Indian economy week ahead: inflation, factory output data to set tone for rate cut

With the stock markets largely affected by weakened factory activity and concerns over retrospective taxation, the direction of the economy during the upcoming week is expected to be influenced by data releases on inflation, industrial production and trade figures. The stock markets rebounded on Friday after regaining the 27,000 mark as government formed a committee to address concerns on retrospective taxation. The rupee also recovered after hitting a 20-month low, closing the week at 63.94 against the dollar.

Trends in the stock market will be affected by US jobs data as Friday release of non-farm payrolls reported that US economy added 223,000 jobs in April and unemployment dipped to 5.4 per cent, the lowest since May 2008. The strong jobs market data further provide an impetus to the Federal Reserve to hike the policy rate. The markets are pricing a rate hike in September and though Asia seems to be in a better position than in 2013, the recent outflow of FII shows that Indian markets are still vulnerable to a rate hike.

Data releases on consumer inflation and industrial production on Tuesday are expected to show further weakening. A survey of 19 economists conducted by VCCircle found that inflation is set to weaken to 4.85 per cent for April while industrial production will slump to 2.8 per cent in March compared with 5 per cent in the previous month. The risks to inflation are higher in the coming months as rising crude prices and weak monsoons as predicted by IMD are expected to drive up food prices. Food prices have remained contained despite the unseasonal rains as government released some of the buffer stock to prevent prices from rising.

Meanwhile, slow growth in the core industries will weigh down on industrial output figures. Despite the government’s efforts to pick up activity, IIP data have remained subdued.  

Data for prices for manufacturing goods to be released on Thursday will indicate wholesale price index still in the negative territory with a fall of 2.30 per cent compared with the year-ago period. The prices of manufactured goods have declined for a year owing to weak demand and falling crude oil prices.

Data from the inflation releases and industrial production are set to provide a further impetus to the Reserve Bank to cut rates. The RBI already cut rates by 50 bps in two rounds this year and is expected to cut rates again in June. With inflation still well below the RBI’s mandate of 6 per cent and bank credit slowing down along with the slump in industrial output, a rate cut is warranted to provide a leg-up to the economy.

RBI’s second bi-monthly policy review for the year is slated to happen on June 2.

Trade figures for March will be released on Friday. India has had a dismal export performance last year with the sluggish world demand but the trade balance was evened out by low crude prices. With crude prices on the rise again and no signs of recovery for exports, current account and trade balance might be a worry for the government.

Another reason of concern for the government will be the land reform bill. All eyes will be on the two houses as the government tries to clear the passage for GST bill through Rajya Sabha and the key legislation on land reform through the lower house. Though Modi has been able to initiate some major reforms in the country, his resolve to get the major legislation through the parliament has been questioned. The government would have to deliver on some of the promises as markets have started questioning the big wave of reforms that Modi had promised a year ago.

Rajya Sabha session ends on Thursday while the extended session for Lok Sabha is to end a day before. 

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