GLOBAL UPDATE | INDIA UPDATE | INDIA INFRASTRUCTURE UPDATE

MONTHLY UPDATE JUNE 2016

CHALLENGING TIMES FOR GLOBAL ECONOMIES INDIA IN A COMPARATIVELY BETTER POSITION

32

Amid much anxiety over the issue, Brexit has finally

taken place, with immense politico-economic

repercussions for the EU and Britain, as well as for

financial markets across the globe. Post Brexit, the British

pound tumbled to a 31-year low, while European stocks lost

7% – the biggest slide since the 2008 financial crisis. The

US dollar strengthened against the major currencies, while

gold prices rose 8% to $1,358.20 per ounce, the highest

since March 2014, as investors sought refuge in safe-haven

investments. Given the current state of affairs, an interest

rate cut of 25 bps and more quantitative easing can now be

expected from the Bank of England. The pound is likely to

depreciate, while the residential and commercial property

markets can expect short-term volatility. On the political

canvas, voices are raised that parliamentary supremacy

can/should overrule the referendum, but much depends

on the course of action the legislators take in the current

scenario. Voices are also for an exit of Scotland from the

UK. Previously, the European Central Bank in its policy meet

kept the key policy rates unchanged as inflation stayed still

below though close to the targeted 2%. The US Fed too kept

the key policy rates unchanged amid slower growth and

inflation staying below the targeted levels. The growth of the

Japanese economy stands revised from 1.7% in Q1 2016 to

1.9%; yet the economy follows a negative interest rate regime

as inflation lags at 0%.

The Reserve Bank of India kept the key policy rates unchanged

while staying determined to have an accommodative policy

and enhanced monetary transmission that would help in the

revival of growth. Inflation is firming up gradually with food

inflation, majorly in pulses and vegetables, being a significant

contributor. Concerns over rising food prices have prompted

the Finance Ministry to hold a high-level meet to review the

rise in food inflation. With rising inflation levels, there is less

likelihood that the RBI would cut the interest rates soon.

India is in a comparatively better position among the global

economies in terms of the rising growth trajectory and other

macro-economic fundamentals; however, challenges exist

for India too. Exports are picking up while manufacturing

continues to be a laggard and core sector industries, including

real estate and infrastructure, display sluggish growth. The

government’s steps to relax FDI norms in the key sectors are

expected to help a pick-up in investments. The passing of

a crucial legislation— the GST—is still to see the light of the

day. Rain showers in late June pulled the monsoon deficit

down to 11% during the month; much depends on the outturn

of the monsoon in the coming months.

CHALLENGING TIMES FOR GLOBAL ECONOMIES INDIA IN A COMPARATIVELY BETTER POSITION

RESEARCH MONTHLY UPDATE

54

GLOBAL UPDATEUS FED KEEPS THE KEY POLICY RATES UNCHANGED, DISAPPOINTING BOTH MARKETS AND INVESTORS The Federal Open Market Committee rendered the target

range for the benchmark federal funds rate unchanged

at 0.25–0.5%. The Fed noted that there is a pick-up in

economic activity, housing and exports; however, the pace

of improvement in the labour market still lags behind the

expected levels. It stated that interest rates are expected to

rise at a ‘gradual’ pace, though it did not make a specific

reference to any of the meets slated in the year for the next

hike.

EUROPEAN CENTRAL BANK (ECB) KEEPS RATES UNCHANGEDThe ECB, in its June policy meet, kept the interest rates on

the main refinancing operations, marginal lending facility and

the deposit facility unchanged at 0.00%, 0.25% and -0.40%

respectively. It will continue with its long-term refinancing

initiative. The eurozone inflation has surged from negative to

levels below but close to the targeted 2%. The Bank viewed

that its supporting decisions taken in early March have

translated into some degree of economic recovery in the

euro area and helped raise in the inflation level.

BREXIT HAPPENS, BRITAIN VOTES TO QUIT THE EUROPEAN UNIONAmid much anxiety preceding the polls, the Brexit vote

slated for 23 June 2016 tilted in favour of ‘LEAVE’, with a 52%

mandate by the voters. As Britain voted to leave the European

Union, financial markets across the globe witnessed spells

of volatility. The pound tumbled to a 31-month low against

the dollar at $1.3228, while European stocks lost 7% – the

biggest slide since the 2008 financial crisis.

RESEARCH MONTHLY UPDATE

Brexit portends immense politico-economic repercussions

for the EU and Britain, as well as financial markets across the

globe. The interest rate cut of 25 bps and more quantitative

easing is expected from the Bank of England, while the pound

is expected to stay muted. Short-term volatility is expected

in the residential and commercial property market. Spells of

instability and uncertainty in the financial markets, including

volatility in the pound sterling vis-à-vis the euro and the US

dollar are also expected.

For the first time since 2013, the yen firmed up over 100 per

dollar, while gold prices surged the most in more than seven

years.

JAPANESE ECONOMY EXPANDED 1.9% YOY IN Q1 2016, INFLATION STILL AT 0%The Japanese economy expanded 1.9% YOY in Q1 2016,

revised from a preliminary figure of 1.7%. According to the

Bank of Japan (BoJ), the economy is on a moderate recovery

despite sluggish exports and production, prompted by the

slowdown in the emerging economies.

76

In June 2016, oil prices moderated by 1.7%. Brexit had a limited impact on oil prices, though the prices witnessed some

volatility as investors coveted dollar and gold. However, the commodity has followed an upward momentum post the Brexit

shocks on a larger-than-expected fall in the US crude stocks.

RBI RENDERS KEY POLICY RATES UNCHANGEDIn its June policy meet, the RBI rendered the key policy

rates unchanged. The policy repo rate under the liquidity

adjustment facility (LAF) stays unchanged at 6.5%, while

the cash reserve ratio (CRR) of scheduled banks too stays

unchanged at 4.0% of net demand and time liabilities (NDTL).

So as to facilitate comfortable liquidity conditions for the

time being, the Bank also kept the reverse repo rate under

the LAF unchanged at 6.0% and the marginal standing

facility (MSF) rate and the Bank Rate at 7.0%. The Bank

stated that its stand is accommodative and that enhanced

monetary transmission is required to support the revival of

growth. It announced that it will review the implementation of

the Marginal Cost Lending Rate framework by banks. It also

stated that there is also a need to infuse capital into public

sector banks to help credit flow.

With inflation firming up, it is unlikely that the RBI will reduce

the key rates soon.

INDIA UPDATE

EUROPE BRENT SPOT PRICE ($/BARREL)

OIL

31/0

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01/0

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02/0

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43

44

45

46

47

48

49

50

51

52

53

$/ba

rrel

Source: U.S. Energy Information Administration

BoJ has decided to continue with a negative interest rate of

-0.1% to the Policy-Rate Balances in current accounts held

by financial institutions at the Bank.

Inflation as measured by consumer price index (CPI, all items

less fresh food) stands at about 0%, far below the targeted

2% level. Inflation expectations have actually weakened of

late, though they may firm up in the long term. BoJ declared

that it will continue with the ‘Quantitative and Qualitative

Monetary Easing (QQE) with a Negative Interest Rate’,

focused on achieving the inflation target of 2%, as long as

necessary.

RESEARCH MONTHLY UPDATE

98

RESEARCH MONTHLY UPDATE

INFLATION IIP (GENERAL INDEX)

IIP (SECTOR WISE)

6

4

2

0

1

3

5

-2

-1

-4

-3

-6

-5

WPI CPI

MAY

-15

JUN-15

JUL-15

AUG-15

SEP-15

OCT-15

NOV-15

DEC

-15

JAN-16

FEB-16

MAR-16

Annu

al R

ates

(%) b

ased

on

WPI

& C

PI

AP

R-1

6

MAY

-16

Sources: Ministry of Commerce and Industry, RBI

Source: Ministry of Statistics and Programme Implementation & RBI

INDEX OF INDUSTRIAL PRODUCTION (IIP) SHRINKS, MANUFACTURING A DRAGINFLATION FIRMING UP ON BACK OF FOOD INFLATION

In May 2016, retail inflation rose to 5.76% YOY from the

5.01% YOY recorded in the same month last year and from

5.47% recorded last month. The CPI inflation for last month

has been revised to 5.47% from the 5.39% estimated earlier.

Inflation in food moved up to 7.55% YOY in May 2016, as

against the 4.80% in the same month last year, and the 6.40%

YOY recorded last month. The firming up of food inflation is

resulting in the overall retail inflation strengthening. Core CPI

inflation too has firmed up a tad higher to 4.7% YOY in May

2016 from 4.6% in May 2015, though it has softened from last

month’s level of 4.9%.

With CPI inflation rising month by month, there is a less likely

chance that the RBI would cut interest rates, as, of late,

it is the CPI that the RBI refers to in its inflation targeting

exercise. We expect retail inflation to stay firm at around 6%

in the coming months. The performance of the monsoon

will remain crucial in lending stability to retail inflation and

particularly to food prices.

The annual rate of wholesale inflation that entered into

positive territory last month (after staying in the negative

for 17 months) has strengthened to 0.79% YOY in May 2016

from 0.34% in April 2016 and from -2.20% in May 2015. The

build-up inflation rate in the financial year so far stood at

2.34%, compared to 1.08% in the corresponding period of

the previous year.

The rise in prices of primary articles, particularly food articles

(pulses, sugar and vegetables) has been instrumental in the

firming up of the WPI. The rise in food prices has contributed

substantially to the WPI in May, with the WPI inflation in food

articles rising to 7.88% from 2.74% last year. Wholesale

inflation in primary articles (weight 20.12%) rose to 4.55%

from -1.05% last year; WPI inflation in fuel and power (weight

14.91%) and manufacturing products (64.97%) rose to -6.14%

and 0.91% in May 2016 from -9.43 and -0.52%, respectively,

in the previous month.

-4

-2

0

2

4

6

8

10

APR-15

MAY

-15

JUN-15

JUL-15

AUG-15

SEP-15

OCT-15

NOV-15

DEC-15

JAN-16

FEB-16

MAR-16

APR-16

YOY

Grow

th R

ate

(%)

-7

-5

-3

-1

3

5

1

7

9

11

13

15

MAR-16

APR-16

APR-15

MAY

-15

JUN-15

JUL-15

AUG-15

SEP-15

OCT-15

NOV-15

DEC-15

JAN-16

FEB-16

YoY

Grow

th R

ate

(%)

ELECTRICITY MANUFACTURINGMINING & QUARRYING

The industrial output shrank in April 2016 after edging up

briefly in the previous month. The IIP for April 2016 fell to -0.8%

YOY from that of 3% in April 2015. The cumulative growth

for the period April-March 2015-16 over the corresponding

period in 2014-15 is 2.4%.

The growth in the mining, manufacturing and electricity

sectors stood at 1.4%, -3.1% and 14.6% YOY, respectively,

in April 2016. The growth in these sectors during the

period April – March 2015-16 as compared to that in the

corresponding period of 2014-15 stands at 2.2%, 2.0% and

5.7%, respectively.

The overall industrial production has stayed muted. Poor

manufacturing remains a pressing concern. Only 13 out of the

22 industry groups in the manufacturing sector could post a

1110

CORE SECTOR SLIPS, INFRASTRUCTURE A WORRY

SENSEX

INDEX OF EIGHT CORE INDUSTRIES

S&P BSE SENSEX

positive growth in April 2016. The government’s resolve to

step up plan spending is likely to help the industrial sector

enhance its production. The outturn of the monsoon may

make or mar the sentiments, impacting a pick-up in the later

months of the year, especially with rural demand pushing up

industrial production.

The Sensex rose by around 1.25% in June 2016. After Brexit, the Sensex closed at 26,397.71, down 2.24%, or 604.51 points,

and also witnessed spells of volatility in the following intra-day trades, only to recover at the end of the month.

Sources: Department of Industrial Policy & Promotion (DIPP), GOI

Source: BSE

In May 2016, the Index of Eight Core Industries (which has

a 38% weightage in IIP) slipped to a five-month low. The

growth in the core sector slipped to 2.8% YOY in May 2016

from 8.5% last month and from 4.4% in May 2015. The

downturn has hit after a five-month trend of rising output in

the core sector. Its cumulative growth during April to May,

2016-17 made up 5.5%.

The maximum rate of growth in production has been

observed in fertilizers (14.8%), mainly attributed to the onset

of the kharif sowing season, followed by coal (5.5%) and

electricity (4.6%). The growth in the natural gas sector, which

had picked up, continues to stagnate (-6.9%) the most. This

is followed by a fall in the production of crude oil (-3.3%).

The underlining sluggishness in the real estate sector and

steel and cement production continue to lag behind at

subdued growth rates of 3.2% and 2.4%, respectively – a

downturn from their last month’s growth of 6.1% and 4.4%,

respectively.

The core sector growth is likely to stay slow, given the overall

weakness in industrial activity, weaker infrastructural activity

and subdued capital expenditure. Enhanced government

spending is expected to help a pick-up. An adequate

monsoon could also help boost sentiments.

EXPORTS CONTINUE TO FACE A DECLINE, THOUGH THE SMALLEST IN 18 MONTHS Exports fell by 0.79% YOY in May 2016, thus indicating a

pick-up from a dip of 6.74% in April. In May 2016, exports

made up at $22,170.62 mn against $22,346.75 mn in May

2015. However, the fall in exports has reduced considerably.

The cumulative value of exports during April-May 2016-17

made $42,739.47 mn against $44,401.47 mn last year, thus

making a negative growth of 3.74%.

During the month, imports too stood tepid. Imports fell by

13.6% YOY against a 23.10% fall in April 2016. Imports stood

at $28,443.52 mn in May 2016 against $32,752.99 mn in May

2015. Cumulatively, the value of imports for the period April-

May 2016-17 stood at $53,857.24 mn against $65,800.01

during the same period last year.

Oil imports during May 2016 fell 30.45% YOY to $5,938.59

mn, while non-oil imports were valued $22,504.93 mn –

7.06% YOY. Gold imports fell by 39.14% YOY to $1,472.73

mn.

The trade balance in services (i.e. net export of services) for

April 2016 stood at $5,725 mn.

The trade deficit (for merchandise and services) during April–

May 2016 stood at $5,392.77 – 65.67% below the $15,710.54

mn recorded during April–May 2015.

Though the decline in exports is lesser during May, falling

exports is still a concern, given the slow global and Chinese

growth. Exports are likely to stay muted in the coming

months.

GOVERNMENT RELAXES FDI NORMS IN KEY SECTORSTo make India more investor friendly and a favoured

investment destination, the government has allowed a 100%

FDI in key sectors, such as trading, including ecommerce,

defence, civil aviation and pharmaceuticals. It has also

allowed a 100% FDI under the government approval route for

trading, including ecommerce, with respect to food products

manufactured and/or produced in India. Allowing 100%

FDI in defence, the government has removed the condition

of ‘state-of-the-art’ technology, while also permitting

foreign investments in the manufacture of small arms and

ammunitions. The government has also permitted a 100%

FDI through the automatic route in broadcasting carriage

services such as teleports, direct to home and mobile TV.

The government has also announced that an FDI of up to

74% will be allowed in private security agency services.

Further, up to 74% FDI under the automatic route will be

allowed in brownfield projects and beyond that under the

approval route.

The FDI prohibited list continues to hold sectors/activities

such as lotteries, gambling, atomic energy, real estate

investment trusts (ReITs) and railway operations.

26000

26200

26400

26600

26800

27000

27200

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-2

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0

1

2

3

4

6

5

9

8

7

MAY

-15

MAY

-15

JUN-15

JUL-15

AUG-15

SEP-15

OCT-15

NOV-15

DEC-15

JAN-16

FEB-16

MAR-16

APR-16

YOY

Grow

th R

ate

(%)

RESEARCH MONTHLY UPDATE

1312

INDIAINFRASTRUCTURE & REALTY UPDATE

GOVERNMENT PLANS NATIONAL HIGHWAY GRIDS FOR SMOOTH TRAVEL, 27 CORRIDORS IDENTIFIED To address the issue of the absence of a scientific road

network pattern in India, the National Highways Authority of

India (NHAI) has prepared a grid of 27 four-lane horizontal

and vertical national highway corridors every 250 km,

providing more road space for seamless transport. The

total length of these corridors is about 36,600 km, including

corridors stretching from Kanyakumari to Srinagar,

Porbandar to Kolkata, Surat to Paradip Port, Rameswaram

to Dehradun and Mangalore Port to Chennai Port. Out of

this, about 30,100 km are already national highways (NH),

but only 18,800 km actually have four-lanes while the others

are either single or two-laned. NHAI’s initiative would help

re-designating the NHs and facilitate easy identification.

SEBI PLANS TO INTRODUCE NEW REIT RULES, PROPOSAL UNDER CONSIDERATIONTo attract investors to the sector, SEBI has proposed to

ease the rules for real estate investment trusts (REITs) –

investment vehicles similar to mutual funds. The new rules

would allow REITs to invest 20% instead of earlier 10%

in assets under construction, helping delayed projects to

take off with larger fund availability. SEBI has also decided

to remove restrictions on the special purpose vehicle,

the asset holding company, to invest in other holding

companies without any limit on the number of layers in the

holding company hierarchy, though this suggestion is being

debated among the stakeholders.

CURRENCY

CURRENCY TREND `/$

Source: RBI

In June 2016, the Indian rupee lost 0.6% against the US dollar. After Brexit, it closed at 68.01 a dollar, down 1%, its steepest fall since 24 August 2015.

68.5

68.0

67.5

67.0

66.5

66.0

`/$

31/0

5/20

16

01/0

6/20

16

02/0

6/20

16

03/0

6/20

16

04/0

6/20

16

05/0

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06/0

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16

RESEARCH MONTHLY UPDATE

1514

2. IIP

3. CORE SECTOR

INDEX OF INDUSTRIAL PRODUCTION – GROWTH RATE

General Index Mining & Quarrying Manufacturing Electricity

Apr 2016 -0.8 1.4 -3.1 14.6

Mar 2016 0.1 -0.1 -1.2 11.3

Feb 2016 2.0 5.0 0.7 9.6

Jan 2016 -1.5 1.2 -2.8 6.6

Dec 2015 -1.3 2.9 -2.4 3.2

Nov 2015 -3.4 1.9 -4.7 0.7

Oct 2015 9.9 5.2 10.6 9.0

Sep 2015 3.7 3.5 2.7 11.4

Aug 2015 6.3 4.5 6.6 5.6

Jul 2015 4.3 1.3 4.8 3.5

Jun 2015 4.2 -0.4 5.2 1.2

May 2015 2.5 2.1 2.1 6.0

Apr 2015 3.0 -0.6 3.9 -0.5

Source: Ministry of Statistics and Programme Implementation, RBI

Source: Department of Industrial Policy & Promotion (DIPP), GOI

Sector Coal Crude oilNatural

gasRefinery products

Fertilisers Steel Cement ElectricityOverall Index

Weight 4.379 5.216 1.708 5.939 1.254 6.684 2.406 10.316 37.903

May-16 5.5 -3.3 -6.9 1.2 14.8 3.2 2.4 4.6 2.8

Apr-16 -0.9 -2.3 -6.8 17.9 7.8 6.1 4.4 14.7 8.5

Mar-16 1.7 -5.1 -10.5 10.8 22.9 3.4 11.9 11.3 6.4

Feb-16 3.9 0.8 1.2 8.1 16.3 -0.5 13.5 9.2 5.7

Jan-16 9.1 -4.6 -15.3 4.8 6.2 -2.8 9.0 6.0 2.9

Dec-15 6.1 -4.1 -6.1 2.1 13.1 -4.4 3.2 2.7 0.9

Nov-15 3.5 -3.3 -3.9 2.5 13.5 -8.4 -1.8 0.0 -1.3

Oct-15 6.3 -2.1 -1.8 -4.4 16.2 -1.2 11.7 8.8 3.2

Sep-15 1.9 -0.1 0.9 0.5 18.1 -2.5 -1.5 10.8 3.2

Aug-15 0.4 5.6 3.7 5.8 12.6 -5.9 5.4 5.6 2.6

Jul-15 0.3 -0.4 -4.4 2.9 8.6 -2.6 1.3 3.5 1.1

Jun-15 6.3 -0.7 -5.9 7.5 5.8 4.9 2.6 0.2 3.0

May-15 7.6 0.8 -3.1 7.9 1.3 2.6 2.6 5.5 4.4

RESEARCH MONTHLY UPDATE

1. INFLATION

WPI CPI

May-2016 0.79 5.76

Apr-2016 0.34 5.47

Mar-16 -0.85 4.83

Feb-16 -0.91 5.18

Jan-16 -0.90 5.69

Dec-15 -1.06 5.61

Nov-15 -1.99 5.41

Oct-15 -3.70 5.00

Sep-15 -4.59 4.41

Aug-2015 -5.06 3.66

Jul-2015 -4.00 3.69

Jun-2015 -2.13 5.40

May-2015 -2.20 5.01

WPI Base Year = 2004-05, CPI Base : 2012 = 100

APPENDICES

16

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