Market Review

Global growth activity remained mixed and consistent with the trend witnessed during recent months. US growth held up well in Q3CY24 with GDP growing by 2.8% on back of resilient consumption and healthy capex. Further, robust services activity and stabilizing real estate activity aided the growth momentum. Labour market witnessed signs of easing with latest NFP data remaining low at ~12000. It is likely to be one-off and should improve as the impact of disruption caused by hurricane and worker's strike at a large aircraft manufacturing company fade. However, US's manufacturing activity remained subdued. On the other hand, Eurozone business activities remained subdued as reflected in weak manufacturing and services PMIs. China continues to experience broad based slowdown with persistent weakness in its real estate sector, softness in manufacturing and infrastructure investments along with decline in industrial profit. Further, its exports and import growth also moderated. In response to persistent tepid activities, People's Bank of China, (China's Central Bank) announced major steps in September 2024 which inter alia included reduction in policy rates, cutting mortgage rate on existing loans, etc.

Inflation moved within a narrow range in most countries and largely on expected lines across most major economies. Consequently, most major central banks, with a notable exception of Japan, continue to remain in easing mode.

Indian economic activity picks up: High frequency indicators point at improvement in growth momentum with rise in GST collections, surge in retail 2W and PV sales, E-way bills growth, buoyant Manufacturing and Services PMI, retail spending, etc. Improvement was driven by strong festive demand and discounts offered by manufacturers. On the flip side, power demand was subdued, rise in unemployment (based on CMIE survey), weak tractor sales, etc.

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. * based on CMIE survey

India's economic indicators rebounded in October on back of festive demand, after witnessing moderation in Q2FY25. Going forward, growth is expected to remain steady as the impact of softness in urban consumption is likely to be partially offset by rural recovery, which may strengthen in view of expectation of robust growth kharif crop production.

Central government finances in a comfortable position: Fiscal deficit remained low on back of robust growth in direct tax collections primarily driven by personal income tax. Notably, corporate tax collections grew at a modest pace of 3% only in H1FY25 mirroring subdued growth in corporate profits. Indirect tax collections also grew at a healthy pace led by GST. Large increase in dividend from RBI resulted in fiscal deficit narrowing YoY. On the spending side, capex contracted on FYTD basis partly on account of delay in spending due to elections while Revenue spending also grew at a subdued pace. Capex is expected to rise over in H2FY25 but can still fall short of FY25BE

Source: CMIE

While the fiscal deficit has been substantially low, normalisation in government spending in H2FY25 should result in deficit widening at a faster pace in H2FY25. However, in view of high run rate of capex spending required in H2FY25 and buoyant personal tax collections, deficit might undershoot the FY25 budgeted estimates (4.9% of GDP).

Trade deficit widens sharply, likely to remain range bound: Trade deficit fell sharply in September 2024 as net gold imports normalised after witnessing a sharp surge in August 2024 on back of reduction in import duties. NONG deficit narrowed on back of lower import of vegetable oil, metals and electronic goods, while NONG exports were steady on month-on-month basis. This was partially offset by higher oil imports.

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 trade deficit is likely to remain range bound in coming months in view of steady domestic demand and tepid exports growth. This along with potential healthy growth in services exports is likely to keep current account within manageable range in FY25.

Retail inflation inches up, likely to pick up further in near term: India's CPI rose sharply in September 2024 as the impact of favourable base effect wanes and sustained momentum in food prices. Food and beverage inflation rose YoY primarily driven by surge in vegetable prices along with elevated pulses and cereal inflation. Core CPI inched up slightly due to rise in gold prices, most other sub-components were largely steady relative to last month.

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

CPI is expected to rise further in October 2024 driven by continued strong momentum in food prices especially vegetables. However, it is likely to ease thereafter in view of benign input price pressure, arrival of new crops resulting in easing of food inflation and sluggish core CPI momentum.

Commodity prices: Oil prices rose on back of higher inventory drawdown in the US and continuing geopolitical tension. Further, gold prices continue to rise driven by safe haven demand given election related uncertainty in the US and elevated geopolitical tensions. Industrial commodity prices witnessed a mixed trend during the month.

Source: Bloomberg; *Market prices as on October 31, 2024. ^M-o-M change. & - Change in FYTD25

Summary and Conclusion:

Global economic activity momentum witnessed divergent trend across economies with US growth holding up better than expected while EU and China's growth weakening. The global growth is expected to remain steady in view of improvement in the resilient US growth. Further, stimulus announced by China's regulatory authorities is also likely to aid growth in the coming quarters. However, global growth remains subject to escalation in geopolitical tensions impacting global supply chain and commodity prices.

India's growth momentum has moderated driven by slowdown in urban consumption. However, this is counterbalanced by early sign of recovery visible in the rural sector. Investments remain supported by real estate sector and improvement in organised private corporate capex. Going forward, we expect growth to moderate in FY25 but still remain better than rest of the major economies globally. Consumption is likely to be supported by improvement in rural income on back of robust improvement in kharif crop production while urban consumption is likely to stabilise, albeit at a lower level. Further, private corporate sector capital expenditure has potential to accelerate in view of low leverage, increasing capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector also remains robust on the back of comfortable current account deficit and adequate forex reserves. Rise in geopolitical tensions, rise in crude prices, sharp deceleration in global economic activity, etc. are key near-term risks.

Looking ahead, the medium-term outlook for India's economy seems optimistic, in our view. This optimism is driven by policy continuity, 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.