Vijay Kumar Gaba

July CPI Inflation Jumps to 7.4% on Food Prices (CARE Ratings)

Retail inflation has sustained its upward trajectory for the second consecutive month, surging to 7.4% in July from 4.9% in the previous month. Consequently, the Consumer Price Index (CPI) inflation has breached the Reserve Bank of India's (RBI) target range for the first time since February 2023. This marks the highest reading observed since the peak in April 2022 at 7.8%. The notable surge in vegetable prices and elevated inflation in other food categories such as cereals, pulses, spices, and milk have driven this increase. Notably, the contribution of food and beverages to the overall inflation has risen significantly to 65%, surpassing their weight in the CPI basket.

Specifically, vegetables alone have contributed nearly 30% to the headline inflation figure, despite having only a 6% weight in the CPI basket. Encouragingly, the core inflation has moderated to 5.1% in July, down from 5.3% in June, thereby falling below the headline inflation rate for the first time in four months.

Concurrently, the data on wholesale inflation released earlier today showed the continuation of the deflationary trend. The wholesale price index contracted 1.4% in July. The divergent trend between the two inflation measures is primarily because of the compositional differences. WPI inflation is largely influenced by global commodity prices which have been on the declining trend. Furthermore, in comparison to the CPI basket, the WPI basket gives nearly one-third of weightage to food items. Consequently, any fluctuation in food prices has a greater impact on the CPI inflation.

Food and beverages inflation (CPI) surged to 10.6% in July, the highest in about 3.5 years. Within the group, inflation in sub-groups such as cereals (13%), milk (8.3%), pulses (13.3%) and spices (21.6%) continued at elevated levels. However, the main culprit for the upswing in food inflation was a significant increase in vegetable prices during the month due to a combination of factors including high temperatures, erratic rains and virus outbreaks. Additionally, flooding in certain areas due to heavy rains also resulted in transportation and logistical challenges adding to the price pressures. Vegetables witnessed a 37% (y-o-y) inflation in July from a marginal deflation during the previous month.

Way Forward

Even though the rise in vegetable prices is transient, the sustained price pressures in categories like cereals, pulses, spices, and milk can keep food inflation elevated in the near term. Higher food prices for longer could impact households’ purchasing power and dent consumer sentiment. This could have a bearing on the growth prospects, especially amid external headwinds and uncertainty regarding rural recovery. The RBI is aware of these challenges and will closely monitor these evolving trends to decide on its future policy course.

However, given the supply-driven nature of these inflationary pressures, RBI has limited space to act. Hence, the government’s timely supply-side interventions are essential to close the supply-demand gap before the upcoming festive season.

Though the moderation in core inflation is reassuring, the possibility of elevated headline numbers in the upcoming months has pushed the expectation of a rate cut by the RBI to the next fiscal.

 

Goods trade deficit widened in July (Kotak Securities)

July goods trade deficit widened to US$21 bn while the services surplus remained firm at US$12.3 bn. In FY2024, we continue to see the current account buoyed by a narrowing goods trade deficit, and steady services surplus. However, we see non-oil imports being relatively stronger than nonoil exports and, hence, revise up our goods trade deficit estimate. We revise our FY2024 CAD/GDP estimate to 1.4% (from 1% earlier).

Lower oil exports weighed on July exports; non-oil exports marginally higher Exports in July contracted 16% yoy to US$32.3 bn (June: US$34.3 bn), led by a sharp fall in oil exports to US$4.6 bn (June: US$6.8 bn). Non-oil exports increased only marginally to US$27.7 bn (June: US$27.5 bn)—lower by 8.3% yoy (Exhibits 3-5). Non-oil exports were propped up by engineering goods, and organic and inorganic chemicals (Exhibit 6). Further, in 4MFY24, engineering goods were the top export, followed by gems and jewelry, and organic and inorganic chemicals (Exhibit 7). The sharp fall from July 2022 reflects the impact of lower commodity prices and gradually weakening global demand.

Imports remained broadly steady in July July imports, at US$52.9 bn (June: US$53.1 bn), declined by 17% yoy. Non-oil imports were higher at US$41.2 bn (June: US$40.6 bn), but it was offset by lower oil imports at US$11.8 bn (US$12.5 bn). Non-oil imports were buoyed by electronics and machinery imports, while gold imports contracted sequentially (Exhibit 6). Further, in 4MFY24, main imports were electronic goods, machinery, coal, coke and briquettes, and gold. Consequently, the July trade deficit widened to US$20.7 bn (June: US$18.8 bn). The trade deficit in 4MFY24 stood at US$77 bn (4MFY23: US88 bn)

Credit-Deposit Ratio Falls, HDFC Merger Pushes Credit Growth (CARE Ratings)

Credit offtake continued to show robust growth, increasing by 19.7% year on year (y-o-y) to reach Rs. 148.0 lakh crore for the fortnight ending July 28, 2023. This surge continues to be primarily driven by the impact of HDFC’s merger with HDFC Bank, as well as growth in personal loans and NBFCs. Meanwhile, if merger impact is excluded, credit grew at a lower rate of 14.7% y-o-y for the same fortnight.

•      Deposits too witnessed healthy growth, increasing by 12.9% y-o-y for the fortnight (including the merger impact). On a pro forma basis, deposits grew by 12.3% y-o-y during the same period. The growth in deposits has not been at the same pace as credit since the larger proportion of liabilities of HDFC was by way of borrowings rather than just deposits.

•      The outlook for bank credit offtake remains positive, with a projected growth of 13-13.5% for FY24, excluding the merger's impact.

•      Deposit growth is expected to improve in FY24 as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.

•      The Short-term Weighted Average Call Rate (WACR) stood at 6.39% as of August 04, 2023, compared to 4.72% on August 05, 2022. Banking system liquidity remained in surplus through the month, at an average monthly surplus of around Rs 1.7 lakh crore in July. A temporary provision of incremental cash reserve ratio for SCBs was introduced to manage liquidity, CareEdge Economics expects this new measure to absorb liquidity worth Rs 1 lakh crore from the system which is also likely to impact short term rates.

The outlook for bank credit offtake remains positive, supported by factors such as economic expansion, increased capital expenditure, the implementation of the PLI scheme, and a push for retail credit. CareEdge estimates that credit growth is likely to be in the range of 13.0%-13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments in FY24. However, elevated interest rates and global uncertainties could potentially impact credit growth in India.

1QFY24 Results Review

Motilal Oswal Securities (MOFSL)

After a solid 23% earnings CAGR over FY20-23, Nifty posted 32% earnings growth in 1QFY24, a beat vs. our expectations of 25%. MOFSL Coverage Universe recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals, such as BFSI and Auto. Healthcare has made a strong comeback with 24% earnings growth after six consecutive quarters of flattish earnings.

·         MOFSL Coverage Universe recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals (such as BFSI and Auto). BFSI coverage universe recorded a 60% YoY profit growth while Auto posted a significant profit of INR179b (vs. a profit of INR13b only in 1QFY23). OMC's profitability surged to INR305b in 1QFY24 vs. a loss of INR185b in 1QFY23 due to strong marketing margins. Healthcare made a strong comeback with 24% earnings growth after six consecutive quarters of flattish earnings. Around 15 of 21 sectors have either met or exceeded expectations.

·         We raise our FY24E Nifty EPS by 2.5% to INR988 (earlier: INR964) due to notable earnings upgrades in TTMT, JSTL, Bharti, SBI, and KMB. We now expect the Nifty EPS to grow ~22%/16% YoY in FY24/ FY25

The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was largely balanced as 36% of the companies beat our estimates, while 38% missed estimates at the PAT level. For MOFSL Universe, however, the earnings upgrade to downgrade ratio has also been a bit unfavorable for FY24E as 66 companies have reported earnings upgrades of >3%, while 76 companies’ earnings have been downgraded by >3%. EBITDA margin of MOFSL Universe (ex-Financials) rose 330bp YoY to 17.6%.

Heavyweights drive the quarter: Earnings performances of both MOFSL Universe and Nifty were led by heavyweights. The top five companies within MOFSL Universe contributed 84% to the incremental YoY accretion in earnings (three OMCs contributed 59%, followed by SBI – 13% and Tata Motors – 12%). Similarly, within Nifty, five companies (BPCL, SBI, Tata Motors, HDFC Bank, and ICICI Bank)

Key sectoral highlights – 1) Technology: IT Services companies reported weak performance in 1QFY24 with flattish median revenue growth QoQ in CC, in an otherwise seasonally strong quarter. The weakness in key verticals continued through 1Q with BFSI and Retail reporting a median USD revenue decline of 1.2% and 0.4% QoQ, respectively. 2) Banks: The banking sector posted a mixed 1QFY24, driven by healthy loan growth and sustained improvement in asset quality; however, margin trajectory reversed due to a sharp rise in funding costs. 3) NBFCs – Lending: Most of the NBFCs (except HFCs) reported a sequential contraction in NIM, surpassing our initial projections. For a majority of the NBFCs, the principal reason behind this NIM compression was the substantial increase in borrowing costs. 4) Auto: The quarter saw upgrades for FY24E largely to factor in the benefits of better gross margin, thus aiding overall profitability and commentaries related to a sequential improvement in exports. 5) Consumer: The overall performance of MOFSL Universe was a mixed bag with a few companies reporting healthy volume growth while others posted healthy value growth during the quarter.

The top earnings upgrades in FY24E: JSW Steel (34%), Tata Motors (28%), Dr Reddy’s Lab (15%), Bharti Airtel (13%), and M&M (10%).

The top earnings downgrades in FY24E: Tech Mahindra (-10%), UPL (-7%), Tata Steel (-5%), Apollo Hospital (-5%), and HUL (-4%).

 

China: PBoC cuts rates amidst data weakness (ING Bank)

Rate cuts show that concern is mounting The 15bp cut to the medium-term lending facility (MLF) was unexpected. Almost all forecasters expected China's central bank, the PBoC, to wait until September to cut again. MLF lending volumes of CNY401bn were in line with expectations. The PBoC also cut the seven-day reverse repo rate by 10bp, which now stands at 1.8%.

The market responded abruptly. The CNY rose to close to 7.29 immediately after the decision, though eased lower soon after. And 10Y Chinese bond yields dropped about 6bp to 2.56%. From a macro perspective, today's policy decisions are somewhat helpful. They will help improve the debt-service ability of cash-strapped local governments and property companies. But this isn't a game-changing outcome, and so we doubt that market sentiment will dramatically improve just on this.

Activity data remains extremely poor The activity data release contained no bright spots, and quite a few downside surprises. Perhaps the worst of these was the 2.5% YoY growth in retail sales. This has declined sharply from an admittedly base-effect inflated 18.4%YoY growth rate in April as the re-opening briefly led to a retail sales surge. Now the idea of a consumer-spending-led recovery is looking very vulnerable. In year-on-year terms, industrial production slowed to 3.7% YoY, from 4.4% in June. Year-to-date, production growth remained at 3.8% for the second month. Property investment slowed at a faster pace in July, falling at an 8.5%YoY pace, weaker than the 7.9% YoY decline achieved the previous month. Property sales growth also slowed to almost a standstill in July, rising at only 0.7% YoY YTD, down from 3.7% in June. And fixed asset investment slowed to 3.4% from 3.8% YoY YTD. Topping all of this off, the surveyed unemployment rate rose to 5.3%.

What does this mean for policy?

The question of the day based on the number of times it has been posed to this author is "Does this mean the PBoC will undertake Quantitative Easing (QE), and if so, when?" At the current juncture, QE does not seem to be the right response to what we are seeing. Nor does a large dollop of fiscal stimulus.

China is undergoing a painful transition to a less debt-fuelled, less property-centric and more consumer-driven economy. An "emergency" policy like QE that primarily inflates real and financial asset prices does not appear to have a strong role to play here. QE would also put the CNY under further weakening pressure, which it is very clear the PBoC does not want and would make it much harder for them to manage the CNY. It would also raise the risks of capital outflows, which they will also be keen to avoid.

More policy measures will be needed and more will certainly be delivered. The PBoC has not ended the rate-cutting cycle yet, and there will be further iterations of policy rate cuts along the lines of what we have seen today.

As for government stimulus policies, these, we think, will tend to be along the lines of the many supply-side enhancing measures that we have already seen. The way through a debt overhang is not to print more debt, though it may be to swap it out for lower-rate central government debt, or longer maturity debt to ease debt service. Enhancing the efficiency of the private sector will also play a key role, though this and all the supply-side measures will take a considerable time to play out.

The tiresome chorus clamouring for more stimulus is unlikely to stop in the meantime. And we will continue to see weak macro data for the foreseeable future. It is a necessary part of the adjustment and is far preferable to resurrecting the debt-fuelled property model that propelled growth previously. But we do need to lower our expectations for China's growth.