The MPC meeting coincided with complex domestic and global economic conditions. India’s macro-economic health has deteriorated on the back of rising crude prices, currency depreciation, volatile capital markets and pressure on fiscal and current account deficits. The silver lining is the decline in consumer inflation as borne out by the two headline inflation prints after the August 2018 MPC meeting. Further softening of expected food inflation in H2FY19 has led to a pause in October and a status quo on the repo rate. India’s domestic lead indicators present a mixed bag. Manufacturing PMI rose to 52.2 while services PMI expanded at a slower pace in September 2018. Indicators of rural demand like growth in tractor and two-wheeler sales have slowed down while indicators of construction, steel and cement production remain robust. It is heartening to note from the MPC’s statement that private consumption is robust and is likely to sustain. Retail inflation eased below 4% in August, primarily because of volatility in food inflation. Moderation in food inflation in key food items and first estimates from kharif food production are encouraging for food prices.

Given the status quo in rate, there can, however, be a further weakening of the rupee. Along with a hardening of global crude prices, it will create pressure on raw material and transportation and packaging costs. The emergence of this margin pressure on the manufacturing sector, at a time when output gap is virtually closed in the economy, may push up WPI and CPI. Lower profits will reduce the investible surplus, further affecting the investment momentum in the medium term. Global macro forces are complicating India’s economic balance. The rise in Fed rates against the backdrop of a strong US economy continues to have important implications for India. Other emerging market (EM) central banks have raised policy rates to protect their currencies in the last couple of months. Further, the decline in India’s forex reserves would have underpinned RBI’s matching rate actions with global rates. Having said that, the quantum of movement in the rupee looks to be along comparative lines. A number of measures have been announced to rein in current account deficit (CAD) and it seems that RBI has decided to wait and watch the lag effect on economic activity before any rate action is taken to defend the currency.

India’s macro-math stands fiendishly complicated. This has led to a widening of the structural CAD against tightening global financial conditions and terms of trade. A status quo on rate is a predictable outcome but it calls for a hawkish vigil to further strengthen macroeconomic fundamentals.

R. Shankar Raman, CFO, L&T.

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