Market Review

In recent months, global growth has been mixed with US economic activity holding up better than expected while China and EU growth remained lack lustre. US GDP growth in Q2CY24 was healthy driven by consumption and relatively resilient private capex. US labour market rebounded with NFP data surprising significantly on the upside while unemployment rate moderated slightly (4.1%). Further, US services activity also grew at a healthy pace as reflected in buoyant PMI. However, its housing and manufacturing remained subdued. On the other hand, Eurozone business activities contracted in Q2CY24. Further, PMIs indicated both manufacturing and services continue to remain weak. China witnessed broad based weakness in activity with housing still reeling under pressure while manufacturing and infrastructure investments along with industrial production decelerating. On the flip side, China's export growth remained healthy, despite subdued imports. In response to persistent tepid activities, People's Bank of China, (China's Central Bank) announced the largest stimulus since the pandemic including (1) Banks' reserve requirement ratios have been slashed by 50bps, freeing up USD142bn funds for banks to lend. (2) interest rates on existing housing loans have been reduced, (3) minimum down payments on all housing was brought down to 15%. Further, there is increasing expectations of additional stimulus from China's government.

Inflation moved within a narrow range and largely on expected lines across most major economies. After nearly 2 years of high interest rates, the US Fed undertook a 50bps rate cut. ECB also reduced rates. Bank of Japan previously had indicated that it will continue to hike policy rates to get inflation under control but decided to maintain status quo in September.

Indian economic activity softens: India's growth momentum moderated as reflected in YoY contraction in retail PV and 2W registration, decelerating GST collections and both Manufacturing and Services PMI easing near year lows. Further, power demand remained flat while CV retail sales also witnessed YoY contraction. Some economic indicators have held up, such as the robust growth in digital spending and unemployment rate moderating.

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 have been mixed in recent months with some slowdown visible in select pockets. Overall, growth is expected to moderate relative to last year.

Current account widens, capital account remains supported by FDI: After witnessing a current account surplus in 4QFY24, India's current account swinged into deficit in Q1FY25 driven by widening of trade deficit due to surge in oil and NONG net imports. Gold imports moderated as the elevated prices resulted in import volumes declining. Invisible exports grew at a healthy pace on back of improvement in exports of software services and steady other business services. Capital account was relatively sanguine as FDI rebounded during the quarter along with improvement in flows from trade credits, external commercial borrowings and NRI deposits. FPI flows, however, were subdued during the quarter.

The external sector is well placed for FY25 in view of manageable current account deficit and improvement in the capital flows. Further, high foreign exchange reserves are likely to keep INR pressure at bay.

Trade deficit widens sharply, likely to remain range bound: Trade deficit rose sharply in August 2024 primarily driven by rise in gold imports. The reduction in import duties in the budget along with upcoming festive season resulted in sharp rise in gold imports. Further, rise in NONG imports driven by ferrous goods, transport equipment and machinery along with relatively flat exports resulted in trade deficit widening. This was partially offset by lower petroleum 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 moderate as gold demand normalises in coming months. However, it is likely to not fall significantly in view of resilient 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.

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 declined YoY in first 5 months of FY25 indicating subdued growth in corporate profits. Indirect tax collections also grew at a healthy pace led by GST. Large increase in RBI dividend also 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. Revenue spending also grew at a subdued pace.

Source: CMIE

While the fiscal deficit has been substantially low, pick up in government spending in H2FY25 is likely to normalise the same. Government announced the full budget for FY25 wherein it estimates the deficit to narrow to 4.9% (interim budget estimate: 5.1%) of GDP. The revenue and spending assumptions for FY25 appear realistic and achievable.

Retail inflation remains range bound, likely to pick up in near term: India's August CPI remained similar to the month before and below RBI's target (4%) primarily driven by favourable base effect. Food and beverage inflation rose marginally driven by higher vegetable prices along with elevated pulses and cereal inflation. On a sequential basis, food inflation, declined by 0.4% after increasing ~3% per month in two months prior. Core CPI remained benign on back of subdued input prices and demand moderation.

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

CPI is expected to pick up in near term driven by impact of favourable base effect fades and elevated food prices. However, in view of benign input price pressure, arrival of new crops resulting in easing of food inflation and sluggish core CPI momentum is likely to result in CPI normalising closer to target in upcoming quarters.

Commodity prices: Oil prices corrected sharply during the month driven by possibility of increase in oil supply by OPEC+ countries. Most industrial commodity prices increased during the month. In early October, Oil prices rose sharply on back of rise in geopolitical risks as the conflict between the Middle East nations exacerbated.

Source: Bloomberg; *Market prices as on September 30, 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 growth weakening. The global growth is expected to remain steady in view of improvement in the US labour market along with resilient consumption and investments. Further, China has announced large stimulus measures to pull up its growth, the impact of the same should be visible in the coming quarters. However, it remains subject to geopolitical risks escalating impact on global supply chain and commodity prices.

India's growth momentum has moderated in recent months reflected in visible moderation in urban consumption. However, this to an extent, is counterbalanced by improvement in the rural sector which is showing nascent sign of recovery. Investments remain supported by real estate sector and improvement in organised private corporate capex. Going forward, we expect growth to moderate compared to last year but still better than rest of the major economies globally. Consumption is likely to be supported by improvement in rural income 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 tension disrupting supply chains, 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 fuelled 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.