India Recent data releases – difficult times continue ::RBS

India
Recent data releases – difficult times continue
We had three important data releases last Friday – June CPI, June trade data and
May industrial production. Put together and similar to recent trends, these releases
painted a sombre picture for the economy. Our key observations are:
y Trends in exports and manufacturing output suggest that risks of full-year FY14 GDP
(fiscal year ending March 2014) growth falling short of 5% are rising.
y The recent moderation in retail price inflation has stalled. Though most likely a oneoff blip, it only adds to the RBI’s reluctance to cut rates aggressively.
y The trade deficit corrected impressively. Though it may be too early to arrive at a
firm conclusion, official measures to stop the frenzy of gold purchases may finally be
starting to bear fruit.
Industrial activity in May displayed its recent perfunctory weakness declining 1.6% yoy.
The weakness was broadbased encompassing both the mining and manufacturing
sectors. Manufacturing contracted 2% yoy, pulled down by dismal performance in the
capital goods and consumer durable sectors.
Prospects of even a moderate recovery in manufacturing have been complicated by
sluggish global domestic demand – exports fell 4.6% yoy in June. Exports had
contracted 1.1% yoy in May. Put together, the manufacturing and trade data validated
our long-standing view that none of the major components of aggregate growth are
holding up – consumption, investment and exports are all weak. In fact, these data
releases are raising the odds that full-year FY14 may fall short of 5%.

��

-->
This sub-trend performance in industrial activity/exports did not filter down to consumer
prices. CPI accelerated to 9.9% yoy in June from 9.3% yoy last month. Though much of
the variation was caused by a rise in food prices owing to untimely rains, non-food CPI
also edged up albeit moderately. As such, we think that this was a one-time blip as
demand is simply too weak for corporates to command much pricing power. At the
same time, we have to be cognisant of the fact that the RBI was uncomfortable with the
pace of moderation in consumer prices and June data has probably added to its
resolve to embark on an aggressive easing cycle for even longer.
The positive news and probably the only one was on trade imbalances. The trade
deficit moderated to USD12.2bn after averaging USD19bn in April and May. The
improvement was predominantly due to a sharp fall in gold imports to USD2.45bn from
USD8.4bn in May and USD7.5bn in April. Though perhaps too early too conclude, the
combination of falling gold prices, higher import tariffs and curbs on margin financing for
gold purchases appear to be working.

The reduction in the trade deficit is critical for stabilising the INR particularly at a time
when US bond yields are rising and large dollops of portfolio flows are no longer
assured. Though USD/INR had barely reacted on Friday, we do believe that a
continuation of this trend of lower trade deficits should allow USD/INR to stabilise in the
55-57 range.