The Signal: The Week & More

1. High Oil Import cost drags fiscal deficit

Exports for the month of June were at USD 32.5 Billion as compared to USD 21.91 Billion in June 2020, exhibiting a positive growth of 48.34%, wherein Imports stood at USD 41.87 billion which exhibited a growth of 98.31%. The substantial rise in imports was led by the oil imports which grew from USD 4.93 Billion in June 20 to USD 10.68 Billion in the current month.

Global rise in prices of Brent has been a key factor in the value of oil imports in the country. The global Brent Prices have increased by 83% in June 2021. As compared to June 20. The rise in exports in gems, chemicals and petroleum products signal a positive trend for the country. RoSCTL scheme extension for textile exporters is expected to further boost the exports of the country

2. CPI still above RBI’s risk tolerance

CPI Inflation for the month of June 2021 came in at 6.26% slightly lower than 6.30% in May 2021.The inflation stood above RBI’s tolerance level for the second straight month on the back of elevated price pressure across food and fuel segment. Food Inflation in June accelerated to 5.15 percent in June as opposed to 5.01 percent in May

A few members of the RBI’s monetary policy in conjunction with the US Fed have acknowledged the high inflation pressure is here to stay for the next couple of months as economies are opening up. In the Indian context the Kharif harvesting season can be a deciding factor for the RBI’s further monetary policy action.

3. IIP rises on abnormal base impact

IIP growth in May 2021 stood at 29.3% driven by an abnormal base effect. The IIP Contracted 33.4% in the same period last year and hence the abnormal rise in IIP in the month of May 2021. Manufacturing sector output registered a growth of 34.5% as against a de-growth of (-) 37.8% last year, mining activity, saw 23.3% growth compared to a 20.4% contraction in the same month last year. Electricity generation growth stood at 7.5% in May as against a fall of 14.9% in the last year period

According to the use-based classification capital goods and consumer durables saw the worst slumps on account of localized lockdowns which hampered these spaces the most. Sequential opening up of economies would mean that the figures for the next month would not be as bad as May and the worst of second wave might be over. Going forward vaccination drives, government policies and demand side growth will be the path to the prominent economic recovery

4. WPI Update

The wholesale price-based inflation eased marginally to 12.07 per cent in June as a normalizing base helped the softening of growth in minerals, crude oil and food. In May 2021, the inflation was at a record high of 12.94 per cent.

Spill over effects of the WPI into the CPI need to be closely monitored to predict any policy changes which might come from the RBI. The WPI inflation is however expected to remain elevated for another quarter from here on as a large part of the inflation is on account of increase in price of metals and minerals

5. Retail Participation in Government Bond

The RBI introduced ‘RBI Retail Direct’ scheme which will aid retail investors to participate in government securities market directly. Under the scheme retail investors can open and maintain a Retail Direct Gilt Account to access primary issuance of government securities

The scheme which was well received by the bond markets when earlier announced will be key for the RBI to keep bond yields on check through retail participation in securities such as Treasury Bills, Sovereign Gold Bonds and State Development Loans. The retail participation in the government securities will be keenly watched by the bond market participants to gauge the further trajectory of bond yield.