The improvement in India's February industrial growth was largely limited to solid growth in electricity output that accelerated to 9.6% y-o-y, the highest since September 2015. However, the remaining industrial sub-sectors indicated much weaker growth, with manufacturing output up by a mere 0.7% y-o-y. Meanwhile, on a sequential month-over-month basis, the country's headline industrial production index declined by 0.9% from January.
March CPI inflation dipped below 5.0% to 4.8% y-o-y from an upwardly-revised 5.3% rate in February. For a second month, food prices declined 0.1% m-o-m, seasonally adjusted, pushing annual inflation down further to 5.3% y-o-y from 5.5% in February.
The Indian Meteorological Department released its first forecast of the upcoming monsoon and it seems the prospect of a normal/above-normal monsoon season after successive droughts should come as welcome relief to policy-makers. The monsoon forecast has implications for monetary policy. Wholesale prices came in below expectations in March, with deflation of the wholesale price index (WPI) at 0.9% y-o-y, led by a downside surprise in electricity prices, which have a 3.45% weight in the WPI.
India’s monthly trade deficit narrowed to a five-year low of $5.1 billion in March from $6.5 billion in February, helped by seasonality. Exports and imports excluding oil and gold both stabilized after losing momentum in the 4Q15. India's merchandise imports stood at just $27.8 billion in March, down 21.6% y-o-y. Foreign purchases of gold declined by 80.5% y-o-y to a 28-month low of $973 million. Falling global trade and fierce competition from weaker currency exporters have caused Indian exports to decline in 2015/16, resulting in the country's longest period of exports contraction to date exceeding even that of the financial crisis of 2008-09. Thus, even a slight improvement in March would be unlikely to revive exports in the coming months.
Net FDI inflows have increased sharply in last two years helped by government policy and have supported the macroeconomic backdrop. India has witnessed a sharp rise in net FDI in the last couple of years. According to the latest JP Morgan weekly report, net FDI, after hitting a bottom of 0.5% of GDP in FY 2011 (that is, the year ending March 2011) increased to 1.6% of GDP in FY 2015 and, based on the trends of the past months, it is expected to rise further to 2.4% of GDP in FY 2016.
After disappointing results for three successive months, industrial production finally offered surprising results in February with a trend to the upside, rising to 2% y-o-y growth, significantly above expectations.
Indian manufacturing output growth reached a four-month low in April, indicating no fundamental change in underlying demand. The PMI slowed to 50.5 in April, up from 52.4 in March, as it was pulled down by weak orders. The new orders sub-index stood at 50.2, falling from at 53.9 in March. Growth in export orders also slowed, with the relevant sub-index at 50.9, which is only slightly above the threshold mark that indicates expansion. Manufacturing PMI data continue to reflect the ongoing challenges faced by Indian factories. Recent policy rate cuts and a host of liquidityboosting measures by the Reserve Bank of India (RBI) should help to ease financing pressures but will not address other relevant issues, indicating that a sustained recovery in India's manufacturing growth remains elusive. The GDP growth expectation for 2016 remains unchanged at 7.5%.