The cheerful billionaire owner of RPG Goenka group, a midsized conglomerate based in Mumbai, is midway through an investment splurge. All in all, he plans to spend about $350m by the end of next year, most of it on two new factories for Ceat, the company’s flagship tyremaker.
“If you are bullish about demand in India, you put in new facilities. And I am feeling bullish,” he says. “Unfortunately, it is no secret that the majority of my fellow industrialists do not feel the same way.”
That is putting it mildly. On the surface, India’s economy seems to be doing nicely, growing at about 7 per cent a year. The International Monetary Fund predicted last week that it would creep up further next year, making India the world’s fastest-growing major economy and a rare bright spot in an otherwise gloomy global outlook.
Behind the scenes, though, the private sector has in effect downed tools. Total capital expenditure has “nosedived” so far this year, according to rating agency Fitch, and is set to hit its lowest level since 2010. Laden with debt and stung by delays to previous big investment projects, India’s typically adventurous entrepreneurs are shying away from new spending. Many banks are struggling too, making them reluctant to lend.
All this makes India’s recovery feel fragile, in turn undermining hopes that growth will accelerate, supporting the world economy at a time when emerging markets such as China and Brazil are struggling. “India is growing at 7 per cent, but it often feels like 5 per cent,” says Shikha Sharma, managing director of Axis, one of India’s largest private sector banks.
A senior Federal Reserve policymaker has urged the central bank not to prematurely withdraw its monetary support for the US economy given the mounting risks globally and danger of low inflation.
Lael Brainard, a member of the Federal Reserve’s board of governors, said the central bank should be “watching and waiting” rather than pushing forward with an increase in short-term interest rates, adding that financial market movements have already delivered a tightening equivalent to two rate hikes.
The comments came in a dovish speech that suggested Ms Brainard is a considerable way from supporting an interest-rate increase, highlighting the divisions that exist on the Federal Open Market Committee.
Ms Brainard said that the risks to inflation and to growth are “tilted to the downside” and that the Fed should not run the risk of lifting rates when it has limited scope to inject fresh stimulus if a U-turn were necessary.
In a speech in Washington DC, she added: “There is a risk that the intensification of international cross currents could weigh more heavily on US demand directly, or that the anticipation of a sharper divergence in US policy could impose restraint through additional tightening of financial conditions.
“For these reasons, I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the US recovery — and argue against prematurely taking away the support that has been so critical to its vitality.”
The rapid growth enjoyed by emerging markets over the past two decades could be in “jeopardy” as the world adjusts to China’s slowdown and a “prolonged period of low commodity prices”, Christine Lagarde has warned.
The managing director of the International Monetary Fund said global growth was likely be weaker this year compared with 2014 as emerging economies face a fifth consecutive year of declining growth.
Brazil and Russia faced “serious economic difficulties”, while India’s status as one of the only “bright spots” meant the IMF expected only a “modest acceleration” in 2016.
This was in contrast to the UK and the US, where growth was described as “robust”. The two countries were the only advanced economies that were potentially strong enough to withstand interest rate rises, she added.
Speaking in Washington ahead of the IMF’s annual meeting next week, Ms Lagarde said the global economy faced a number of obstacles, including Europe’s refugee crisis, lower growth in the world’s second largest economy and the volatility triggered by higher interest rates in the US.
“On the economic front, there is … reason to be concerned. The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility,” she said. “Despite progress in recent years, financial sector weaknesses remain in many countries, and financial risks are now elevated in emerging markets.”
Ms Lagarde said China’s policymakers faced a “delicate balancing act” as they attemped to steer the economy towards consumption-led growth and away from “commodity-intensive investment”.
Ms Lagarde said: “They need to implement these difficult reforms while preserving demand and financial stability.”
The managing director urged central bankers to be “very clear” about their communications on raising interest rates. Janet Yellen, the chairman of the Federal Reserve, and Mark Carney, the Governor of the Bank of England, have stressed that they expect any rises to be gradual.
Benoit Coeure (ECB board member) also spoke on financial stability at the IMF conference, saying that low rates for a long time creates challenges. On inflation, he said it will come back to target only very slowly.
We grow more confident of our standing call that lending rate cuts hold the key to recovery. Our lead indicators continue to point to growth bottoming out very slowly. Yes, headline March quarter GDP growth surprised up at 7.5% due to a drop in subsidies. Yet, gross value added (GVA) – which is surely what we care about – skidded to 6.1% (6.7% BAMLe, 7% consensus) from 6.8% in December and 8.4% in September. In the old GDP series, March growth works out to about 5.2%. Investment also expectedly slipped to 33.1% of GDP from 33.7% in March 2014. On balance, we have cut our FY16 growth forecast marginally to 7.5% from 7.7%, slightly better than FY15’s 7.2%.
We expect the RBI to cut 25bp on Tuesday, pause for the Fed rate hike we expect in September and cut 50bp in early 2016. 20bp GDP cut: 7.3% FY15 growth, 7.5% FY16, 7.9% FY17 FY15 growth ended at 7.3% with the March quarter posting 7.5%. This, however, was driven by an 18.9% jump in net taxes. More importantly, GVA growth slowed to 6.1% from 6.8% in December. In the old GDP series, this works out to ~5.2%, somewhat below than the 6% we expected last year due to unseasonal rains. GVA slowdown was led by a contraction in agriculture (-1.4% from -1.1% in December) and services (8% from 11.1%), despite a pick-up in industry (7.2% from 3.8%).
Within services, the entire drop was accounted for by a deceleration in government services to 0.1% from 19.7% in December. Against this backdrop, we have cut our FY16 growth forecast to 7.5% (6% in the old series) in FY16 from 7.7%. FY17 is projected at 7.9% (7% in the old series). Recovery should be back-ended as lending rate cuts take 6 months to support growth. In fact, Pranob Sen, chairman, National Statistical Commission has told the media: “…I think there may be some cause to be pessimistic…you may be looking at something closer to 7%…” RBI to cut 25bp on June 2, pause, 50bp early 2016 The case for a 25bp RBI rate cut on Tuesday has strengthened with GVA growth disappointing. Inflation is well set on the RBI’s ‘under’-6% January 2016 target. In response, we expect banks to cut lending rates 25bp.
The following are the expectations for today’s FOMC minutes from the September meeting as provided by the economists at 15 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.
Goldman Sachs: The Fed will release the minutes from its September 17 meeting today. We will be looking for any indications regarding the timing of the Fed ‘lift-off’. Our economists have noted that FOMC guidance about the appropriate lift-off point now seems more unified than earlier in the year. Since the meeting, Chair Yellen and Presidents Dudley, Rosengren and Williams have all reiterated that they expect a rate hike before year-end.
BofA Merrill: The minutes of the September FOMC meeting are likely to be scoured for clues about how close the non-hike decision was and what the Committee needs to see in order to hike later this year. Relative to market expectations, which interpreted the statement as very dovish and are not pricing a rate hike until well into 2016, the minutes could appear somewhat hawkish.Several recent Fed speakers have emphasized that the September meeting was a very “close call,” and that conditions for liftoff are likely to be satisfied soon. Market participants will be looking for signs of how strongly held this view actually is, and what conditions – particularly on the global front – might derail that expectation. Our base case is that the Fed begins a very gradual normalization process with liftoff at the December meeting. In a nutshell, the debate in the minutes is likely to boil down to the continuing strength of the labor market recovery versus continued low inflation and risks to the outlook originating from abroad. If the Committee sounds fairly convinced that there has been sufficient improvement in the labor market to start normalization – perhaps some residual slack notwithstanding – then that would be a hawkish message for the markets. We expect a divided Committee on the issue of “hidden slack,” the cyclical nature of the low participation rate, and the signal to take from low wages.
Barclays: Since the September FOMC meeting, a number of FOMC participants have declared that the decision not to raise rates was “close”. We look to the minutes to provide some insight into this statement. We also look to the minutes for context on the new sentence inserted into the September statement acknowledging risks from “global economic and financial developments.” The minutes are likely to reveal the balance of sentiment between those members who preferred to look through these risks and those members who pushed to postpone any rate hike in an abundance of caution,” Barclays projects. “In addition, the minutes should reveal the number of members who are focused on economic activity abroad rather than just the financial market spillovers to the US. Keeping in mind that our call for March lift-off rests on both our forecast path of inflation and the FOMC’s growing concern about low US inflation, we will be attentive to members’ views on the prospects for inflation normalization in the external environment.
If you have been paying attention, you should not be shocked to hear that the Bank of England has left interest rates on hold. Again. Still, here is some insight as to what prompted that decision.
In its online summary, the BoE says:
Inflation is soggy
With inflation below the target, and the likelihood that at least some spare capacity remains in the economy, the MPC intends to set monetary policy so as to ensure that growth is sufficient to absorb any remaining underutilised resources.
It’s not all bad, but…
On the one hand, UK private final domestic demand, and consumer spending in particular, has been resilient… On the other hand, the on-going fiscal consolidation has had a restraining influence on activity and global growth has continued at below-average rates.
Wage growth just isn’t having the usual effect on inflation
Annual regular pay growth in the private sector has risen and now exceeds 3%. But encouraging improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation.
The usual press conference is due later in the day.
The downside risks to inflation have increased and we expect the National Bank of Poland to recognise this in their communication and we expect a more distinct dovish tone.
We see a rising probability, albeit still a minority case scenario, that the NBP will eventually ease monetary policy further next year. The upcoming elections and the potential fiscal changes after the elections leave the MPC erring on the cautious side.
Bank of America Merrill Lynch says the environment would have to deteriorate quite markedly to prompt more action.
Our economist, Mai Doan, expects the NBP to remain on hold in 4Q15 and in 2016. In her view, the necessary condition for the NBP to resume easing is a renewed downtrend in inflation, or a combination of prolonged deflation/lower inflation and significantly worse activity.
The MNI India Consumer Sentiment Indicator fell 3.2 per cent last month to 115.3, the lowest since the survey launched in November 2012.
Respondents were least optimistic about household finances. Its measures of current and future personal finances each fell to record lows. Nevertheless consumers were optimistic about buying big-ticket purchases.
“While the sharp rise in domestic stock prices since the start of 2014 is testament to the growing confidence investors have in India’s economic prospects, it is not a view shared by our panel of urban consumers,” said MNI, a unit of the Deutsche Börse Group.
Any level above 100 reflects optimism, so sentiment hasn’t deteriorated that much. And the Reserve Bank of India’s surprisingly large 50 basis point cut to interest rates last week could offer a spring back to India’s step as soon as next month.
“Most observers tend to agree that the long-term outlook for India is positive, with equity markets having taken their cues from a wave of Modi optimism,” said Philip Uglow, chief economist of MNI Indicators. “Seen through the eyes of our survey respondents, though, the short- to medium-term outlook looks less compelling, with consumer confidence at a record low and little sign of a quick turnaround.”
India’s Sensex equities benchmark was trading 0.5 per cent higher on Tuesday morning in Mumbai.