September 2015
INDIAN ECONOMY
CRISIL Insights
The commodity blessing
Through the monthly
CRISIL Insights
Indian Economy
series, we offer
incisive analysis of
macroeconomic
parameters of the
country. In this
September issue, we
highlight how the
decline in
international
commodity has
proved to be a
blessing for India’s
key macroeconomic
parameters such as
current account deficit
and inflation.
The global downturn, particularly the sharp slowdown in the resource-intensive
Chinese economy, has depressed the prices of many commodities. The
decline is broad-based, including metals, oil and agricultural commodities.
And, this situation is likely to persist with China's GDP growth expected to slow
to 6.3% by 2016. In addition, the dynamics of shale gas and the reluctance on
the part of Organization of Petroleum Exporting Countries (OPEC) to cut oil
production is likely to keep crude oil prices soft.
Although there are pockets of stress within India due to low commodity prices,
the overall economy stands to gain as the country is a net importer of a majority
of these commodities. The recent depreciation of the currency has pared some
gains from the drop in commodity prices. Yet, the decline in commodity prices
has been much sharper than the currency depreciation. Net-net, imports are
cheaper.
The fall in international commodity prices, especially of crude oil, has helped
improve India's key macroeconomic parameters, such as fiscal deficit, current
account deficit and inflation. Low crude prices have also provided an
opportunity to reform the fuel subsidy regime. Industries dependent on oil, such
as auto, also get a boost from lower fuel prices. Lower international prices of
edible oil have proved a blessing this year. Weak monsoons are expected to
take a toll on acreage, yields and output of oilseeds. A drop in coking coal prices
by 18% since last year will reduce input costs for sectors such as power.
India is a significant exporter of agricultural products and is trade surplus in the
segment. The exports include 11.6% of total rice production, 4% of total wheat
production and also cotton. The slump in global prices hurts the export income
of farmers already reeling under consecutive monsoon failure.
Metal companies also stand to lose, particularly given a drop in aluminium and
steel prices.
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BALANCE OF
PAYMENTS
CRISIL Insights
Balance of
Payments
Industrial
Production
Inflation
CAD in safe zone
at 1.2%
IIP splutters as
factory wheels jam
Inflation
bottoming out?


INDUSTRIAL
PRODUCTION



INFLATION



India’s current account deficit (CAD) shrank to $6.2 billion (1.2% of GDP) in the first quarter this
fiscal from $7.8 billion (1.7% of GDP) in the corresponding year-ago period. With goods trade
deficit nearly stable, the reduction was aided by a rise in services exports and narrowing deficit
on the primary income account. Net foreign capital inflows in the financial account exceeded
CAD, bolstering foreign exchange reserves.
In fiscal 2016, we expect CAD to remain at 1.3% of GDP, same as in the last fiscal. Exports are
expected to remain subdued owing to a weak economic outlook for major export markets such
as OPEC, China and eurozone. But significant reduction in crude oil prices (CRISIL forecast for
Brent is $51-56/barrel in 2015-16 vis-à-vis $85/barrel in 2014-15) will reduce the overall import
bill. Core (non-oil, non-gold) imports, though are expected to be marginally higher on account
of better domestic GDP growth.
IIP growth moderated to 4.2% from 4.4% in June as manufacturing activity slowed to 4.7% from
5.4%. However, mining & quarrying (+1.3%) and electricity (+3.5%) found their touch after a
decline the previous month.
Manufacturing lost steam as growth in consumer-oriented sectors fell to 4% from 7.8% the
previous month – sectors that shrank were textiles (-0.6%), tobacco products (-2.0%), office,
accounting & company machinery (-14.8%), and rubber and plastic products (-4.3%).
Industrial & investment-oriented sectors, on the other hand, grew 5% compared with 4.8% in
June.
The capital goods sub-index surprised on the upside, with strong growth of 10.6%, in part due
to a weak base, with month-on-month growth confirming the positive trend.
CPI (consumer price index) inflation in August was 3.7%, unchanged from July, while WPI
(wholesale price index) inflation fell further to -4.95% from -4.05% in July.
However, the base effect appears to be wearing out; food prices firmed up even as fuel and
core inflation continued to ease. The pick-up in food inflation was led by pulses, where inflation
shot up to 25.8%, with inflation in tur (arhar) crossing 41%. Inflation in fuel & light category rose
to 5.7% from 5.4%; however, fuel-only inflation plunged to -5.9% in August from -4.1% in July.
Domestic fuel inflation continued to soften aided by a fall in lower global crude oil (-54% onyear) and metal prices (-27%) in August.
Core inflation fell 10 bps to 5.2%, the second consecutive monthly decline, due to lower
inflation in health, personal care effects and education





Yields move
southwards
Rupee slips further
Trade woes refuse to
abate
The RBI's decision to maintain the repo rate at 7.25% in its August 4, 2015, policy review kept
government bond (G-sec) yields stubborn in the beginning of the month. Yet they softened
towards the month-end as retail inflation printed lower at 3.78%.
The yield on the 7.72%, 2025 government bond - the new 10-year benchmark - averaged
7.79% in August, lower than July's 7.82%. On a month-end basis, too, the yield dropped to
7.78% compared with 7.81% at July-end. One-year G-sec yields also eased to an average
7.50% in August from 7.57% in July; on a month-end basis, too, the yield was lower at 7.42%
compared with 7.59%.
Volatility though was slightly higher, with the 10-year G-sec yield moving within 7.74-7.89%
compared with 7.75-7.87% in July.
The rupee averaged 65/$ in August, down sharply from 63.6/$ in June. It also lost ground
against most major currencies as foreign institutional investors shuttled out of emerging
markets after China shock devaluation of the yuan.
The rupee hit a low of 66.7/$ on August 25 before recovering a tad (it has depreciated 3% since
the announcement of the Chinese devaluation). It averaged 65.1/$ for the month, weaker than
63.6/$ in July. Against the euro and the pound, it fell on average 3.5% and 2.4%, respectively.
We have revised our outlook on the rupee to 64/$ by March 2016 from 63/$ earlier, versus
62.6/$ in March 2015.
Exports slumped 20.7% y-o-y to $21.3 billion in August, marking the ninth consecutive monthly
decline and the highest so far this fiscal. The culprit in the decline was non-oil exports, which fell
by as much as 13.9%. Non-oil exports contributed 54% to the exports decline in August.
Imports fell 9.9% to $33.7 billion in August – a somewhat slower pace when compared to
previous months – due to a sharp rise in gold imports. While crude oil imports declined 42.6%,
gold imports rose 140.1%. However, core (non-oil, non-gold) imports fell 5.2% - the biggest fall
in last 17 months - suggesting that domestic demand may be weakening.
Source: CRISIL Research
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TRADE

Trade
RUPEE

Rupee
INTEREST
RATE

Interest Rate
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Last updated: August, 2014
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