Hawkish Monetary Policy, Weak Auto sales, lower hydro generation and more

This Week In Data #59

In this edition of This Week In Data, we discuss:

• The hawkish monetary policy from RBI and implications for rates

• Weak Auto sales in March

• Pick up in power generation

• Declining hydro power generation

• Soft services export growth

• Lower Euro area CPI

• Strong US labour data

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The monetary policy. As expected, the Monetary Policy Committee (MPC) kept rates unchanged. So, the repo rate remains at 6.5%, the SDF rate at 6.25% and the MSF rate at 6.75%.

But there was an expectation that they could change their stance to neutral and prepare the ground for an eventual rate cut. But that did not happen. So the hawks have had it their way. The MPC maintained a relatively hawkish stance continuing to note that:

“Monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission.”

Assuming that this stance needs to change before an actual rate cut, this would suggest that the first-rate cut from the RBI will come through in August, at the earliest assuming a shift in the stance in June.

And what is driving this is an expectation of continued strong growth. The MPC expects GDP to grow by 7% in FY25, slightly slower than the 7.6% growth in FY24 but still a fairly strong growth rate. So, the MPC does not, as yet, expect the tight monetary policy to result in any material growth sacrifice. And even as the MPC expects growth to remain resilient, it expects inflation to remain contained at 4.5% in FY25, down from 5.4% in FY24 and close to the MPC’s target of 4%. Compared to February, while MPC’s growth estimate has remained unchanged, its inflation estimate has seen a modest downward revision. So as far as the MPC is concerned it is goldilocks in FY25 – strong growth and inflation close to target.

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A bunch of high-frequency data as we start a new month. And Automobile sales growth has not been strong. Passenger Vehicle sales (Cars, UVs) declined 9% YoY, the first month of decline since July 2022. And 2W sales growth was also soft at just 1% down from double-digit growth in the preceding 4 months. Tractor sales declined in March by 5%, after double-digit growth in the preceding two months.

Power generation however accelerated in March growing 9% YoY from 7.5% in February. A noteworthy trend in power generation is the decline in hydropower generation. Hydropower generation has declined in 12 of the last 13 months. And this has been offset by a pick-up in thermal power generation. In the last 12 months, for instance, thermal power generation has grown by an average of 10% YoY while hydro power generation has declined by almost 20% YoY. Renewable power generation has grown by ~12% YoY during this period.

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Services Export increased by 3.5% YoY in February, slower than the 11% YoY growth in the previous month while Services Imports increased by 1.8% YoY, broadly the same pace as in January. Services surplus thus grew by a modest 6% YoY to US$13bn.

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Globally, this week started with the Euro Area's flash Inflation (HICP) release. Inflation measured by the HICP (harmonised index of consumer prices) declined by 20 basis points in March to 2.4% driven mainly by a fall in energy prices. So euro area’s inflation is finally coming close to the 2% target set for the ECB. Euro area inflation was last below 2% in June 2021.

Turkey however continues to see inflation tick higher – its March CPI rose to a 16-month high of 68.5%. And this comes on top of a 50% inflation in March last year and 60% inflation in March 2022. So, on average prices of goods and services have risen 4x in Turkey between March 2024 and March 2021! Yes, a 4-fold increase in price level…  

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We also got the Non-Farm Payrolls data for the USA as per which the US economy added 303k jobs in March, higher than the forecasted 212k. This is the highest growth since May last year. The change in total nonfarm payroll employment for January was revised upwards by 27k and that for February was revised down by 5k. With these revisions, employment in January and February combined is 22k higher than previously reported.

So continued strong labour market data from the US and that means, yes that’s correct, further pushing out of the timing of Fed’s rate cut expectation! Fed fund futures are now assigning just slightly over a 50% probability to a rate cut from the Fed in June.

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That’s it for this week. Some more high-frequency data for March will be available next month which will give us a fuller picture of recent activity trends. So see you next week.