Calendar year 2013 was characterized by rising inflation and falling growth and this impacted the INR as well as bond yields. Inflation as measured by the WPI (Wholesale Price Index) and CPI (Consumer Price Index) rose to calendar year highs in 2013 at levels of 7.5% and 11.2% while GDP growth fell to levels of below 5% growth seen in fiscal 2012-13. The INR crashed to all time lows of Rs 68.80 against the USD on the back of rising inflation, falling growth and high current account deficit that saw record highs of 4.8% of GDP for fiscal 2012-13. The INR closed down over 12% against the USD in calendar year 2013.
Government bond yields closed the year 2013 higher by 80 bps on the back of rising inflation and weakening INR. RBI flipped flopped on policy rates, first by lowering it in the first half of 2013 and then raising it in the second half. RBI’s change in policy stance took its effect on the government bond market that saw bond yields rise sharply by 150bps from lows seen in 2013.
How will 2014 look for India’s macro? The latest data shows some positive signs and some negative signs. Inflation for December 2013 has come off from levels of 11.2% to 9.87% for the CPI while the WPI is expected to show a decline from 7.5% to 7%. The fall in headline inflation is largely due to fall in food prices that have come off sharply from highs. Vegetable prices that rose 60% year on year as of November 2013 fell 19% in December 2013 leading to fall in headline inflation numbers.
Core inflation that is inflation adjusted for food and fuel were at levels of 3% and 8% for WPI and CPI respectively. Low core inflation suggests that demand is weak in the economy as seen by the negative 0.2% and 0.6% growth in the IIP (Index of Industrial Production) and manufacturing index for the period April-November 2013. Consumer durables index showed a 12.6% decline in the April-November 2013 period. Passenger car sales declined in 2013, the first time in a decade, as weak economy and high interest rates hit consumer sentiments.
The current account deficit (CAD) is expected to decline by over 40% for fiscal 2013-14. Trade deficit that is down over 20% on the back of rising exports and falling imports is helping the CAD come off. Falling CAD is positive for the INR that has gained 10% from lows against the USD and could stabilize further on the back of improved capital flows.
A stable INR would help the RBI hold rates or even lower it if inflation is seen to come off sharply even as growth weakens. RBI would ensure good liquidity in the system for banks to improve credit growth that is trending at 14.5% levels year on year as of December 2013. The FCNR B inflows of over USD 30 billion has helped shore up banking system liquidity with bank deposits growing at 15.9% year on year as of December 2013.
A stable government at the center post the elections that will be held in April-May 2014 would help the economy if the government adopts strong economic policies.
2014 looks to be promising for the economy but many hurdles still remain.
Green shoots are emerging except in China
US revised its third quarter 2013 economic growth to 4.1% from earlier revised estimates of 3.6%, largely on the back of rise in inventories by 0.4% and increased consumer and business spending. Consumer spending rose 2% while business investment in software rose 5.8% and exports rose 3.9%. The US economy grew at 1.1% and 2.5% in the first two quarters. US economy added 74,000 jobs in December 2013, well below expectations of 197,000 job additions. November job additions were revised upwards to 241,000 from 203,000. Unemployment rate in the US fell to over five year low levels of 6.7% in December against 7% levels seen in November. The Fed in its December 2013 meet announced a taper of USD 10 billion from its USD 85 billion a month asset purchase program and is likely to continue with its calibrated taper in 2014.
Eurozone third quarter 2013 GDP rose 0.1% while unemployment rate held at 12.1% in November 2013. Eurozone CPI printed at 0.8% in December 2013 against 0.9% levels seen in November. Eurozone economy is coming out of recession but falling CPI is a worry and that would spur the ECB to maintain rates at record low levels of 0.25%.
China exports rose 4.3% in December 2013 against a rise of 12.7% seen in November. CPI rose 2.5% in December 2013, a seven month low, against 3% rise seen in November. China is undergoing a painful process of stabilizing an economy that has seen excesses in a controlled environment. China reforms on interest rates have taken up bond yields sharply higher and the economy will take a while to adjust to the higher rates.
Japan’s CPI rose to a five year high of 1.2% in November 2013, the sixth month of consecutive rise. Japan’s exports rose 18.4% in December and its trade deficit widened as imports rose 21.1%. Japan recorded its 17th straight month of deficits in November 2013. The Yen is trading at multi year lows against the USD and Euro and is helping Japan in its fight against deflation and low growth.
Table 1: Economic Data