There seems to be some good news coming on the infrastructure growth front. May core sector output recorded sharply higher at 5.1% led by steel and electricity. In fact, steel output growth at 19.9% and electricity growth at 7.2% were the two key drivers of sharply higher core sector growth for the month of May. The core sector accounts for over 40% of the IIP and hence it is a critical signal for the IIP and the GDP in the coming months. However, the production growth in crude oil, refinery products and fertilizers remained in negative zone. The sharp rise was also due to the base effect.
Private sector weather forecaster, SKYMET, expects heavy rains in July after driest the June in last 4 years. According to SKYMET, June 2019 was the driest that India had witnessed since 2015 with the pan-India rainfall deficit at close to 33%. With the Australian Met withdrawing the El Nino alert, SKYMET does expect heavy rains in the month of July, although it may have still delayed the cropping season. Weak cropping normally impacts Kharif output and escalates food inflation. That could have larger implications for cost of inputs and also for the RBI monetary policy direction.
After a spurt in GST collections in the last 3 months, GST collections again dipped below the Rs.1 trillion marks for the month of June 2019. The GST collections for June came in at just Rs.99,939 crore. India needs to average nearly Rs.120,000 crore monthly to be able to meet its budget targets for GST collections. It is in this light that the GST Council is launching GST 2.0 which will simplify rules, rationalize rates and tighten compliance in order to improve GST revenues. This year, with rising fiscal deficit risks, the government will be counting on the GST collections to make up for shortfalls.
OPEC and Russia agreed to an extension of the oil supply cut of 1.2 million bpd through the year 2020. That means the oil markets will be short of supply at least for another year. Meanwhile, smaller OPEC members like Iraq and Iran have demanded better control over inventories to ensure that the oil market is balanced and sharp fluctuations are avoided. While OPEC and Russia jointly control nearly 45% of output, they still don’t have control over inventory shifts. Smaller OPEC members like Iran and Iraq have been unhappy with Saudi directly interfacing with Russia on crucial oil supply and pricing issues.
Sensex bounced close to 300 points on relaxation of Sino-US trade tensions. Even the Nifty settled above the 11,850 mark. With Trump and Xi Jinping agreeing to tone down the trade war, most emerging markets celebrated a possible return to growth. For the Indian markets, this also opens the doors for adopting a more dovish monetary stance to give the much needed boost to its manufacturing and export growth. Meanwhile, ahead of the Union Budget, foreign investors have been demanding a consumption boost and NBFC resolution in the Budget. High frequency data points like auto sales and air ticket sales are hinting at a slowdown in demand, which needs to be addressed. FIIs also want the budget to address liquidity crisis that has been plaguing the financial sector in India.
In a move that was long overdue, Nirmala Sitharaman has called for more powers to RBI to regulate the shadow banks. However, the government is unlikely to infuse fresh funds into these shadow banks to rescue them. RBI had earlier suggested to the government to bring these shadow banks / NBFCs under greater regulatory and supervisory scrutiny and subject them to reserve requirements. The last time NBFCs had been brought under a strict regulatory regime was in 1998 when the number of NBFCs in India had dwindled from 40,000 to just 5. Government may be more careful this time around.
