The Indian market (Nifty Fut/India-50) is currently trading around 10670 early Monday, at session low, slumped almost -0.70% on increasing geopolitical tensions between India and Pak. This follows after the horror attack on Indian CRPF by Pak sponsored terrorists’ organizations in Pulwama (Kashmir) on Valentine’s Day (Thursday, 14th Feb). The heinous car bomb attack on a CRPF convoy of around 2500 security personnel, returning from their holiday, costs almost 44 lives and injured over24; but it also raised some serious questions about various alleged procedural lapses on the part of Indian security forces despite definitive intelligence clues.
In any way, the market is now concerned that India may launch another wave of “surgical strike” or even a “mini tactical war” on major terrorist Launchpad across the LOC with Pak ahead of the general election (like Kargil war in 1999). In any war-like situation, FIIs or even DIIs got nervous and tend to sell amid “risk-off” mood, although the probability of a full-fledged war between India and Pak is remote now for various reasons. But as the current Pak admin led by Imran Khan may be under control of the Pak military (ISI) rather than the opposite and thus the overall situation is quite serious.
But as per reports, the Indian Army has launched Operation-25 to nab the main Pak mastermind (JEM) behind the CRPF attack plan, who may be still within 25-km of the Pulwama site. Also, some border/LOC skirmish is going on between the two neighboring countries.
On Thursday and Friday, the Indian market slumped around 0.64% on geopolitical tensions with Pak as-well-as on RBI credibility. Despite sticky and higher core inflation, RBI may again cut in April’19, just ahead of the general election, which may start on 7th April. The EC may announce the election schedule on 7th March and it may be a five-phase election.
On Tuesday (12th Feb), data shows that the Indian headline CPI further dropped to +2.05% in January from +2.11% in December (revised downwards from +2.19%) and was also below the market expectations of +2.48%. In line with soft headline CPI and some moderation in healthcare and educational services cost, the core CPI also dropped to +5.40% in January from 5.6% in December; it was around +5.15% in January’2018. The Indian core inflation is consistently above +5.50% in the last year on an average, quite high and sticky above RBI’s target of 4%.
Although RBI, under the new governor Das does not consider the core inflation, still Indian policymakers would likely to maintain a “neutral” (real rate of interest) rate of around +1.25 to +1.75% (from core inflation); i.e. +1.5% on an average. Thus at around +5.00% to +5.50% core inflation range in 2019, the RBI repo rate should be around +6.50 to +7.00%; otherwise, RBI may soon find it behind the inflation curve again. The angel investors do not appreciate such repeated policy flip-flops by a central bank.
On Thursday (14th Feb), another data shows that the WPI inflation (Indian version of PPI) slumped to 2.76% in January from +3.80% in December, way below the expectations of +3.65%. The core WPI stands around +2.90% in January against core CPI of +5.40%; i.e. there is an unusually wide divergence between the two.
This may be an indication that Indian retailers are not passing the full benefit of the falling prices on non-food and non-fuel items to the consumers, which may be a structural legacy issue (too much pricing power), despite there is a clear deflationary trend, be it for DEMO or the huge unemployment/underemployment problem in India. All these are indicating muted consumer spending (discretionary) for the Indian economy, a vital pillar for the country’s GDP growth.
Overall, Nifty plunged from the RBI day (7th Feb) high of 11118.10 to a low of 10620.40 (15th Feb) by 6-consecutive days of fall of almost 500 points (-4.50% till last Friday), excluding today’s (Monday) fall till now. This is despite positive global cues on hopes of US-China trade truce and a patient Fed.
The primary reasons for the Indian market fall may be RBI credibility (political interference) issue ahead of the general election and also some political uncertainty as there is no strong NAMO wave this time unlike in 2014. The Indian 10Y bond yield is also hovering around 7.60% and off the December low of 7.218%. The USDINR is currently trading around 71.50 and well-off the January low of 69.24; in February, it made a high of around 71.915. In the meantime, Brent crude oil also made a high of around 66.78 in February (till now), well-off the December low of 49.93. For the Indian macro-economy, Brent oil above $60-65 could be very negative and a dual combination of Brent Crude around $75 and USDINR also around 75 would be devastating.
Technical View (Nifty, Bank Nifty, USDINR)
Technically, whatever may be the narrative Nifty Fut-I (NF) has to sustain over 10850 for a further rally to 10900*/10955-11000*/11075 and 11155*/11205-11245/11315 in the near term (under bullish case scenario).
On the flip side, sustaining below 10825-10785, NF may fall to 10705*/10640-10600*/10560 and 10520/10440-10400/10300 and 10250/10000-9950/9875 in the near term (under bear case scenario).
Technically, Bank Nifty Fut-I (BNF) has to sustain over 26950 for a further rally to 27000/27150*-27300/27650* and 27825/27925*-28115/28275 in the near term (under bullish case scenario).
On the flip side, sustaining below 26900-26885, BNF may further fall to 26800/26700*-26625/26500* and 26400/26250*-26000/25700 in the near term (under bear case scenario).
Technically, USDINR (spot) has to sustain over 71.55-72.05* for a further rally to 72.75*/73.35-73.75*/74.15 and 74.50*/74.75-75.45/76.05 in the near term (under bullish case scenario).
On the flip side, sustaining below 71.15-70.90*, USDINR may further fall to 70.65*/70.30-70.00*/69.35 and 68.95*/68.10-67.25/66.85 in the near term (under bear case scenario).
India 50 USD/INR
A full statement of RBI/MPC:
Date: Feb 07, 2019
Sixth Bi-monthly Monetary Policy Statement, 2018-19 Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India
On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to:
- Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 percent to 6.25 percent with immediate effect.
- Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 percent.
- The MPC also decided to change the monetary policy stance from calibrated tightening to neutral.
- These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.
The main considerations underlying the decision are set out in the statement below:
Assessment
2. Since the last MPC meeting in December 2018, there has been a slowdown in global economic activity. Among key advanced economies (AEs), economic activity in the US lost some steam in Q4:2018. The outlook for Q1:2019 is clouded by the partial government shutdown, though the labor market conditions remain strong. In the Euro area, economic activity lost momentum on weak industrial activity. The Japanese economy is gradually recovering and an accommodative monetary policy stance is expected to buttress domestic spending.
3. Economic activity also slowed in some major emerging market economies (EMEs). In China, growth decelerated in Q4:2018. Economic activity in Russia lost pace, with soft oil prices posing a downside risk to growth. The Brazilian economy appeared to have ended 2018 on a firmer note, driven by improved domestic spending and exports, though industrial activity continued to struggle to recover from the disruptions of H1:2018. In South Africa, the economic recovery in Q4:2018 remained gradual, tempered by weak industrial activity and subdued exports.
4. Crude oil prices recovered from their December lows in early January on production cuts but remain below their peak levels in October. Base metals, which witnessed selling pressures in December on persisting uncertainty over US-China trade frictions, recouped losses in January on expectations of thawing of trade disputes and production disruptions. Gold prices have risen, underpinned by safe-haven demand in response to geopolitical uncertainty and volatility in equity markets. Inflation edged lower in major AEs and many key EMEs.
5. Global financial markets began the year on a calmer note after a turbulent December. Among AEs, equity markets in the US recovered from a sharp sell-off in December, triggered by monetary policy tightening by the Fed, trade tensions and an impending shutdown. EM stock markets, which declined in December on a slew of soft economic data, registered some gains recently on expectations of accommodative monetary policy stances in major economies. The 10-year yield in the US, which fell to a multi-month low in December, rose in January on the edging up of crude oil prices and positive risk sentiment, though softening of the Fed stance restricted the gains.
Among other AEs, bond yields in the Euro area and Japan eased on diminishing optimism about global growth. In most EMEs, bond yields have eased as well. In currency markets, the US dollar remained under pressure, though expectations of easing trade tensions provided some support. EME currencies appreciated on the pause in the rate hiking cycle by the Fed and expectations of a positive outcome from US-China trade negotiations.
6. Moving on to the domestic economy, on January 7, 2019, the Central Statistics Office (CSO) released the first advance estimates (FAE) for 2018-19, placing India’s real gross domestic product (GDP) growth at 7.2 percent – the same level as in 2017-18 (first revised estimates). The FAE for 2018-19 featured an acceleration in gross fixed capital formation (GFCF) and a slowdown in consumption expenditure (both private and government). The drag from net exports is estimated to decline in 2018-19.
7. Some indicators of investment demand, viz., production and imports of capital goods, contracted in November/December. Credit flows to industry remain muted. Available data suggest that while revenue expenditure of the Centre, excluding interest payments and subsidies, contracted in Q3, that of States increased sharply, thus maintaining overall growth in government spending.
8. On the supply side, the FAE has placed the growth of real gross value added (GVA) at 7.0 percent in 2018-19 as compared with 6.9 percent in 2017-18. The estimates incorporated a slowdown in agricultural GVA growth and an acceleration in industrial GVA growth. Services GVA growth is set to soften due to subdued activity in trade, hotels, transport, communication, and other services. Growth in public administration and defense services is also likely to moderate.
9. Rabi sowing so far (up to February 1, 2019) has been lower than in the previous year, but the overall shortfall of 4.0 percent across various crops is expected to catch up as the season comes to a close. The lower rabi sowing reflects a deficient north-east monsoon (44 percent below the long period average); however, storage in major reservoirs – the main source of irrigation during the rabi season – at 44 percent of the full reservoir level (as on January 31, 2019) was marginally higher than in the previous year. The extended period of cold weather in this year’s winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in area sown.
10. After exhibiting an uptick in the festive month of October, industrial activity, measured by the index of industrial production (IIP), slowed down in November. The year-on-year (y-o-y) growth in core industries decelerated to 2.6 percent (y-o-y) in December, pulled down by a slowdown in the production of electricity and coal; and contraction in petroleum refinery products, crude oil, and fertilizers output. Capacity utilization (CU) in the manufacturing sector, as measured by the Reserve Bank’s order books, inventory and capacity utilization survey (OBICUS), increased to 74.8 percent in Q2 from 73.8 percent in Q1; seasonally adjusted CU also improved to 75.3 percent from 74.9 percent.
While the Reserve Bank’s business assessment index of the industrial outlook survey (IOS) for Q3:2018-19 suggests a weakening of demand conditions in the manufacturing sector, the business expectations index (BEI) points to an improvement in Q4. The manufacturing purchasing managers’ index (PMI) for January remained in expansion on the back of increased output and new orders.
11. High-frequency indicators of the services sector suggest some moderation in the pace of activity. Sales of motorcycles and tractors imply a weakening of rural demand in December. Sales of passenger cars – an indicator of urban demand – contracted, possibly reflecting volatility in fuel prices and mandated long-term insurance premium payments. Commercial vehicle sales also shrank in December 2018 from a high base of the previous year.
Lead indicators for the hotels sub-segment, viz., foreign tourist arrivals and air passenger traffic, point to softening in November-December. In the communication sub-segment, the telephone subscriber base contracted in October-November, while that of broadband continued to expand in October. The services PMI continued to expand in January 2019 despite a dip from the previous month. Indicators of the construction sector, viz., consumption of steel and production of cement, continued to show healthy growth, though growth in cement production inched lower in November 2018, reflecting a base effect.
12. Retail inflation, measured by y-o-y change in the CPI, declined from 3.4 percent in October 2018 to 2.2 percent in December, the lowest print in the last eighteen months. Continuing deflation in food items, a sharp fall in fuel inflation and some edging down of inflation excluding food and fuel contributed to the decline in headline inflation.
13. Five constituents of the food group – vegetables, sugar, pulses, eggs, and fruits, accounting for about 30 percent of the food group – were in deflation in December. Inflation in respect of other major food sub-groups – cereals, milk, and oils and fats – was subdued. Within cereals, rice prices declined for the fourth consecutive month in December. Inflation in prices of meat and fish and non-alcoholic beverages showed an uptick, while it remained sticky for prepared meals.
14. Inflation in the fuel and light group fell from 8.5 percent in October to 4.5 percent in December, pulled down by a sharp decline in the prices of liquefied petroleum gas (LPG), reflecting softening of international petroleum product prices. Kerosene inflation continued to edge up due to the calibrated increase in its administered price.
15. CPI inflation excluding food and fuel decelerated to 5.6 percent in December from 6.2 percent in October, dragged down mainly by the moderation in the prices of petrol and diesel in line with the decline in international petroleum product prices. Housing inflation continued to edge down as the impact of the house rent allowance (HRA) increase for central government employees dissipated. However, inflation in several of the sub-groups – household goods and services; health; recreation and amusement; and education – firmed up in December, offsetting much of the impact of lower inflation in petrol, diesel, and housing.
16. Inflation expectations of households, measured by the December 2018 round of the Reserve Bank’s survey, softened by 80 basis points for the three-month ahead horizon and by 130 basis points for the twelve-month ahead horizon over the last round, reflecting the continued decline in food and fuel prices. Producers’ assessment of inflation in input prices eased in Q3 as reported by manufacturing firms polled by the Reserve Bank’s industrial outlook survey.
17. Inflation in the prices of farm inputs and industrial raw materials remained elevated, despite some softening. Growth in rural wages moderated in October.
18. The weighted average call rate (WACR) traded below the policy repo rate on 12 out of 20 days in December, all 23 days in January and 4 days in February (up to February 6). The WACR was below the repo rate on an average by 4 basis points in December and 11 basis points each in January and February. Currency in circulation expanded sharply during December and January.
The liquidity needs arising out of expansion in currency were met by the Reserve Bank through injection of durable liquidity amounting to ₹500 billion each in December and January through purchases under open market operations (OMOs). Accordingly, total durable liquidity injected through OMOs has aggregated ₹2.36 trillion during 2018-19 so far. Liquidity injected under the LAF was ₹996 billion in December on an average daily net basis, and ₹329 billion in January. In February, however, the average daily liquidity position turned into surplus with an average absorption of ₹279 billion.
19. Export growth on a y-o-y basis was almost flat in November and December 2018, primarily due to a high base effect and weak global demand. While growth in exports of petroleum products remained positive, non-oil exports declined, dragged down by lower shipments of gems and jewelry, engineering goods, meat, and poultry. Import growth slowed in November and turned negative in December 2018.
While imports of petroleum (crude and products) rose in line with the increase in import volumes, non-oil imports such as pearls and precious stones, gold, electronic goods, and transport equipment recorded declines. The merchandise trade deficit for April-December 2018 was a shade higher than its level a year ago. Net services exports picked up in October and November 2018, which combined with low oil prices, could have a salutary impact on the current account deficit in Q3.
On the financing side, net FDI flows to India during April-November 2018 were higher than a year ago. Foreign portfolio flows turned negative in January 2019, after rebounding in November and December 2018. India’s foreign exchange reserves were at US$ 400.2 billion on February 1, 2019.
Outlook:
20. In the fifth bi-monthly monetary policy resolution in December 2018, CPI inflation for 2018-19 was projected in the range of 2.7-3.2 percent in H2:2018-19 and 3.8-4.2 percent in H1:2019-20, with risks tilted to the upside. The actual inflation outcome at 2.6 percent in Q3:2018-19 was marginally lower than the projection. There have been downward revisions in inflation projections during the course of the year, reflecting mainly the unprecedented soft inflation recorded across food sub-groups.
21. Several factors will shape the inflation path, going forward. First, food inflation has continued to surprise on the downside with continuing deflation across several items and a significant moderation in inflation in cereals. Several food groups are experiencing excess supply conditions domestically as well as internationally. Hence, the short-term outlook for food inflation appears particularly benign, despite adverse base effects.
Secondly, the moderation in the fuel group was larger than anticipated. Inflation in items of rural consumption such as firewood and chips, which had remained sticky and at elevated levels, has collapsed in recent months. Electricity prices also showed an unexpected moderation, providing a softer outlook for the fuel group.
Thirdly, while inflation excluding food and fuel remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon.
Fourthly, the crude oil price outlook remains broadly the same as in the December policy.
Fifthly, the Reserve Bank’s surveys show that inflation expectations of households as well as input and output price expectations of producers have moderated significantly.
Finally, the effect of the HRA increase for central government employees has dissipated completely along expected lines.
Taking into consideration these developments and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.8 percent in Q4:2018-19, 3.2-3.4 percent in H1:2019-20 and 3.9 percent in Q3:2019-20, with risks broadly balanced around the central trajectory.
22. Turning to the growth outlook, GDP growth for 2018-19 in the December policy was projected at 7.4 percent (7.2-7.3 percent in H2) and at 7.5 percent for H1:2019-20, with risks somewhat to the downside. The CSO has estimated GDP growth at 7.2 percent for 2018-19.
Looking beyond the current year, the growth outlook is likely to be influenced by the following factors.
First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong but are yet to be broad-based.
Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds. In particular, trade tensions and associated uncertainties appear to be moderating global growth.
Taking into consideration the above factors, GDP growth for 2019-20 is projected at 7.4 percent – in the range of 7.2-7.4 percent in H1, and 7.5 percent in Q3 – with risks evenly balanced.
GDP growth for 2018-19
GDP growth for 2019-20 is projected
23. Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Beyond the near term, some uncertainties warrant careful monitoring.
First, vegetable prices have been volatile in the recent period; reversal in vegetable prices could impart upside risk to the food inflation trajectory.
Secondly, the oil price outlook continues to be hazy.
Thirdly, a further heightening of trade tensions and geopolitical uncertainties could also weigh on global growth prospects, dampening global demand and softening global commodity prices, especially oil prices.
Fourthly, the unusual spike in the prices of health and education needs to be closely watched.
Fifthly, financial markets remain volatile.
Sixthly, the monsoon outcome is assumed to be normal; any spatial or temporal variation in rainfall may alter the food inflation outlook.
Finally, several proposals in the union budget for 2019-20 are likely to boost aggregate demand by rising disposable incomes, but the full effect of some of the measures is likely to materialize over a period of time.
24. The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.
25. Against this backdrop, the MPC decided to change the stance of monetary policy from calibrated tightening to neutral and to reduce the policy repo rate by 25 basis points.
26. The decision to change the monetary policy stance was unanimous. As regards the reduction in the policy repo rate, Dr. Ravindra H. Dholakia, Dr. Pami Dua, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted in favor of the decision. Dr. Chetan Ghate and Dr. Viral V. Acharya voted to keep the policy rate unchanged. The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis. The minutes of the MPC’s meeting will be published by February 21, 2019.
27. The next meeting of the MPC is scheduled from April 2 to 4, 2019.