Growth indicators

High frequency domestic growth indicators continue to suggest weakness in consumption sector and strength in construction indicators. Data continue to be soft in consumer durables and nondurables production, auto sales, NONG imports, and industry commentary remained weak. PMI also weakened with companies citing election related uncertainty as drag. However, cement and steel demand, credit growth, capacity utilization, remained decent. Traffic indicators were mixed with railway traffic growth increasing and airport traffic weakening. There was some moderation in petrol and diesel consumption growth. Credit growth remains strong and the breakdown of banking credit is showing inching up of industries and strong growth in infrastructure segment.

Quarterly GDP for 1QCY19 rebounded strongly in both US and Europe, and remained stable in China, receding worst fears about global growth. Chinese data release in the month was positive with rebound in retail sales, industrial production, fixed asset investments and credit impulse. Global manufacturing PMI for April declined somewhat due to decline in EM PMIs even as DM PMIs rebounded. Chinese and Indian manufacturing PMIs declined while US and European PMIs improved.

External trade

Exports rose by healthy 11% y-y, highest in five months, though partially on weak base. This is in sync with exports rebound in Asian peers particularly China. Weak exports since November have been one contributor to weak domestic growth and if the uptick continues it may give some relief to weak domestic growth. Imports remained weak at 1.4% y-y, although up from February, due to higher oil imports. On m-m basis, trade deficit increased marginally, this can be largely accounted by higher oil imports.

NONG imports remained weak, reflecting weak domestic demand and NONG trade balance turned positive for the first time after April 2016. Segment wise breakdown of imports show one interesting trend of decline in electronics imports which can partially be due to government policies shifting some manufacturing domestically. However, imports on machinery also remained weak reflecting weak investment demand. At this rate we could expect BoP surplus in FY20, provided there is a stable government post elections and there is no major global slowdown.

Inflation

CPI came at 2.86%, which was broadly in line with market expectations. Key highlight of the data was reversal in food inflation but moderation in core inflation. Food inflation turned positive after 5 months of negative reading while core inflation declined to the lowest since February 2018. Besides divergence in core and food inflation, there is high divergence in urban and rural inflation. While CPI urban is witnessing a rebound, rural inflation remains surprisingly low. Urban inflation is already above 4%.Urban food inflation reflects the rise which we are witnessing in high frequency data, not visible in rural inflation. So either high frequency data is not capturing the rural trend or there is some data issue in capturing rural food inflation. Such high divergence in rural and urban is quite strange given the improvement in connectivity and farmers being allowed to sell crops in urban areas as well.

Recent high frequency data is suggesting pick-up in food prices and normalisation of food inflation. While IMD has forecasted a near normal monsoon this year, El Nino remains a risk and will have an important bearing on food inflation. We expect inflation to rise to above 3% in April and further normalisation of food inflation from the current ultra- low levels.

Other developments

The FOMC made modest changes to its statement compared to March, upgrading its growth assessment while downgrading its inflation assessment. With global major central banks remaining dovish and global growth fears receding, equities rallied across the world with rise in both EM and DM equity markets and US equities at near all-time highs. Foreign capital flows remained strong in EM economies.

Brent crude rallied to just short of 75 as growth fears receded and US decided to end the Iran sanction waiver, before cooling to 70. Metals declined steadily through the month and may come under more pressure if US-China trade tensions escalate. Dollar continued to remain strong despite moderation in global growth fears and dovish Fed policy. Risk of escalation in US-China trade tensions will be keenly watched.

Portfolio Positioning

Markets are bracing with political uncertainty and awaiting outcome of the elections. Going ahead a decline in core inflation, significant deterioration in growth outlook, collapse in commodity prices and greater clarity on monsoon can create a conducive environment for rates while the adverse movement in above can pose risks to such expectations. The above outlined state of uncertainty means that while on an absolute basis the long duration Gsec and AAA PSUs are attractive, the risk-reward is still not very clear at this point of time. We believe that funds which focus on the shorter end of the curve could 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; DM: Developed Markets; IIP: Index of Industrial Production; PMI: Purchasing Managers’ Index’; CAD: Current account deficit; NONG: Non-Oil, Non-Gold; FOMC: Federal Open Marketing Committee; BoP: Balance of Payment

Source: CEIC, Bloomberg, RBI

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