GDP, BOP data and monetary policy this week
The coming week is set to witness a host of macro releases, viz. GDP and BOP numbers for the September-ending quarter, and the RBI’s policy stance at its fifth bi-monthly Monetary Policy meet on 1 December. “We expect” says Religare “GVA growth to accelerate to 7.4% in Q2 (Q1: 7.1%) but the overall BOP position to deteriorate on lower capital flows. In terms of monetary policy, we think the central bank would leave key policy rates unchanged as it keenly awaits the Fed’s next move”. Religare is of the opinion that…
- GVA likely up 7.4% in September quarter: We expect growth in India’s GVA (at basic prices) to have accelerated from 7.1% in Q1FY16 to 7.4% in Q2, while trailing 8.4% growth in the year-ago quarter, with industrial sector growth likely pushing up overall growth.
- Manufacturing to buoy industry growth: Manufacturing IIP expanded by 4.6% in Q2FY16, at its fastest pace in four years led by double-digit growth in output of capital goods and consumer durables. Mining activity also picked up as growth in output of crude oil and natural gas turned positive after six quarters of decline. Growth in electricity generation spiraled up to 6.8% from 2-4% in the last two quarters on improved PLFs for thermal plants. Thus, overall industry growth is expected to have risen to 7% in Q2FY16 from 6.5% in Q1FY16.
- Agriculture growth to slow down, services to stay resilient: Poor monsoons hurt Kharif output with food grain production likely to have declined 1.8% during the season, as per the first advanced estimates of the Ministry of Agriculture. Since crops account ~62% of the agri-GVA, we expect agri-GVA growth to have slowed down to 0.8% in Q2 from 1.9% in Q1. Services sector growth likely remained resilient at 8.9%.
- RBI to maintain status quo on 1 Dec: The fifth bi-monthly Monetary Policy Review to be held on 1 Dec’15 is expected to be a non-event. Given the front-loaded 50bps cut in the last monetary policy and a shift in RBI’s focus on controlling inflation to 5% by FY17-end from the earlier FY16-end target of sub-6%, we expect the central bank to stay put and wait for Fed’s action/guidance on Dec’16.
- CAD to contract to 1.5% of GDP: We expect the current account deficit (CAD) to shrink to US$ 7.7bn (1.5% of GDP) in Q2FY16 from US$ 10.2bn in the year-ago quarter. Substantial savings on net oil trade (global crude prices down 50.8% YoY in Q2) should more than offset the increased non-oil deficit, leading to a contraction in the overall merchandise trade deficit.
- Net BOP position to turn negative: The turmoil in international markets due to fears of a Greek exit from the Eurozone had led to high FII outflows in Q2FY16, while FDI inflows dropped to a six-quarter low of US$ 6.9bn. Overall, capital flows are likely to have been insufficient to fund the CAD, leading to a reserve drawdown of ~US$ 2.8bn. Forex reserves declined by US$ 5.2bn during the quarter.