Market Review
Global growth momentum moderated during the month led by the US and China. Within individual countries also, different sectors show mixed trend. For US - PMIs eased, unemployment rate inched up, retail sales moderated and the housing sector weakened further. However, the nonfarm payroll and job openings surprised on the upside. On the other hand, China's exports accelerated with steady growth in manufacturing and infrastructure investments while PMIs stayed just inside the expansionary zone. However, its real estate sector has weakened further and industrial profits have declined. Economic activity in the Eurozone remains subdued.
Inflation in the U.S. has been lower than expected, driven by a broad-based easing of services excluding housing, while it remains low in the Eurozone and China. In recent months, shipping freight rates have increased sharply and can put upward pressure on prices.
The U.S. Federal Open Market Committee (FOMC) kept its monetary policy unchanged in June 2024 and revised down its expectations for rate cuts in 2024 to one from three in March 2024 meeting. Meanwhile, the European Central Bank (25 bps), Swiss National Bank (50 bps), and Bank of Canada (25 bps) have all cut their policy rates in Q2CY24 indicating peaking of rates in major AEs.
Indian economic activity moderates: Indian economic activity indicators signalled mixed picture. On the one hand, retail auto sales weakened, GST collections growth moderated and unemployment rate rose indicating moderating consumption. While, on the other hand, manufacturing and services PMIs remained buoyant, digital spending grew at healthy pace, power sector demand remains strong and railway tonnage movement accelerated. The past couple of months economic activity might have been impacted due to general elections.
| Indicators | Units | Jan-24 | Feb-24 | Mar-24 | Apr-24 | May-24 | Jun-24 |
|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | |||||||
| 2W | YoY, % | 15.4 | 13.6 | 5.8 | 33.6 | 2.7 | 4.7 |
| PV | 16.1 | 15.1 | -3.7 | 19.0 | 2.3 | -6.5 | |
| MHCV | 2.3 | 0.2 | -14.6 | -5.3 | -3.4 | -5.0 | |
| LCV | -3.9 | -0.4 | -7.5 | -1.7 | 1.7 | -8.3 | |
| Tractors | 23.9 | 12.8 | -1.8 | 2.5 | -1.0 | -27.5 | |
| Gross GST Collection | 11.7 | 12.5 | 11.5 | 12.4 | 10.0 | 7.7 | |
| Average E-Way bill generated | 16.4 | 14.8 | 13.9 | 14.5 | 17.0 | ||
| Power demand | 6.1 | 4.7 | 9.1 | 10.5 | 15.3 | 8.9 | |
| Digital Spending & | 35.5 | 40.6 | 33.5 | 32.6 | 31.6 | 32.1 | |
| Railway Freight Tonnage | 6.4 | 10.1 | 9.5 | 1.4 | 3.7 | 10.1 | |
| Railway Freight Earnings | 4.1 | 9.0 | - | 1.3 | 3.8 | 11.1 | |
| Manufacturing PMI^ | Index | 56.5 | 56.9 | 59.1 | 58.8 | 57.5 | 58.3 |
| Services PMI^ | Index | 61.8 | 60.6 | 61.2 | 60.8 | 60.2 | 60.5 |
| Unemployment | % | 7.4 | 8.1 | 7.4 | 8.1 | 7.0 | 9.2 |
Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in ^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to revision. &- Sum of UPI+IMPS spending; * based on CMIE survey
India's growth in FY25 is expected to remain steady, though lower than FY24, supported by robust industrial and investment activities along with resilient services sector and urban consumption. While rural recovery remains mixed, there is optimism due to the expectation of a normal monsoon.
Current account in Q4FY24 moved to surplus, likely to remain within manageable levels in FY25: India's current account swinged into surplus in Q4FY24 driven by robust growth in net services exports and seasonally low trade deficit. On the merchandise trade side, while oil imports were flat YOY, net gold imports widened. This was, however, set off by lower NONG trade deficit due to fall in prices of commodities such as coal and fertilisers. Invisible surplus widened in Q4FY24 on back of resilient exports of IT as well as professional and management consulting services. Further, remittances also inched up. Capital flows remained supported by FII flows into equity as well as debt along with steady NRI deposits. FDI flows moderated sharply as outflows rose driven by increase in exits via IPOs. Strong improvement in Q4FY24 current account resulted in FY24 CAD narrowing to 0.7% of GDP vis a vis 2% in FY23.
| India’s external situation (USD bn) | Q4FY23 | Q4FY24 | Change | FY23 | FY24 | Change |
|---|---|---|---|---|---|---|
| Trade (Deficit) / Surplus | -52.6 | -50.9 | 1.7 | (265) | (242) | 23 |
| Net Oil Imports | -27.0 | -27.4 | -0.4 | (112) | (96) | 16 |
| Net Gold Imports* | -5.0 | -10.6 | -5.6 | (33) | (42) | (9) |
| NONG Trade deficit^ | -20.6 | -12.9 | 7.7 | (120) | (104) | 16 |
| Net Invisibles Surplus / (Deficit) | 51.3 | 56.6 | 5.3 | 198 | 219 | 21 |
| Current account Surplus / (deficit) | -1.3 | 5.7 | 7.0 | (67) | (23) | 44 |
| % of GDP | -0.2% | 0.6% | 0.8% | -2.0% | -0.7% | 1.3% |
| Capital Account Surplus / (Deficit) | 6.9 | 25.1 | 18.1 | 58 | 87 | 29 |
| FDI | 6.4 | 2.0 | -4.4 | 28 | 10 | (18) |
| FII | -1.7 | 11.4 | 13.1 | (5) | 44 | 49 |
| NRI deposits, External assistance etc. | 3.6 | 5.4 | 1.8 | 9 | 15 | 6 |
| Trade credits, ECB’s, etc. | 1.3 | -0.3 | -1.6 | 3 | (6) | (9) |
| Banking capital | -7.7 | 0.6 | 8.3 | 13 | 25 | 12 |
| Others | 5.0 | 6.0 | 1.0 | 11 | (0) | (11) |
| Balance of Payments | 5.6 | 30.8 | 25.2 | (9) | 64 | 73 |
Source: CMIE, Ministry of Commerce; *Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports. ^NONG refers to Non-Oil Non Gold (as defined above) imports/exports
The latest data indicates that growth in services exports is sustaining in FY25 and trade deficit remains close to levels seen in recent past. FY25 current account is likely to remain within comfortable range unless commodity prices, especially oil, widens significantly.
Central government finances in a comfortable position: The fiscal deficit (as % of GDP) in first two months of FY24 was significantly low on the back of buoyant direct tax revenue collections and significantly higher dividend by RBI. Moreover, expenditure also remained subdued as ongoing general elections delayed spending.
| INR billion | 2MFY24 | 2MFY25 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 3,970 | 4,596 | 15.8% |
| Total Direct Tax | 1,838 | 2,256 | 22.7% |
| Total Indirect Tax | 2,131 | 2,340 | 9.8% |
| Less: Share of States & others | 1,189 | 1,406 | 18.2% |
| Net Tax collection | 2,780 | 3,190 | 14.7% |
| Non-Tax Revenue | 1,347 | 2,517 | 86.9% |
| Total Revenue Receipts | 4,127 | 5,708 | 38.3% |
| Total Capital Receipts | 30 | 21 | -30.2% |
| Total Receipts | 4,157 | 5,728 | 37.8% |
| Total Revenue Expenditures | 4,582 | 4,798 | 4.7% |
| Total Capital Expenditures | 1,678 | 1,436 | -14.4% |
| Total Expenditures | 6,260 | 6,235 | -0.4% |
| Gross Fiscal Deficit | -2,103 | -506 | -75.9% |
| Fiscal Deficit as % of GDP | -0.8% | -0.2% | 15.8% |
Source: CMIE
While the fiscal deficit in first 2 months is low, it is likely to normalise in the coming months. More importantly, in view of incumbent government winning the election with a lower majority than last time, one should watch out for FY25 full budget (likely to be presented in July 2024) for medium term direction of fiscal policy. Significantly higher than expected RBI dividend of INR 2.1 trillion (~0.7% of GDP) can provide the government with some flexibility to increase spending and simultaneously adhering to its fiscal consolidation path.
Retail inflation stable, likely to ease in coming quarters: India's May CPI eased marginally relative to the month before. Food inflation continued to remain the primary contributor of CPI led by elevated prices of vegetables, pulses, cereals, spices, and sugar. Core CPI trended lower driven by benign input price pressure and modest increase in inflation of housing goods and services, health, clothing and footwear, and recreation and amusement items. All other major components of CPI were largely similar to last month on YOY basis.
| YoY, % | Apr-24 | May-24 | Change in % |
|---|---|---|---|
| CPI | 4.8 | 4.7 | -0.1 |
| Food & Beverages | 7.9 | 7.9 | - |
| Fuel and Light | -4.0 | -3.8 | 0.2 |
| Housing | 2.7 | 2.6 | -0.1 |
| Transportation & communication | 1.1 | 1.0 | -0.1 |
| Core CPI@ | 3.9 | 3.7 | -0.2 |
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
Trade Deficit rises, likely to remain rangebound: Trade deficit widened month on month in May 2024 largely in line with the seasonal trend. The increase was driven by increase in net oil imports and NONG imports. NONG imports increased driven by higher import of transport equipment, machinery and non-ferrous metals. This was partially offset by rise in exports of engineering and electronic goods.
Trade deficit is likely to remain in similar range in the coming quarters as the oil prices remain range bound. Rise in commodity prices in recent months poses a risk of deficit widening.
| Amount in USD billion | Apr-24 | May-24 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 19.1 | 23.8 | 24.5% |
| Net Oil Imports | 9.8 | 13.2 | 33.8% |
| Net Gold^ Imports | 2.7 | 2.6 | -1.3% |
| Net NONG* imports | 6.6 | 8.0 | 20.9% |
Source: Ministry of Commerce; ^ Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports. *NONG refers to Non-Oil Non Gold (as defined above) imports/exports
Commodity prices: Most industrial commodity prices declined during the month as global growth momentum remained subdued. However, Brent crude oil prices increased during the month as US inventories declined more than expected.
| Market price (USD)* | Jun-24 (YoY, %)^ | FYTD25 (%)& | |
|---|---|---|---|
| Brent Crude (per barrel) | 86.4 | 5.9 | (1.2) |
| Gold (per ounce) | 2,327 | (0.0) | 4.3 |
| Steel (per tonne) | 525 | (1.9) | 2.9 |
| Zinc (per tonne) | 2,920 | (2.5) | 22.1 |
| Copper (per tonne) | 9,477 | (5.1) | 8.6 |
| Aluminium (per tonne) | 2,488 | (4.6) | 8.4 |
| Lead (per tonne) | 2,160 | (3.8) | 9.9 |
Source: Bloomberg; *Market prices as on June 28, 2024. ^M-o-M change. & - Change in FYTD25
Summary and Conclusion:
Global economic activity momentum has moderated in Q2CY24 after a strong Q1CY24. While outlook on growth remains uncertain, it is expected to remain within a range in the coming quarters. This is driven by expectations of labour market in the US to remain resilient and additional policy support by China to support growth. Recent surge in international shipping freight rate can put upward pressure on input prices.
India's growth trajectory remains stable, supported by buoyant industrial and service sectors. While some slowdown is visible in consumption and outlook on rural consumption remains uncertain, it could be partly due to elections related uncertainty. Investments remains supported by real estate activity, government and improvement in organised private corporate capex. Private corporate sectors capital expenditure has potential to grow faster in view of low leverage, increasing capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector remains robust on the back of comfortable current account deficit and adequate forex reserves. Significant rise in geopolitical tension disrupting supply chains, acceleration in monetary policy tightening, potential slowdown in pace of domestic reforms due to coalition government, etc. are key near-term risks.
Looking ahead, the medium-term outlook for India's economy appears promising. This optimism is fuelled by favourable government policies, benefits from Production-Linked Incentive schemes, opportunities arising from shift in the global supply chain, enhanced infrastructure investments, the potential of resurgence in private sector capex, and the enduring robustness of consumption.
