Macro Data

A mixed Week (Blow hot and Blow cold)

Macro data that came out over the week have been fairly mixed. While inflation came in higher than expected, the IIP growth came in lower than anticipated. The good news came from the trade front where the trade deficit for April was lowest in recent memory. Here is what the macro data broadly implies for the economy and markets…

Inflation disappoints on the upside

 The CPI inflation came in at 5.39% for the month of April, sharply higher than the 4.83% CPI number reported for the month of March. This sharp rise in inflation was largely driven by food inflation and fuel inflation. Within the food category, it was eggs that contributed to higher inflation even as pulses continued to be sticky at higher levels. The CPI number was much higher than the consensus estimate of 5.05%. The base effect was partially responsible but food and fuel were the real contributors. The real worry is that a sharp rise in inflation would force the RBI to go slow on rate cuts. Since this is the last CPI number announcement before the next monetary policy review on June 07th, the RBI may be inclined to postpone rate cuts to the next policy.

IIP fails to pick up momentum…

The bigger disappointment on the macro front was the IIP number at 0.1% for the month of March. This is sharply lower than the 2% IIP growth reported in February 2016. The sharp fall in IIP is all the more surprising because the core sector number for March has come in at a healthy 6.4%. This could have two key implications. Firstly, it could mean that the credit cost transmission that the RBI has been referring to, has not been working very effectively. This lack of transmission combined with higher inflation may induce the RBI to hold back on rate cuts in the June monetary policy review. In terms of specific sectors the capital goods sector has shown negative growth. This sector is a lead indicator of a revival in the capital cycle in the economy. Current numbers indicate that a revival may still be some time away.

But, trade data surely flatters…

The good news came from the trade data front. At $4.84 billion, the trade deficit for April was the lowest in a very long time. On the imports front, the import of oil and gold have fallen sharply and that will enable the RBI to breathe a sigh of relief. But, more importantly, with the services trade generating a larger surplus, the current account may turn into a surplus.

For the INR and flows this will be a major positive. With forex reserves covering over 12 months of imports, the rupee is likely to be stable. A current account surplus will entice demand for INR denominated assets. That may be the really Acchhe Din! ©

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