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Indian Economy Report


Posted on 2019-06-20 in KNOWLEDGE PORTAL

 

 

 

 

The Indian economy is the fastest growing major economy and is projected to grow faster in the coming years. However, India’s economy appears to have slowed down slightly in 2018-19. The proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment, and muted exports. On the supply side, the challenge is to reverse the slowdown in the growth of the agriculture sector and sustain the growth in the industry. On the external front, current account deficit as a ratio to GDP is set to fall in Q4 of 2018-19, which will limit the leakage of growth impulse from the economy.

 

The fiscal deficit of the central government has been gliding down to the FRBM target. Monetary policy has attempted to provide a fillip to the growth impulse through cuts in repo rate and easing of bank liquidity. The room for this monetary easing has been created by low inflation in 2018-19, although it has started to inch up in last few months of the year. The real effective exchange rate has appreciated in Q4 of 2018-19 and could pose challenges to the revival of exports in the near future. Increase in foreign exchange reserves in Q4 of 2018-19 on account of improvement in trade balance has increased the import cover for the economy.

 

 

 

CPI inflation saw another uptick in May-19 to 3.1% Y-o-Y as against 3% in Apr-19. This was driven primarily by a rise in food inflation to 1.8% Y-o-Y against 1.1% Y-o-Y in April, and that too on a higher base. Other components such as miscellaneous goods, fuel & light and Clothing saw inflation going down in May to 4.6%, 2.5% and 1.8% Y-o-Y respectively. Hence, Core CPI (ex. Food & fuel) went down further in May to 4.2% Y-o-Y against 4.6% Y-o-Y., which is much lower than FY19 average core inflation of 5.8%.

 

 

 

 

 

 

 

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The uptick in inflation solely came on the back of a rise in food inflation, which is in line with RBI’s expectation of summer rebound in food prices. However, with RBI’s inflation projections at 3.0-3.1% for H1FY20 and 3.4-3.7% for H2FY20 being lower than their long-term target of 4%, RBI decided to cut rates further by 25bps in the June MPC meeting. After consecutive rate cuts in the last three MPC meetings, current policy repo rate stands at 5.75%.

 - We believe RBI could cut the policy rate by a further 25 bps in FY20 owing to still high real interest rates and dovishness in global central banks. Upside risks to inflation would come from the reversal in food inflation, volatility in international crude oil prices and the fiscal situation going ahead.

- IIP in April came at a six-month high of 3.4%. The pickup comes on a broad-based recovery from previous lows and on a significant base of 5.3% growth in April 2018. However, IIP is a very volatile indicator and should be monitored for a few months for signs of a robust recovery. Currently, the 3-month moving average is subdued at 1.2% Mining and Electricity Picks Up, Manufacturing Shows Slow Recovery


Sources

  1. Statistics Department, Ministry of Finance

2.Edelweiss Financial Services

 







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