Indian Economic Update
Important developments during the week:
- Activity in the eight core sectors of the economy accelerated to a 13-month high of 6.7% YoY in November 2017. The surge in growth was propelled by boost in Cement and Steel sectors. The average growth for the period of Apr-Nov stands at 3.9% YoY vs. 5.3% experienced during the same period last year.
- India’s November fiscal deficit data showed that Government breached FY18 budget deficit targets. Fiscal deficit stood at a cumulative INR 6.121 tn from Apr-November, vs. a budget estimate of INR 5.465 tn for the entire financial year. According to data compiled by the Controller General of Accounts (CGA), fiscal deficit in the month of November was INR 86,784 crore, compared to INR 26,383 crore in October and INR 34,489 crore in November 2016.
- India’s December Manufacturing PMI surged to a five year high, with the index printing a healthy 54.7 vs. prior month’s 52.6 reading.
- Services activity rebounded to expansion zone in December, with the PMI coming in at 50.5 vs. prior months 48.9 reading.
Minutes of the Fed’s December policy meet:
- FOMC members debated the risks to the US economic outlook, with some concerned about low inflation and others pointing to robust growth that was about to get a further boost from tax cuts.
- Most participants reiterated support for “continuing a gradual approach to raising the target range” for the benchmark policy rate.
- Fed officials discussed several risks that could result in a faster pace of increases. “These risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level,” owing to fiscal stimulus or “accommodative” financial conditions.
- Several participants thought that it would be important to continue to monitor the slope of the yield curve.
Bank of Japan (BoJ) Governor, Mr. Haruhiko Kuroda said that Japanese economy is showing signs of steady growth. He added that the deflationary mind-set that took hold in Japan is not disappearing easily. While acknowledging that the banking industry faces many challenges, he reiterated BoJ’s commitment to continue its accommodative policies.
Indian equities started the week on a flat note. Markets failed to achieve a firm direction amidst volatile trade. Caution was also prevalent among investors ahead of the earnings season that will begin next week and Union Budget that is scheduled to be presented in early February.
Benchmark indices ignored the positive cues from other Asian and European equities and witnessed a bout of profit booking during mid-week. Meanwhile, equities gained following positive cues from global equity markets. Benchmark Nifty closed above 10.5k on Thursday. PSU banks bagged major gains as government introduced bill for bank recapitalisation bonds. The strong pickup in commodity prices also led to a rally in metal stocks. Oil stocks also ended higher on surging crude prices, which are trading near three year highs.
During the week Sensex gained 0.28% to close at 34153.85 while Nifty advanced 0.27% to close at 10558.85.
Indian Government bonds started this week lower as traders resorted to significant short selling. The current benchmark 6.79%, 2027 bond suffered the most as market players make way for the new 10-year 2028 paper.
Meanwhile, Gilts gained as traders covered short positions noting firm support for prices at lower levels. Purchases from public sector banks provided support to prices. Traders now await the release of the state borrowing plan for January-March.
Media reports suggesting that recapitalisation bonds are likely to be non-SLR and non-tradable provide some relief to the battered markets. The overnight rise in crude prices continued to weigh on domestic gilts.
The 10Y benchmark yield ended at 7.31% as compared to the previous week’s close of 7.33%.
Oil started week lower after rising to a fresh two and a half years high at USD 67.27/ barrel. Monday was the first time since January 2014 that the two crude oil benchmarks opened the year above USD 60/ barrel. Anti-government rallies in Iran in defiance of a warning by authorities of a crackdown, supported prices. Russia’s oil output increased to an average 10.98 million barrels a day in 2017, up 0.1% from the previous year, according to data published by the Energy Ministry’s statistics unit.
Oil sustained prices near 2015 highs as protests in Iran stoked further buying. While Iran’s oilfields have so far been unaffected by the largest protests against the regime in almost a decade, traders said renewed risks in OPEC’s third-biggest producer had added to momentum as prices test new peaks. Meanwhile, Libya’s pipeline outage also came to an end after the damaged pipeline was repaired.
Increase in heating oil demand in the US amid extremely cold weather conditions also offered a fresh boost to the US oil.
Gold edged higher during beginning of the week. However, the bullish momentum seen around the yellow metal lost traction as the dollar strengthened after nursing losses for ten consecutive trading sessions. Moreover, the metal lost value amid profit taking by investors from a near three-and-a-half-month high.
The yellow metal was supported by a subdued dollar towards the end of the week, which lacked any follow through buying and limited deeper losses for the dollar-denominated commodity.
Indian Rupee started this week significantly stronger. Domestic currency strengthened to a 29-month high on persistent dollar sales by foreign banks and major PSU banks. Exporters’ dollar sales along with weakness in the dollar index has also supported the rupee.
Meanwhile, rupee came under pressure due to dollar buying by PSU banks. Importers' dollar demand and rise in the dollar index after Tuesday's sharp fall also weighed on the rupee. Dollar sales by some foreign banks and exporters supported the domestic currency.
Rupee gained significantly towards the end of the week. Persistent dollar sales by foreign banks aided the domestic currency. The weakness in the dollar index also provided tailwinds for the domestic currency.
Source: ICICI Bank Research, Bloomberg and CRISIL.