining headline inflation continues to be driven by very low food inflation, which was sub-zero in October. Very low food inflation is broad based with vegetables, sugar and pulses in negative territory and very low inflation in fruits, milk and spices. We have been highlighting the significant supply shock in food production especially in horticulture production, which has consistently surpassed population growth over the last decade and is a key driver for low food inflation. Even the sharp rise in MSP this season has failed to have a material impact on food prices.
However, outside the food segment, inflation remained elevated with core inflation (ex-food, fuel, petrol and diesel) at 5.64% driven by uptick in health, personal care and household goods. Food prices continue to remain low and we expect November headline inflation to be still lower at 2.5-2.7%, although partially aided by a favorable base.
Sharp decline in crude price resulted in significant improvement in outlook for India’s external account. While headline trade deficit rose in October to 17.1 bn USD, it was driven by higher oil imports, which will likely subside going ahead. NONG import declines for third consecutive month to 28.2 bn from 28.4bn in last month. Growth in exports and imports remained pretty strong at ~17.5% each. With the sharp decline in crude oil price the outlook for trade deficit is positive for the upcoming months.
INR rebounded sharply in the month in the wake of sharp reduction in crude prices and return of foreign portfolio inflows both in debt and equity segments. Despite expectations of forex purchases to recoup the recent decline in reserves and relative tight domestic liquidity, RBI remained on the sideline allowing the sharp INR appreciation.
In a widely expected decision, RBI MPC kept both the policy repo rate and stance unchanged. There was a sharp decline in its inflation forecast with upside risks and growth forecast was left unchanged with downside risks. Despite the status quo policy and stance, the policy had a dovish tilt with RBI hinting at commensurate action if the upside risks to its inflation projection doesn’t materialize.
RBI policy has to be seen in the backdrop of significant change in domestic and global backdrop since the last October policy: sharp (~30%) decline in crude prices, sharp appreciation in INR, food inflation declining even further from already low levels, incremental weakness on global data and markets, dovish tilt in the Fed policy and decline in US yields. Consequently, market pricing of rate hikes came down steadily from ~100bp hike in September to no rate hike at present i.e. expecting 6.50 to be the terminal repo rate level, making it one of the shallowest rate hike cycle.
The global manufacturing PMI was stable in November, after 6 consecutive months of decline. DM PMIs declined, led by weaker PMI in EU and US which however continued to show strong growth at 55.3. EM PMIs were better except for China; Indian PMI was quite healthy.
There was a brief thaw in rising US-China trade tension with both countries agreeing to pause the imposition of additional trade tariffs for a period of 90 days. However, after so many false starts, markets will be cautious to see actual agreement.
Global markets continued to remain under pressure with markets factoring in risk of global slowdown. While US macro indicators continue to remain strong US equity markets remained under pressure and US yield curve flattened. Recent communication from Fed also had a somewhat dovish tilt and market pricing of rate hike declined to only 1 in 2019 after a rate hike in December.
In last few months we had been anticipating lower crude prices/food inflation and possibility of weaker global growth and had proactively increased duration across funds. The pace of OMO purchases has been also forecasted by us and has been reflected in overweight on Govt securities in our funds.
Going ahead we feel that needle has been moved in terms of RBI communication on future policy action, the caveat being that underlying data remains supportive, its inclination to support the market on liquidity front and also its willingness to be lender of last resort if situation so warrants. This thus translates into a two-pronged strategy for us 1) to remain constructive on duration, and 2) capture the attractive spreads in duration AAA PSU bonds.