Economic recovery falters as price pressures start to bite
Interest rates, rupee dampen sentiment
India’s economic activity showed early signs of cooling off in June as acute price pressures, rising interest rates, and a falling rupee dampened sentiment after a strong showing the previous month.
This comes even as the Federation of Indian Chambers of Commerce and Industry’s ( FICCI’s) quarterly survey shows that the economy is expected to expand 7% in fiscal 2022-23, slower than a previous estimate of 7.4% and the Reserve Bank of India’s (RBI’s) 7.2% projection.
Softer increases in factory orders dragged the manufacturing sector, pushing the needle on a dial measuring so-called ‘Animal Spirits’ back to 5, from 6 earlier. The gauge, based on eight high-frequency indicators compiled by Bloomberg News, uses a three-month weighted average to smooth out volatility.
Pent-up consumption had powered revival in Asia’s thirdlargest economy, but rising prices, in part because of the war in Ukraine and supply disruptions, thwarted the nascent recovery. The RBI raised rates by 90 basis points in two moves to temper price gains and is scheduled to hold its next review from August 2-4.
The rupee fell past 80 to a dollar as foreign investors pulled out money amid monetary policy tightening by the US Federal Reserve but recovered to close at 79.85. A declining currency may also prevent a faster pass-through of commodity slump, thus delaying revival.
Purchasing managers’ surveys showed services activity rising to the highest level in more than a decade. At the same time, expansion in manufacturing slowed, pulling down the S&P Global India Composite PMI Index a tad in June.
Demand in the dominant services sector strengthened after a wider reopening from the pandemic, but elevated input costs risk roiling sentiment and hurting demand. “Middle-to-high income households are likely to prioritize spending on contact intensive services that were avoided during the pandemic, at the cost of consumer durables,” according to ICRA Ltd. chief economist Aditi Nayar.
India’s trade deficit widened to a record $26.2 billion in June as imports rose faster than exports, raising concerns about a slide in the rupee and a bigger current account deficit. Petroleum products, coal, and gold primarily contributed to the rise in inbound shipments, while exports took a hit amid fears of a global recession.
After several months of decline, India’s automobile sector recovered amid an easing semiconductor crisis. Key segments, including passenger vehicles, two-wheelers, and utility vehicles, rose, driven by demand for personal mobility.
Other indicators of consumer demand also showed a pick up, with bank credit growing 13.16% at the end of June, from 12.12% in May. However, surplus liquidity in the banking system is dropping as the central bank mops up excess supply extended during the pandemic.
Industrial activity also showed momentum. Factory output rose to a one-year high of 19.6% in May from a year ago, helped by manufacturing and electricity production. The output of eight key infrastructure industries climbed 18.1% in May, the highest jump in more than a year. Both the data are published with a one-month lag.
Meanwhile, FICCI’s quarterly survey, released on Thursday, said the war in Ukraine is likely to keep inflation high and dent consumer demand.
The RBI is expected to stay hawkish to tackle elevated inflation, the survey of top independent economists, showed.
The consumer price index “is anticipated to remain above the RBI’s tolerance band till the third quarter of FY2022-23 and may come within the tolerance level only after the fourth quarter”, FICCI said.
Annual consumer inflation has remained above the RBI’s 2%-6% tolerance band for six straight months to June, prompting economists in the survey to predict the RBI will hike the repo rate further to 5.65% by the end of the fiscal year in March 2023.
Most market participants expect the RBI to raise the repo rate by 50 basis points at its next policy review on August 4, following a similar-sized hike to 4.90% last month.