Inflation is finally trending higher

Inflation is finally trending higher, helped by food inflation. Retail inflation touches 5-month high level of 2.86% for March 2019. After a gap of nearly five months, the food inflation moved from negative territory to positive territory. However, fuel inflation and even core inflation (excluding food and fuel inflation) continued to be at elevated levels. The RBI has set an inflation target of 4% for the long term with a leeway of 2% either ways. CPI inflation is one of the key inputs for RBI rate action. The good news may be that the farmers are finally getting a good price; at least that is the hope.

Growth continues to lag making a case for further rate cuts by the RBI. Index of Industrial Production (IIP) grew at just 0.1% for February 2019. IIP numbers almost stagnated at 0.1% against the market consensus estimates of close to 2% growth. For the 11 month period from April 2018 to February 2019, the IIP figure stood at 4%; 30 bps lower than the previous year corresponding figure. The biggest pressure on IIP came from negative growth in manufacturing which accounts for a bulk of the IIP basket. The RBI may still wait for better transmission before taking on further rate cuts.

The US withdrawal of GSP benefits for India may come right in the middle of the election season, something India may want to avoid. In fact, US senators have warned against withdrawing GSP benefits to Indian exporters. The General System of Preferences (GSP) which allows India to export goods worth $5.6 billion under concessional tariffs is likely to be scrapped by Trump in the first week of April. US senators have argued against this move because the GSP with India has been around since the 1970s and the withdrawal of GSP would make products costlier; at least where India has the pricing power.

Is the great Indian steel story under threat once again? India has become net steel importer for the first time in 3 years. For the fiscal year 2018-19 India became a net importer of steel after losing market share in its traditional global markets. Finished steel exports fell by 34% to 6.36 million tonnes while imports were up by 4.7% at 7.84 million tonnes, making India a net importer. China, Japan and Korea took away a bigger share of steel demand in Africa and Middle East and also exported to India. India needs to urgently address this loss of competitiveness to lower costs in China and Japan.

Brent continued its upward journey even as rupee weakened. Meanwhile, Russia and OPEC may soon opt to drop supply cuts and fight for market share, which they have recently ceded to the US. Analysts believe that such a move may push oil prices down again. However, on Friday there was little impact with oil prices closing at $71.55/bbl after touching a high of $71.87. Meanwhile, the Indian Rupee weakened after 3 days of gains to 68.92/$ on Arcelor flow concerns. After 3 days of rapid gains in the rupee, the currency gave up value on Friday after the Supreme Court order on Arcelor Mittal meant that the inflow of $6 billion for the NCLT acquisition would get delayed.  The rupee had actually strengthened on the back of the expected flow. The next round of dollar swap auctions is on 23rd April.

IN a hint that the RBI may increasingly look beyond repo rates, the RBI governor underplayed the role of traditional monetary tools. Das underlined that the global financial crisis had highlighted the limitations of traditional monetary tools like rates and liquidity. According to Das, there was no sanctity in the 25 bps rate shift and it could be higher or lower. Speaking at the IMF Convention, Das said governments must focus more on the use of real fiscal tools to address economic challenges rather than monetary tools alone. It also meant that RBI could look at higher or lower shifts in repo rates.