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Retail Inflation in May hits a record low of 2.18%

Indian Economic Update

  • The GST council slashes tax rates on 66 items and widens the scope of a concessional tax payment scheme for small businesses and restaurants.
  • Government is considering clearing one more public sector bank consolidation by March 2018.
  • India's consumer inflation was 2.18% in May compared with 2.99% a month ago.
  • India’s inflation based on the Wholesale Price Index (WPI) slipped to a five-month low of 2.17% in May compared to 3.85% in April.
  • India's industrial production growth slipped to 3.10% in April due to poor show by manufacturing, mining and power sectors coupled with lower off take of capital goods and consumer durables; March's IIP was revised to 3.75%.
  • India's exports grew 8.3% year-on-year to $24 bn in May, while imports were up 33% from a year ago to $37.8 bn, resulting in a trade deficit of $13.84 bn in May, highest in two-and-a-half years, compared with a deficit of $13.25 bn in April.

Other important developments during the week were:

  • India improves its ranking by one notch to 9th position as one of the highest recipients of FDI in 2016.
  • SEBI is considering tightening its investigation and enforcement mechanism to check misuse of stock market platform for generating bogus long-term capital gains to launder black money.SEBI is considering tightening its investigation and enforcement mechanism to check misuse of stock market platform for generating bogus long-term capital gains to launder black money.
  • The Statistics Ministry is set to change the base year of national accounts to 2017-18 from 2011-12 after completion of the household consumer expenditure survey and labour force data by the end of 2018.
  • RBI's Internal Advisory Committee (IAC) identifies 12 accounts that cover 25% of the bad loans for banks for immediate resolution under the Insolvency and Bankruptcy Code.
  • Eurozone ZEW economic sentiment index rose to 37.7 for June from 35.1 in the previous month.

 

Global Update

  • US initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 245,000 for the week ended June 3.
  • The US Federal Reserve hikes the fed-funds rate by a quarter-point to 1-1.25% and indicates that it would reduce its $4.5 trillion balance sheet this year.
  • The median Fed Funds Rate (FFR) projections for 2017 and 2018 were unchanged, indicating the FOMC’s continued intention to hike once more in 2017. However, for 2018, the distribution of dots seemed more dovish, even as the median dot is unchanged. This signals an increase in the number of participants revising their confidence in the economic outlook downwards for next year.
  • US federal government ran a budget deficit of $88 bn in May, up from $53 bn in the same month a year ago.
  • Eurozone GDP expanded 1.9% in Q1 - FY 2017 after expanding 1.8% in the previous quarter.
  • European Central Bank (ECB) keeps its main interest rate unchanged at 0% and reiterates its commitment to purchase assets of 60 bn euros a month until the end of this year.
  • UK visible trade deficit declined to 10.38 bn pounds in April from 12.04 bn pounds in March.

 

Equity

  • The banking sector received a boost after the Reserve Bank of India identified large loan defaulters that could be taken up under the Insolvency and Bankruptcy Code (IBC).
  • IT pack continued to bore bear the brunt on weak commentary from the sector companies with respect to business and challenges in the US and Europe, their key export market.
  • Sentiments were hit across the globe following reports that US President, Mr.  Donald Trump was being investigated for possible obstruction of justice.
  • The political turmoil in the US has triggered a mild risk-off sentiment, with global equities ending down. Further, with markets already near record closing highs, some investors resorted to profit booking.

 

During the week Sensex lost 0.66% to close at 31056.4 while Nifty declined 0.84% to close at 9588.05.

 

Debt

  • Profit booking by investors as well as the recovery in US bond yields witnessed was seen putting pressure on Indian gilts. However, the overall sentiment continues to remain positive after the benign CPI and WPI prints.
  • Positive external factors coupled with an already benign domestic outlook in terms of inflation continuing its decline is behind the current rally. Investors are also hopeful of a rate cut in the next monetary policy.
  • Further, the lack of any gilt auction this week is also forcing the traders to take positions now.
  • The RBI’s significant reduction of its own inflation forecast was cheered by markets.
  • Three reverse repo auctions were conducted by the central bank for a total notified Rs. 55,000 cr. Further, the central bank also conducted a 14 -day term repo auction for Rs. 21,000 cr.

 

The 10Y benchmark yield ended at 6.48% vs. previous week’s close of 6.50%.

 

Oil

  • Oil prices are now at near six-month lows.
  • The official EIA estimates released showed that US gasoline inventories showed an unexpected build last week. IEA in its outlook predicted that supply would outpace demand in 2018. Any commentary from OPEC officials will be keenly tracked.
  • The overall sentiment remains bearish, as the summer driving season is not yet showing any significant impact on US crude inventories, raising concerns over increasing global supply glut.
  • OPEC’s monthly report released added to the bearish sentiment. The cartel in its monthly publication conceded that the oil market balancing is going on at a “‘slower pace’ ” than expected and also revised OPEC’s own production higher due to increase in production by exempt nations (Libya and Nigeria).

 

Gold

  • The metal is more than USD 25/oz. down from its week's high and it is headed for a second consecutive weekly loss of ~1%.
  • The strengthening dollar index is pressuring the demand for gold.
  • Trading activity, however, was limited as investors were cautious and did not take large positions.

 

Currency

  • India’s trade data released showed that imports expanded at a faster pace than exports taking the trade deficit to a 30-month high of USD 13.8 bn in May.
  • The mild strengthening witnessed in the dollar over the past days post hawkish commentary from the Fed has also pressured the domestic currency.
  • The soft domestic Wholesale Price Index-based inflation for May, released during the session, lent some support to the rupee.

 

Source: ICICI Bank Research, Bloomberg and CRISIL.