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The sense of foreboding that had gripped investors a few months ago has faded. While the currency's stability has largely contributed to this turnaround in sentiment, macro-economic data points are also showing signs of improvement. With the trade deficit for the month of September dipping to $6.76 billion from $18 billion seen last year, economists are already cutting the down their current account deficit estimates for FY14. Undoubtedly, the government's clamp down on gold imports has helped bring down this deficit sharply, weak industrial growth has also led to relatively weaker oil and non-oil imports.
Even if imports pick up in the second half of the year, the overall trade deficit may be lower by $10-20 billion in FY14. However, if mining issues are not resolved, then import of iron ore and coal could put push up the trade deficit again. Coal imports have risen from $1.19 billion in April 2013 to $1.42 billion July 2013.
Industrial production data shows that mining continues to decline and this could stress the external sector if no resolution is found to the mining issue. But on the positive side, manufacturing and electricity are showing a pick-up over the last few months. Industrial production too is showing signs of revival and for the month of August the Index for Industrial Production (IIP) for the month of August is expected to expand by 2% going by consensus estimates. This uptick would be largely driven by a pick-up in manufacturing and electricity. Religare's Tirthankar Patnaik expects electricity to grow by 6.4% YoY and manufacturing by 2.4%. Mining will continue to decline.
Morgan Stanley says Over the past few weeks, the delay in Fed tapering and measures taken by the RBI have reduced the short-term funding risks for India. However, the structural problems of higher real rates and lower GDP growth still remain intact.
The other piece of data that is expected next week is WPI inflation figures for the month of September. According to consensus estimates, WPI should come in at 6% for the month and CPI at 9.6%. While rupee's depreciation is expected to push up the headline print, high vegetable prices would also play spoilsport. Given that inflation remains sticky, most economists believe the RBI's policy stance would definitely not be dovish. Many economists are expecting repo rate hikes of 25-50 bps spread over the next quarter, however, a sustained increase in rates is ruled out. While a majority of economists are not ruling out a one-off hike, few believe it would be a sustained trend. However, if RBI chooses the old fashioned way to battle inflation, rate hikes may be imminent and that would negatively impact the banking sector as asset stress would increase.
