Market Review

The global economy, while better than expected, remained in an ambivalent state with diverging growth trends visible amongst major economies. Within individual economies too, various sectors paint a mixed picture. The US economy continues to beat expectations with GDP growing at a robust pace in Q3CY23 supported by buoyant consumption spending and services sector. Labour market continues to remain tight and manufacturing sector is showing signs of flattening out. Housing data also surprised on the upside in September but whether it sustains or not remains to be seen. Growth in the Eurozone, on the other hand, remains fragile with manufacturing as well as the services sector decelerating. The tightening of monetary policy, weak consumer confidence, elongated war, slowing global trade, etc. has kept the growth weak despite excess accumulated savings. Chinese economy appears to be recovering well, post weak Q2CY23, and most indicators like industrial profits, trade, fixed assets investments, credit growth, etc. are either showing signs of bottoming out or improvement. Real estate sector in China, however, is still not out of the woods and weakness is persisting. China's regulatory authorities are increasingly rolling out targeted measures to boost growth and this should reflect in growth over the coming quarters.

Inflation continues to trend lower at a gradual pace mainly led by food and energy. While Core Inflation has also cooled down across most economies, it remains higher than pre-pandemic levels and the risk to upside remains in view of tight labour market and resilient growth. While most major AE central banks have kept their policy rates unchanged in their latest policy meeting, given elevated core inflation current consensus is that they are likely to maintain the policy rates at an elevated level for an extended period.

Indian economic activity remains stable: High frequency indicators show a steady growth momentum holding up well although rural sector seems to be under pressure. PMIs, power demand, digital spending, GST collections, CV registration, etc. indicates growth is holding up well.  However, Tractor, PV and 2-wheeler retail registration remained weak (although there is some impact of festive season timing) and unemployment rate (as per survey by CMIE) rose sharply driven by rural sector.
 

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.

India's economic activity remained resilient and we expect the growth momentum to remain steady in the near term in view of upcoming festive season. However, spatial and temporal distribution of monsoon and its impact on crop yields may weigh on rural sector.

Robust direct tax collections keep fiscal deficit on track to achieve BE target: Fiscal deficit as % of GDP inched up to 2.4% by the end of September 2023. Direct tax collections witnessed a sharp improvement over Aug-Sep 2023 a er weak growth in the first four months of the fiscal year. Indirect tax collections, however, remains muted relative to BE on the back of contraction in excise duty collections and moderate growth in GST. This was partly offset by a better-than-expected customs duty collections. Non-tax revenues remain buoyant supported by higher than estimated dividends from RBI and PSUs. Government spending grew at a healthy pace led by capital spending on rail, roadways, disbursement of interest free capex loans to states, etc. Revenue spending also grew at a healthy pace driven by disbursement of fertiliser subsidy, MNREGA spending and transfers for PM-KISAN.
 

Source: CMIE
Better than expected direct tax collections and non-tax revenues are likely to make up for likely shortfall in divestment receipts and indirect tax collections. Further, the spending is largely on track to achieve budget estimate. Hence, we expect fiscal deficit for FY24 to remain close to budget estimates.
 
Retail inflation plunges, likely to trend lower in the near term: CPI inflation in September' 23 fell sharply to 5% (Aug-23: 6.8%) primarily driven by sharp decline in vegetable prices especially tomato. However, prices of other food items like cereals, pulses, spices etc. remained at elevated levels. The fall in inflation was aided by decline in fuel & light component on the back of reduction in LPG prices by the government. Housing inflation also surprised on the downside. Core CPI trended lower aided by favourable base and slowing price momentum as input prices eased.

YoY, %	Aug-23	Sep-23	Change in %
CPI	6.8	5.0	-1.8
Food & Beverages	9.2	6.3	-2.9
Fuel and Light	4.3	-0.1	-4.4
Housing	4.4	4.0	-0.4
Transportation & communication	2.5	2.3	-0.2
Core CPI@	5.7	5.3	-0.4

Source: CMIE; @-CPI excluding food, fuel, housing and transportation & communication

Inflation is expected to moderate further in the near term due to low vegetables prices. While the recent increase in onion prices poses an upside risk, it is unlikely to sustain for a prolonged period. The consequence of uneven distribution of monsoon on crop yields can result in cereals and pulses inflation surprising on the upside, although government measures to manage supply are likely to limit the impact, to a certain extent. Importantly, the so Core Inflation momentum is likely to persist in view of the lagged impact of tight monetary policy, lower input price pressure etc. and, thus likely to keep CPI within upper bound of RBI target range (6%).

Amount in USD billion	Aug-23	Sep-23	Change
Trade Deficit / (Surplus)	24.2	19.4	-19.8%
Net Oil Imports	7.3	7.5	2.4%
Net Gold^ Imports	4.5	3.1	-31.7%
NONG* net imports	12.3	8.8	-28.6%

Source: CMIE, Ministry of Commerce; NM – Not meaningful. ^ 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.

Trade Deficit widens, likely to remain elevated in the near term: Trade deficit narrowed considerably in September 2023 driven by –decline in gold volumes and fall in NONG imports. The rise in gold prices weighed on the demand and resulted in gold import volume falling. Further, the NONG imports fell, led by lower import of chemicals, dyeing material, machinery, transport equipment etc. This was partly offset by lower exports of rice, readymade garments, etc.

	Market price (USD)*	Oct-23^ (%)	FYTD24& (%)
Brent Crude (per barrel)	87.4	(8.3)	9.6
Gold (per ounce)	1,984	7.3	0.7
Steel (per tonne)	525	(2.8)	(19.8)
Zinc (per tonne)	2,433	(7.9)	(16.3)
Copper (per tonne)	8,038	(2.3)	(10.0)
Aluminium (per tonne)	2,240	(3.9)	(5.7)
Lead (per tonne)	2,111	(4.5)	(1.6)

Source: Bloomberg; *Market prices as on October 31, 2023. ^M-o-M change. & - change during FY24

In the near term, domestic demand is likely to remain better than global demand as India enters the festive season. Further, oil prices have rebounded from the lows and if sustained, can keep oil imports high. Hence, trade deficit is likely to remain in similar range (like last few months) with risk skewed towards the upside.

Commodity prices: Oil prices cooled off during the month as no major supply impact is expected due to ongoing Israel-Hamas conflict. Sharp rise in US yields during the month weighed on the growth outlook and most commodity prices declined during October 2023. Gold prices inched up on the back of rise in risk-off sentiments. 

Summary and Conclusion:

Global growth, while better than expected, remains patchy with cross country and sectoral divergences. The narrative of so landing is increasingly becoming a base case, despite aggressive monetary tightening, in view of resilient US economic activity, tight labour market, benign wage growth and gradually declining inflation. The picture in Eurozone is sanguine as growth momentum is weak while Core Inflation is still at elevated levels, thus forcing the monetary policy to remain tight. Chinese economic recovery is taking hold with manufacturing, infrastructure, services and personal consumption improving. Further, it is likely to benefit from reforms and growth supportive measures announced over the past few months. However, real estate still remains under pressure. Overall, global growth is expected to decelerate driven by tight monetary conditions, draining of excess accumulated savings especially in US, etc. Sharp rebound in China's growth poses upside risk to the growth outlook.

While Indian economic activity remains supported by urban consumption, rural sector recovery remains benign. We expect the growth momentum to continue in the near term driven by the onset of the festive season, easing inflation, resilient services sector, etc. However, the growth in rural sector is subject to risks emerging from impact of uneven rainfall on Kharif crop yields, uncertainty over rabi season, low allocation towards MNREGA spending, weak employment condition, etc. Investment activity remains supported by both centre and states governments front loading the capex spending and household real estate activity holding up well. Private sector capex remains relatively so but can pick up as conditions remain conducive given the low leverage, rising capacity utilization, steady corporate profitability and robust balance sheet of the banking sector. The external sector is relatively better placed with trade deficit likely to remain within a manageable range and services exports growing at a reasonable pace despite high base. While capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels and INR stable.

Over the medium term, we remain optimistic on Indian economy in view of the favourable policy environment, positive impact of PLI schemes, opportunities arising from shi of global supply chain, Government thrust on infrastructure spending, possibility of private sector capex recovery, personal consumption holding up well, etc.