3QFY GDP at 7% surprises positively, belying concerns of meaningful hit due to demonetization. Higher than expected agricultural production and Government spending provided an offset. More importantly, Central Statistical Organization maintained its full year GDP growth estimate at 7.1%, same as its first estimate in early January, which captured no impact from currency ban.
Union Budget FY18 broadly met expectations a) Provided a mild fiscal stimulus – fiscal deficit targeted at 3.2% of GDP for FY18; b) Government’s targeted capital spend is up about 14% YoY; c) Personal income tax rates have been reduced for low income segments; d) Indirect taxes have been left largely unchanged given impending GST roll out. Overall the fiscal math appears credible, with nominal GDP growth budgeted at 11.75% and tax collections expected to increase by about 12% Y/Y. Divestment receipts at INR725 bn do appear a tad stretched though as do petroleum subsidies at INR250 bn. But higher dividends from RBI and better tax buoyancy can provide a leg up.
Re-monetization is progressing well- RBI significantly eased cash withdrawal limits imposed following the demonetization exercise. Withdrawal limits have been increased to Rs50,000 per week from 20 February vs. the Rs24,000 earlier. The restrictions will be completely withdrawn from 13 March onward. Further, we note that Rs9.9 trillion, i.e., 65% of the withdrawn currency is back in circulation in the system.
FX reserves remain largely stable at US$362bn.
CPI Inflation eased to low of 3.2% on lower vegetable prices. WPI although spiked on firming commodity prices.
RBI has kept benchmark rates on hold vs expectations of a 25 bps cut In the February monetary policy review. More importantly, the Central Bank changed its liquidity stance to “Neutral” from “Accommodative,” signaling an end to the easing cycle. Monetary Policy Committee highlighted the stickiness of core inflation (non-food, non-fuel inflation at 4.9% levels) and pointed to increasing upside risks from firming international crude prices, FX volatility and full flow-through of Pay Commission recommendations. MPC maintained headline inflation target of 4.0% on a durable basis.
10 year benchmark yield increased by 47bps to 6.9% levels. INR appreciated by 1.6% to 66.7 (vs. USD) with FII turning buyers of Indian equities and debt after four months.
Domestic high frequency economic indicators remain mixed with PMI & auto sales improving; while IP saw sharp deceleration. 3QFY Earnings performance was weak for domestic sectors given demand hit due to demonetization; while global cyclicals fared well.
Nifty was up 3.7% in February. Equity market performance was supported by a credible Union Budget for FY18E, corporate action by some index heavyweights and receding concerns on growth due to demonetization. Key outperforming sectors were – Energy, primarily Reliance Industries, on telecom tariff announcement and IT sector on expectations of stock buybacks. Consumer Discretionary underperformed on 3Q FY earnings miss from select companies; while Utilities and Materials also lagged after the sharp run up seen recently.
FIIs were buyers of US$1.5 bn of Indian equities in February, after four consecutive months of outflows. DIIs were marginal buyers at US$140 mn led by buying from insurance companies.
Note: The above data has been generated from sources in public domain.