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Business News/ Politics / Policy/  Good tidings on macro numbers
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Good tidings on macro numbers

Experts predict key economic indicators will turn positive soon

Graphic: Subrata Jana/MintPremium
Graphic: Subrata Jana/Mint

The economy has turned (or is turning) the corner, say experts.

The prognosis comes even as India gets ready to release key inflation and factory output data on Monday and external sector data later this month and after a period when things seemed to be getting worse.

That fits in with the theory that things had to get worse before starting to get better.

Retail inflation, which crossed 6% in July, is likely to decelerate sharply, beginning with August numbers to be released this week, over the next few months on the back of a good monsoon and fall in food prices; similarly, factory output may rebound after bottoming out in July if one goes by the recent uptick in the Purchasing Managers’ Index (PMI); finally, India’s external sector may also see further improvement with the current account deficit turning surplus.

Analysts expect this improvement in the macro numbers to provide room to the Reserve Bank of India (RBI) to further cut key policy rates later in the year, though they rule out one at the upcoming 4 October monetary policy review.

Retail inflation recorded a 22-month high of 6.07% in July spurred by higher food prices. The index of industrial production has so far remained volatile with no sustained signs of recovery in the manufacturing sector.

However, in August, the Nikkei/Markit Manufacturing PMI—an indicator of factory activity—rose to 52.6, from 51.8 in July.

JPMorgan economists Sajjid Chinoy and Toshi Jain said in an advisory on 7 September that consumer price inflation (CPI) may decelerate to 5% in August, 4.5% in September and to an average of 4% in the three months ending December. “In recent weeks—even as the monsoon has underperformed exuberant initial expectations but remained in the normal range, pulse sowing has remained strong, and food prices have begun to decline—we have been flagging downside risks to our inflation trajectory with the implication that the space for more monetary easing may be opening up. With pulse and vegetable prices declining meaningfully over the last fortnight, we are sufficiently convinced that those downside risks have now been realized," they said.

So far, around 86% of the country has received normal to excess rainfall, according to the India Meteorological Department. Though some parts of the country have recorded deficit rainfall, no major crop loss has been reported.

In fact, sowing of kharif (monsoon) crops this year has shown a rise compared to last year. Data with the agriculture ministry shows that 105.4 million hectares have been planted under different kharif crops so far, an increase of 4.16% from the area sown by this time last year. Sowing of pulses, a key pressure point in retail inflation, saw almost a 30% increase this year to 14.4 million hectares. Other crops such as rice, coarse cereals and oilseeds have also seen an increase in the sowing area, with sugarcane and cotton being the exceptions.

Pranjul Bhandari, chief India economist, and Dhiraj Nim, economics associate, at HSBC Securities and Capital Markets (India) Pvt. Ltd wrote in a note dated 8 September that a good set of macroeconomic numbers is expected in the next few days.

“August CPI inflation is likely to fall sharply after a four-month rise, solidifying our forecast for a 25bp repo rate cut in 4Q (the fourth quarter). The 2Q current account is likely to post a surplus after nine long years of deficit. The August trade balance is expected to narrow further as gold imports touch a five-month low. The industrial production index may be depressed, but the data is for July. The more updated PMI Index suggests that activity improved markedly in August," they said.

To be sure, in its monetary policy review last month, RBI warned about upward price pressures on inflation. While it acknowledged that a good monsoon after two consecutive drought years and better supply side management could see food inflation moderating, it flagged pressures on the non-food, non-fuel inflation outlook.

“The prospects for inflation excluding food and fuel are more uncertain; if the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation. In addition, the full implementation of the recommendations of the 7th central pay commission on allowances will affect the magnitude of the direct effect of house rents on the CPI," it said.

D.K. Joshi, chief economist at rating agency Crisil, ruled out a rate cut in the October monetary policy review: “Even though the monsoon data will be available with RBI by September end, rate cuts will not happen this October. RBI will do that by end of the year only."

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Published: 11 Sep 2016, 11:42 PM IST
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