Growth indicators

GDP data for 3QFY19 pointed to some further weakening in growth momentum in the quarter even as internals were somewhat better. 3Q GVA (Gross Value added) and GDP came at 6.3% (6.8%) and 6.6% (7.0%) respectively, which were lower than the market consensus.

The decline was largely owing to lower growth in agriculture, reflecting the lower rabi sowing, and decline in growth of government services and consumption. Core GVA, which gives a better reflection of underlying trend (ex-agriculture, PADS) rose moderately. Growth rate in industry increased but services growth declined. If we look at the data from demand side, then the slowdown was clearly led by decline in consumption growth, both government and private. However, a key positive in the data is that GFCF,(Gross Fixed Capital Formation) which reflects investment in the economy, remains strong at 10.6%, 5th consecutive quarter of double digit growth.

Monthly domestic high frequency growth indicators continue to give a mixed picture. Composite PMI data, credit growth, and construction indicators is showing decent numbers even as auto sales data remain unusually weak. While traffic data (railway and airport) showed some moderation, there was pick-up in fuel consumption and government expenditure. Total credit (banks plus bond market issuances) data for December quarter came quite strong and the breakdown of banking credit is also indicating positive trend of rising growth in industrial sector.

Global February PMI (Purchasing Managers’ Index) saw a mild acceleration in the rate of global economic expansion with composite PMI rising to 52.6, up from January’s 28-month low of 52.1, with a weaker manufacturing PMI offset by stronger services growth. Breakdown of sub-indices show that improved new orders and strong business optimism should help support growth of output and employment during the months ahead, offsetting the continued weakness of international trade flows. The US was the main driver of global economic growth, seeing its rate of expansion accelerate to a seven-month high. Accelerations were also registered in the euro area and the UK, but both remained below the global average.

External trade

Trade deficit for January increased to 14.7bn against 13.1 bn in December. The rise in trade deficit was due to some seasonal fall in exports even as imports rose. There was an uptick in oil imports, which can be accounted by some rise in price. However, electronics goods imports also rebounded after declining trend in previous two readings. On a growth basis, both exports and imports remain weak. NONG imports also remain quite weak. At current run-rate, we are looking at CAD at ~2.2 to 2.5% of GDP range, which should be comfortably funded by capital inflows if global environment remains OK and there is a stable government post elections.

Inflation

Headline inflation, surprised once again on the downside, declining further to 2.05%, almost touching the lower end of RBI target zone. Food inflation continued to be in negative zone and prime driver of very low inflation numbers. Low food inflation remained very broad-based with vegetables, fruits, sugar, pulses, and eggs continuing in negative zone. Besides the low food inflation, another positive in the inflation data was the decline in core inflation as well, with the previous few month’s surge in health and education sub-sector, appear to be plateauing. Overall, further decline in headline inflation print with some decline in core inflation and continuation of very low food inflation indicates possibility for more rate cuts.

Other developments

The RBI monetary policy minutes reinforced the dovish tone in the 7th February monetary policy meeting, keeping alive good possibility of further easing in CY19. Statements and minutes emanating from Fed continue to suggest extended policy dovishness, which has been keeping global markets in risk-on mode. Major global indices have erased December losses and global volumes continue to remain low across most asset classes and markets. Progress in US-China trade and BREXIT negotiations shall remain important focus for markets in March.

China has increased policy efforts to help economy. While reducing the official growth target to 6-6.5% range from around 6.5% in past two years (broadly in line with market consensus), China increased the official budget deficit for 2019 to 2.8% of GDP from 2.6% last year to accommodate VAT and other tax cuts. The quota for local government special bond issuance (shadow deficit) was raised to 2.2% of GDP from 1.5% last year, taking the total budget deficit to 5% of GDP. Along with the earlier easing measures, this may help in creating a floor on the recent Chinese slowdown.

Portfolio Positioning

We have been looking to incorporate the dovish shift in monetary policy approach by this regime in our portfolio positioning. We note that bond markets is in a curious situation as possibility of further rate cut exists concurrently with increased supply in both long end Government and corporate bonds. We think this push and pull will eventually result in a steeper curve. We believe that funds which focus on the shorter end of the curve offer a better risk-reward mix as they provide both attractive carry and also scope of capital gains from a bull steepening of the curve.

EM: Emerging Markets; IIP: Index of Industrial Production; PMI: Purchasing Managers’ Index’; CAD: Current account deficit; NONG:
Non-Oil, Non-Gold; PADS: Public Administration Defence and Other Services
Source: CEIC, Bloomberg, RBI

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