Lower CPI, narrowing rate differentials, Kharif sowing and more...
This Week In Data #22
In this edition of This Week In Data we discuss:
Lower May CPI in India
Lower inflation in US
The temporary Fed pause and ECB rate hike
Kharif sowing acreage
In case you missed, we released the second episode of our DataSpot podcast few days back. We discussed how Japan continues to run a current account surplus, despite its imports being more than exports - by being a large exporter of capital! You can watch the episode from here
Also, we released a new dashboard covering the Automobile sector. This dashboard gives you a quick overview of sales across categories, states, OEMs as well as fuel type. See this for more.The last two weeks have been all about inflation and monetary policy. If it was the RBI rate decision last week, it was the Fed and the ECB this week. But before that, domestically the May CPI was the key data release this week.
India’s CPI inflation moderated in May for the 5th consecutive month. And at 4.3% it is now the lowest reading in over 2 years. More importantly, it is now close to the RBI's target of 4%. After having averaged over 6% for the last 5 consecutive quarters, CPI will average below 5% in the current quarter. And it wasn’t just food inflation that moderated. Core inflation moderated too. Core inflation had remained sticky at around 6% for over 2 years (6.1% average between Feb 2021 to Feb 2023). Last three months however it has declined sharply, first to 5.8% in March and further to 5.2% in April and now 5% in May. It is now at its lowest level in over three years.
However, as we discussed in this newsletter last week, incrementally it is growth that will matter for monetary policy and not inflation. The MPC thinks it has done enough on the inflation front but at 6.5% the policy rate is not very restrictive in an absolute sense. Thus, the MPC is likely to remain on pause mode until it starts to perceive a (downward) change in growth trajectory. In this context, it is worth noting that the MPC's FY24 GDP growth projection is higher than the market expectation.
But it was not just India which reported CPI. The US also had its CPI release. CPI inflation in the USA declined to the lowest in over 2 years. It moderated 90bps in May and grew just 4% YoY. Among the categories, energy prices saw a steep decline of 11.7% YoY while food saw an increase of 6.7% over the same month last year. And this decline in the US CPI follows the decline in Euro area inflation for May. So globally inflation is now on a downtrend.
And following up with the inflation release, the US Fed kept policy rates unchanged. This was as expected. This was the first pause from the Fed after 10 consecutive rate hikes beginning March last year during which they raised the Fed funds rate by a cumulative 500bps (yes, 500bps!). But the Fed also left the door open for a rate hike during their next meeting in July. And the markets are currently assigning a more than 50% probability of a rate hike in July. Separately, the ECB raised its policy rate by 25bps taking its cumulative rate hikes since July last year to 300bps.
So, while the RBI is done with rate hikes, the Fed and the ECB are not yet done. So interest rate differentials will continue to narrow, they are already close to the smallest they have been in a long time. This unprecedented scenario has several implications. One, this makes rupee debt investments less attractive for foreign investors. Equally, this makes borrowing overseas less attractive for Indian corporates. This also increases the equity risk premium for foreign investors investing in India. The forward premia of the USD against the Indian rupee, a reflection of interest rate differentials, has already fallen to the lowest in over a decade.
Back to India. While it is still early, monsoon rainfall so far (till 16th June) is almost 50% below normal. However curiously, this has not resulted in delayed start to the Kharif sowing season. Kharif sowing so far is broadly flat relative to the normal at this early stage of the season.
While the acreage of Rice, Pulses and Oilseeds so far is tracking well below that of last year, sowing of coarse cereals has been significantly higher, more than offsetting the decline in rice and pulses acreage. Cotton acreage too so far is running above last year’s. Pulses are a big risk from an inflation perspective and that is the category to watch. However as we mentioned above, these are early days and so no point in splitting hairs at this point.
That’s it for this week. The WTC didn’t end well but Djokovic went on to win the French Open. While the world (us included!) kept debating as to whether Nadal or Federer was the GOAT, Djokovic has probably the most credible claim to being the GOAT, based purely on data. He has the most slams, he has beaten Federer thrice at Wimbledon, and Nadal twice at Roland Garros.
And we at IndiaDataHub trust in data more than anything else. So, while our heart may bleed Federer, we have to accept, albeit grudgingly, that Djokovic is the GOAT. And he’s just 36. He may well have 30 slams by the time he retires. Amen…