“There are decades where nothing happens; and there are weeks where decades happen.” – Vladimir Ilyich Lenin
Domestic Updates
India’s retail inflation soothes but wholesale inflation continues to rise
The retail inflation based on the Consumer Price Index (CPI) rate for May dropped to a 12-month low of 4.75% YoY, which was below expectations and saw a marginal decline from 4.83% in April. The downward trend is attributed to all contributors to the headline inflation either softening or remaining steady on a mom basis except a few like pulses. Vegetable inflation continues to be a concern (rose 27.3% YoY in May vs. 27.8% in April) due to the impact of heatwaves across the country. Core inflation, which strips out food and fuel, remained steady at 3.1% YoY in the month. This is the 9th consecutive month the retail inflation remained within RBI’s tolerance band of 2 percentage points within 4%. On the other hand, wholesale price inflation jumped to 2.61% YoY in May from 1.26% in April driven by rising prices of food and primary articles. Food inflation surged to 9.82% in May from 7.74% in April due to higher prices of cereals, wheat, pulses, vegetables, and fruits.
India’s industrial output growth moderates to 3-month low
The growth in India’s industrial output, as measured by the Index of Industrial Production (IIP), moderated to 5% YoY in April from an upwardly revised 5.4% last month, mainly driven by performance in the mining (6.7% YoY) and power (10.2% YoY) sectors. Manufacturing sector output grew 3.9% driven by basic metals, coke and refined petroleum products, and motor vehicles, trailers & semi-trailers.
RBI not in for any rate cut
In its second meeting of the financial year 2024-25, the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5% for the eighth consecutive time, which was in line with market expectations. RBI Governor Das said, “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4% within a band of +/- 2% while supporting growth”. However, the central bank committee has revised India’s GDP growth forecast upwards from 7% to 7.2% for FY2024-25. It remained focused on the withdrawal of accommodation to ensure that inflation does not go up while supporting growth.
India to remain the fastest-growing major economy!
The World Bank in its recent report predicted that India will remain the fastest-growing major economy, with an average growth rate of 6.7% over the next three years, including the current financial year. However, it mentioned that the growth rate is expected to moderate due to a slowdown in investment from a high base. In April’s report, the global agency raised India’s growth forecast by 20 basis points to 6.6% for FY25. For FY26 and FY27, the growth forecasts are 6.7% and 6.8%, respectively.
2 -wheeler & 3-wheeler growth on a fast lane!
The automotive industry witnessed a robust performance in May. Passenger vehicle sales in the domestic market rose 3.9% YoY due to a high base while two-wheeler and three-wheeler segments recorded double-digit growth of 10.1% and 14.7% respectively in May due to higher demand.
RBI report indicates domestic resilience in India’s financial system
RBI’s Financial Stability Report reflected robustness and resilience in the Indian financial system despite global economic challenges like prolonged geopolitical tensions, rising public debt, and the sluggish pace of disinflation. The gross non-performing assets (GNPA) of scheduled commercial banks (SCB) declined to a multi-year low of 2.8% and the net non-performing assets (NNPA) ratio stood at 0.6% at March 2024-end. The financial condition of the non-banking financial companies (NBFCs) remained healthy with a Capital to Risk-weighted Assets Ratio (CRAR) of 26.6%, GNPA ratio of 4% and, return on assets (RoA) of 3.3%, respectively, as of March 2024-end.
Global Updates
US unemployment worsens
The unemployment rate in the US rose to 4% in May, the highest since January 2022, which is higher than 3.9% in April. The market expected the unemployment rates to be unchanged. The labour force participation rate declined to 62.5% in May from 62.7% in April.
Japan’s economic contraction turns narrower
The GDP growth in Japan contracted at a narrower pace of 1.8% YoY in Jan-Mar 2024 compared to estimates. The preliminary reading was a 2.0% decline, and a median forecast was a 1.9% fall.
Roundups
Monetary Policies
The US Federal Reserve in its Federal Open Market Committee (FOMC) meeting left the benchmark interest rates unchanged at 5.25-5.50% for the 7th straight meeting, in line with Wall Street estimates, on a unanimous vote. The US Fed retained the GDP growth projections for 2024 but raised the inflation forecast for the year by 20 basis points (bps) in addition to a 10-bps hike in 2025. With this, the central bank kept the policy rate unchanged since July 2023 after hiking the rates by 5.25 percentage points since March 2022 to tame inflation down consistently toward the 2% target range.
Other central bank actions: The Bank of Canada reduced its key interest rate by 25 basis points (bps) to 4.75%, marking its first rate cut since March 2020. This happened as Canada’s inflation rate moved closer to the central bank target of 2% in recent months (recorded at 2.7% in April) while GDP growth rate (1.7%) came in weaker than expected in the first quarter of calendar year 2024. The Bank of Canada last announced a hike in interest rates to 5% in July 2023 and held it there. The central bank Governor Tiff Macklem said “We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2% target has increased over recent months”. The European Central Bank announced its first interest rate cut since 2019 by 25 bps to 3.75% from a record-high level of 4% citing progress in controlling inflation. However, the bank said its efforts to combat inflation are far from over. The central bank now expects inflation to be 2.2% on average in 2025, up from the previous estimate of 2%. The Bank of England’s Monetary Policy Committee decided to keep the Bank Rate unchanged at 5.25% during its June meeting, which was in line with the market expectations. The central bank, which set the target inflation at 2%, saw inflation falling to 2% in May from 2.3% in April and 3.2% in March. The Bank of Japan kept its key short-term interest rate at around 0% to 0.1% at its June meeting by a unanimous vote, as widely expected. The central bank will reveal its tapering plan for the next 1 to 2 years at the July meeting. It will continue buying government bonds at the current pace of US$38 billion per month but start trimming in the future. The People’s Bank of China left their benchmark loan prime lending rates unchanged in the June meeting. By consensus, the central bank kept the 1-year loan prime rate (LPR) at 3.45% and the 5-year LPR at 3.95%. This happened as China’s real estate sector continues to remain under pressure.
Inflation readings
The annual inflation rate in the US slowed marginally to 3.3% in May, the lowest in three months, from 3.4% in April, due to cheaper gasoline. Despite falling from the peak of 9.1% in June 2022, inflation continues to remain above the central bank target of 2%. In the Eurozone, annual inflation eased to 2.5% in June from 2.6% in May as per preliminary forecasts. Thanks to softer pace of rise in prices of food, alcohol and tobacco, and energy. Inflation was steady for non-energy industrial goods and services. In the UK, the annual inflation rate reached the central bank’s target level of 2% in May, which is the lowest since July 2021. Inflation declined from 2.3% in April led by led by a sluggish pace of increase in prices of food (1.7% vs 2.9%, the lowest since October 2021), namely bread and cereals, vegetables, etc. Prices also eased for restaurants and hotels (5.8% vs 6%) and recreation and culture (3.9% vs 4.4%). The annual inflation rate in Japan accelerated to 2.8% in May 2024 from 2.5% in April, pointing to the highest reading since February. There was a steep upswing in electricity prices as energy subsidies fully ended (14.7% vs -1.1% in April), reversing declines in the prior 15 months. At the same time, prices rose further for food (4.1% vs 4.3%), housing (0.6% vs 0.6%), transport (2.3% vs 2.7%), furniture & household utensils (2.9% vs 2.5%), clothes (2.2% vs 2.2%), healthcare (1.1% vs 1.2%), culture (5.2% vs 6.2%), miscellaneous (1.2% vs 1.1%), and communication (0.4% vs 1.0%). The annual inflation rate in China was unchanged at 0.3% in May for the second straight month in a row which is lower than market forecasts of 0.4%. Food prices declined 2% while non-food prices rose 0.8% in the month.
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