A pacing covid-19 vaccination drive and an equity market flush with liquidity helped India stay ahead of Southeast Asian emerging market peers in September
India retained its growth advantage over key emerging market (EM) peers in September, once again helped by a pacing covid-19 vaccination drive, improving mobility, and an equity market flush with liquidity. However, the country remained stuck at the second position behind Russia in the latest update to Mint’s emerging markets tracker for the second straight month.
The ferocious second covid-19 wave had pushed India down to the third rank in May and June, but it has seen a rapid revival in economic activity since then with infections largely under control. This has pushed the country ahead of Southeast Asian peers struggling with Delta variant outbreaks. Indonesia and Malaysia have started re-opening only in the past few weeks, which is likely to help them recover lost ground soon.
The continuing recovery has been supported by good progress on the vaccination front, with India administering 7.9 million doses a day in September. However, India’s coverage remains lower than some of its EM peers. For instance, Russia has fully vaccinated 32% of its population, while for India, the share is only 21%.
In September, India made great strides on the inflation front, even as other EM peers, including Russia, continued their struggle with soaring retail prices. The recent moderation, aided by base effect and declining food prices, has allowed the Reserve Bank of India (RBI) to keep the repo rate at record-low levels. Inflation, which came in at 4.4% in September, is projected to remain within the RBI’s tolerance band this year. This gives India an advantage over other EMs such as Brazil and Russia, which have already started hiking interest rates. The RBI did embark upon policy normalization earlier this month to absorb excess liquidity from the system, but its general tone remained dovish.
In October so far, economic activity in India has largely remained above the pre-pandemic levels, boosted by higher mobility and increased demand, according to the Nomura India Business Resumption Index. However, economists have warned of a slowdown in industrial activity if the ongoing coal shortage persists for longer.
India’s equity markets went soaring in September as cooling inflation and hopes of better corporate performance added to the early festival cheer. Consequently, Indian stock indices saw the biggest gains among EMs considered in the tracker, with stock market capitalization rising 7.7% month-on-month.
This was fuelled by foreign portfolio investors, which bought equities worth ₹13,154 crore in September. India also gained—and is likely to continue benefiting—from a flight of investors exiting China in the light of regulatory crackdowns against property developer Evergrande and tech giants.
However, an expected tapering of bond purchases by the US Federal Reserve and interest rate hikes next year continues to pose a threat to capital flows into emerging markets, including India.
The rupee appreciated 0.7% month-on-month but was outperformed by other EM currencies. As the greenback depreciated during the month, the Russian ruble and Indonesian rupiah gained 0.9% each, while the Malaysian ringgit topped the chart with a 1.9% gain.
Mint’s emerging markets tracker, launched in September 2019, takes into account seven high-frequency indicators across 10 large emerging markets to help us make sense of India’s relative position in the emerging markets league table. The seven indicators considered in the tracker encompass both real activity indicators, such as the manufacturing purchasing managers’ index (PMI) and real GDP growth, and financial metrics. The final rankings are based on a composite score that gives equal weightage to each indicator.
External trade continued to remain a bright spot for India. Exports in September rose 22.5% year-on-year (y-o-y). Even compared to the two-year-ago period, on an annualized basis, the growth was an impressive 29.9%. However, the y-o-y figure halved from the previous month due to a correction in base effect, which put India in a disadvantageous position.
Domestic manufacturing activity gathered steam after losing momentum in August. The manufacturing PMI rose to 53.7 from 52.3 the previous month. On this front, Brazil outpaced India with a figure of 54.4. Russia, which topped the tracker, saw a contraction in manufacturing activity, with a print of 49.8. A 50-plus PMI reading denotes a seasonally-adjusted month-on-month expansion.
While India’s services PMI declined to 55.2 from August's 18-month high, the pace of expansion pointed to continued recovery in the services sector that had been hurt severely by the pandemic.
With the Indian economy safely on the recovery track, GDP numbers are likely to show further improvement in the September-ended quarter when the data is out next month. GDP had grown 20.1% in the June quarter, behind only Turkey’s 21.7%, on the back of a meagre base. Earlier this month, the RBI raised growth projections for the September quarter to 7.9% from 7.3% earlier, which means India may have reached pre-pandemic levels by now.
On the downside, the growth momentum may get disrupted if the festival season were to spur any fresh covid-19 outbreaks. A consistently high vaccination pace will play a crucial role in keeping economic recovery on track.
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