Macro Forum: The Street View


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India’s economy slowed in the July-September period to 7.1% year-on-year growth, down from 8.2% in the previous quarter. The economy suffered from higher oil prices over this period, resulting in a higher import bill and a weakening rupee.

Growth was also impacted by a liquidity crunch brought on by the default of IL&FS, a large infrastructure development and finance company in India, with regards its failure to meet short term debt obligations, prompting a liquidity crisis which affected the entire non-banking finance sector, a key source of credit expansion in recent years.

Retail inflation dropped to an 18 month low of 2.2% in December, falling from 5.1%at the beginning of the year. Annual growth in India’s industrial output slumped to 0.5% year-on-year growth in November from 8.4% the previous month, primarily due to a slowdown in auto and garment manufacturing.

India’s wholesale inflation also fell to a 3 month low of 4.64% in November, driven down by a decline in food prices, particularly vegetables. Whilst good news for the consumer, it is representative of tangible rural distress for the producers and a big challenge for Prime Minister Modi as we enter election year.

Focus is now on the central bank to soften its monetary stance in its next meeting by cutting its benchmark repo rate, currently at 6.5% by 25 basis points.

Rising oil prices, particularly in the July-September period resulted in the Rupee becoming Asia’s worst performing major currency in 2018, depreciating 9.6% over the course of the year from 63.67 against the dollar at the beginning of 2018 to 69.77 at the end of year. However, in the last quarter of 2018, oil prices fell dramatically allowing hope of a Rupee recovery in the coming months.

The oil price decline helps reduce India’s fuel import bills and aids companies that have a higher share of imports in reducing their operational costs. India’s current account deficit is expected to be lower at 2.5% of GDP for FY19, against earlier predictions of 2.9%.

The first half of 2019 will be dominated by domestic political events with the Prime Ministerial election due in Q2. It would be no surprise to see businesses and consumers remaining cautious in front of this event thereby creating some pent up demand in H2.

Reflecting dismal global stock market performance towards the end of 2018, the Sensex index fell by 2% in December. However, Indian equities have slipped less over the year than other markets with the Sensex rising 6.7% over 2018 in contrast to the MSCI World index which fell by 10.4%.






Real GDP Growth

Source: International Monetary Fund

India FX vs FV

Source: Bloomberg Spot Price and Actis methodology for Fundamental Value


Source: International Monetary Fund