Nomura says its heat-map of high-frequency data indicates that the economic recovery remains uneven and divergence between weak private investment and rising consumption (urban) and slowing industry against a relatively robust service sector continues.
The Composite Leading Index of Nomura, which has a two-quarter lead over non-agricultural GDP growth, suggests that non-agricultural GDP growth could moderate slightly in Q2 and Q3 2016. "However, we believe that a normal monsoon, forthcoming seventh pay commission pay hikes and continued public capex should support GDP growth towards end-2016. We expect GDP growth to recover to 7.8% in 2016 from 7.3% in 2015," it added.
Citing its RBI Policy Signal Index that has moved in to neutral zone, Nomura says, the recent pickup in inflation, along with higher oil prices has reduced the probability of further near-term rate cuts and it believes rates will remain on hold until end-2016. The Nomura RBI Policy Signal Index (NRPSI), which measures the relative probability of near-term monetary policy tightening or loosening rose to -0.15 in mid-May, from -0.21 in March. Historically, NRPSI values lower than -0.2 coincide with a rate cut, while values between -0.2 and zero correspond to policy rates staying on hold.
"Apart from the upside risk to inflation from the seventh pay commission, constant food price pressures and still sticky underlying (core) CPI inflation at slightly above 5% indicate that achieving the RBI's 5% inflation target cannot be taken for granted. Moreover, most of the cyclical factors (oil price falls, rural wage growth deceleration and growth slowdown) that drove disinflation are behind us, leaving little potential for a significant downside. Therefore, we believe that instead of cutting rates further, the RBI will focus on improving liquidity to enable faster transmission of 150bp rate cuts already delivered," the report added.
Nomura says, its economic heat-map of high-frequency data, where the green shading denotes high growth and red shading denotes low growth, shows that the divergence between weak investment (private sector) and rising consumption (urban) and slowing industry vs robust services continues to characterise the economy.
"Drivers of growth are limited, namely urban consumer demand and transportation services. The good news is that green-shoots are visible in external demand (non-oil export volumes and visitor arrivals) and certain infrastructure sectors (cement and power), although both are still at very low levels. Meanwhile, rural demand remains weak, while private investment is yet to show any signs of recovery, which is not surprising given subdued external demand, low capacity utilisation and high leverage in several sectors. Note that the contraction in passenger car sales (indicator of urban demand) and pick-up in two wheeler sales (indicator of rural demand) in Q1 2016 have been driven by one-off factors and do not signal a trend," it added.
Nomura's Monthly Activity Indicator, a weighted average growth indicator combining high-frequency data in the economic heat-map, stood at 8.3% in March, compared with 8.6% in February and an average rise of 8.1% in H2 2015, indicating stable growth in Q1 2016. However, Nomura says, "...going ahead into Q2 and Q3 2016, we see non-agricultural growth consolidating at slightly lower levels. Nomura's Composite Leading Index (CLI) for India, which has a two-quarter lead over non-agricultural GDP growth, is pointing to a slight moderation in non-agricultural growth momentum into Q3 2016, owing to tighter financial conditions and slowing industrial recovery (Figure 2)."
The Nomura Economic Surprise Index for India (NESII 2.0) slipped into the negative zone to -0.05 in mid-May from +0.28 in mid-April, indicating that incoming data have surprised negatively relative to consensus expectations. "CPI inflation was significantly higher than expected owing to higher food prices, while industrial production disappointed in its latest (March) reading. In our note last month, we had highlighted that NESII tends to be mean-reverting and as it was close to +1 standard deviation, there was a strong likelihood of negative data surprises. The trend of negative data surprises could continue in the near term," it added.