<b>Devangshu Datta:</b> Confounding cross connections

Contradictions in Indian economic data mean that flatlining and joblessness exist side by side with signs of strong consumption

The baffling contradictions in Indian economic data leave it open to multiple interpretations. The Reserve Bank of India’s (RBI) mildly surprising decision to cut the policy rate can be justified by pointing to lower inflation, higher unemployment, low bank credit and a manufacturing collapse. At any rate, the decision of the Monetary Policy Committee (MPC) to cut the repurchase rate was unanimous. The minutes of the MPC meeting will be studied with great attention when released this week. 

It’s hard to reconcile signs of flat-lining, as mentioned above, with concurrent signs of strong consumption. There’s double-digit growth in automobile sales and strong growth in the sales of garments, fast-moving consumer goods, white goods and personal electronics items. Civil aviation has seen major traffic increase. Personal loans have also been a major growth area. 

 

Admittedly, all this activity looks better since it is coming off a low base. Much of the buying is at discounted rates, because the last three fiscals were horrible. Nonetheless, a decent monsoon and the Pay Commission releases should help maintain consumption momentum.

But unemployment is also supposedly at five-year highs, according to a recent survey by the Labour Bureau, which makes strong consumption puzzling. It gets weirder when data are directly contradictory. For example, the Purchasing Manager Indices (PMI) suggest factory activity has expanded for nine months (January-September 2016). But the cumulative Index of Industrial Production (IIP) for April-August 2016 says that industrial growth is the weakest it has been since 2007-08. The Services PMI has eased down for September, which also doesn’t fit with accelerating consumption. 

The inflation data looks more consistent. The Consumer Prices Indices (CPI) ran at 4.31 per cent year-on-year for September 2016. That’s an improvement on 5.05 per cent year-on-year in August and the downtrend helps justify the RBI decision. The big deal is falling food inflation. The Wholesale Price Index (WPI) was at 3.57 per cent year-on-year for September, down compared to 3.74 per cent in August. The WPI was running negative through most of 2015. The WPI going positive suggests companies have regained some pricing power. The reduced differential between CPI and WPI is useful. It’s reasonable for the RBI to assume that it will meet the stated inflation target of four per cent (+/- two per cent) of CPI. 

Of course, the market cares more about liquidity than macroeconomics. Apart from the rate cut, the RBI has started increasing liquidity in the system in other ways. It is committed to ensuring liquidity is approximately equal to net demand and time liabilities (money held in bank accounts and fixed deposits). The RBI has conducted Open Market Operations (OMO), bought bonds from banks and released rupees into the system. Over the next couple of months, the RBI will reverse FCNR swaps of $26 billion, giving dollars to banks and accepting rupees in  return. Will it massively increase the scale of OMO to return those rupees to the system?

Traders will welcome rupee liquidity. But they are obviously more focussed on the dollar and other hard currencies. The GBP has gone into a death spiral due to fears of a hard Brexit. Mario Draghi will have to find ways of reassuring European Union watchers at the European Central Bank’s policy meet next week. The US Federal Reserve is now favoured 2:1 to raise USD policy rates in December after the new US President is known. 

Global bond markets are distinctly nervous with yields rising. The forex market is also volatile. As corporate earnings season gets underway, undershooting of expectations could mean panic selling. Incidentally, FIIs are net rupee sellers in October. They bought nominal amounts of equity and sold rupee debt heavily.  

Chinas gross domestic product data may move markets next week, too. If China credibly hits growth targets, markets would be happy. But the key word is “credible”. Metals are up substantially on global commodity exchanges. 

Crude pricing has tightened up since Russia agreed to go along with the Organization of Petroleum Exporting Countries’ attempts to cut crude supply. Coal and gas prices are also up. This has negative implications for India. If prices rise to $60 a barrel or more, Budget estimates will need reworking. 

The spectrum auctions disappointed; less than 12 per cent of the set base price was awarded and the highly expensive 700 MHz spectrum was shunned. Although this means lower realisations than the Budget estimate of non-tax telecom revenues, the inflow on the income declaration front should balance off the shortfall. 

On the corporate front, Infosys just cut its forward estimates again. That is bound to affect sentiment across the information technology industry. Consensus estimates suggest that the Nifty will see 3.1 per cent earnings growth year-on-year, and its revenues will also inch up three per cent.  

Technically, the pattern isn’t looking all that good. The Nifty hit a 52-week high of 8,968 on September 7. That was 31 per cent gain since the 52-week low of 6,825 on Budget Day. The index has been in correction mode since then. Support at around 8,550 has held up so far. If that 8,550 support breaks, a fall of 200-300 points is likely.