Updated on 26rd October 2014
- With strong consumer sentiment, markets abuzz with Diwali, yet no clear uptrend in sight
- Revival in sectors like auto still shaky; low capital goods output point to dismal growth trajectory
- Fall in crude price to help fiscal consolidation
- Lowered inflation numbers give comfort, pressure builds on RBI to cut rates
- Sizzling gold sales hit trade deficit again, rupee weakens
The economy is looking up, but it’s early days yet to call for a definite uptrend. There are many positives to buoy the markets, especially consumer sentiment that has been repressed the past couple of years. The festival season has already been coming through with good sales, however some markets are still cautious. For the auto sector, Diwali saw a good response to aggressive marketing tactics, covering up for the lacklustre September sales. Real estate is another sector that is not out of the woods, even though sales are better than expected; analysts report no upturn in the falling trend in new launches and pre-sales have also declined significantly. Consumer sentiment has been helped by much lower inflation, especially in food and fuel. Also going ahead, while high interest rates has stymied demand so far, the drop in international crude prices indicates that the chances of a rate cut may seem higher over the coming quarter, but there are strong caveats. For the RBI, the trajectory of inflation will be crucial and here as well the numbers have softened considerably. Except for milk, vegetables and fruits that remain elevated in double-digits, all other basic food items have lower inflation now. In fact global food prices are at a four year low, giving more comfort to a dampened trend in India as well this year. With lower commodity prices, the Markit Manufacturing PMI for September reported the lowest cost inflation since May 2013. Sure, there will be some points of stress, yet on the whole the scenario is more comfortable than it was a few months back. The question is will the RBI bite the bullet? There will of course be considerable pressure to cut rates over the next quarter, especially as the government has stepped up on fiscal consolidation through fuel price deregulation. With the Direct Benefits Transfer for LPG now revamped and put into play, significant subsidy tightening should come through over the next twelve months. All will depend on how the expected inflation trends play out according to internal calculations. As of now, the likelihood of a rate cut still seems low. We see CPI at around 7% in the last quarter, which is higher than the target of 6% set by the RBI. Also, there are external factors like the Fed raising rates that will impact the Indian rate scenario as well. While upside risks always exist, they have moderated now and to wait out much longer on the rate cut, will definitely strain consumer sentiment. With capital goods production still strained, the economy will turn in a 5.4% growth this year; with some stalled projects getting back on steam, we are looking at a 6% growth next year. Any further uptrend will only depend on how the government handles the political space and moves on its reform agenda.