PMI data shows loss of momentum: August 2018

India’s manufacturing momentum further faded in August as the Nikkei India Manufacturing Purchasing Managers’ Index to 51.7 from 52.3 in July.

Even though the seasonally adjusted headline PMI reading remained in expansion territory, it is well below the 53.2 level recorded in June. A reading above 50 shows expansion, while the one below 50 indicates contraction from the previous month.

Indian manufacturing companies also continued to face higher input costs in August. The survey said that currency weakness contributed to higher raw material costs. Although sharp, input cost inflation moderated to the weakest since May. Business sentiment wanes in August, while new order growth decelerates.

Tepid growth in domestic new orders, coupled with rising input cost pressures, weighed on manufacturers’ business confidence. While companies retained their optimistic output projections for the next 12 months, the level of optimism eased from July’s three month-high and remained below the historical average.

A silver lining was the surge in export orders, which rose for the tenth consecutive month in August. Moreover, the rate of expansion accelerated to the strongest since Febuary.

That said, since imports are also likely to remain at elevated levels, it is expected to negate the benefits arising from improving exports.

The PMI data suggests that after the sharp rise in manufacturing output in June quarter GDP numbers, the momentum has waned. Considering input cost inflation and limited ability of firms to raise prices, the scenario in India’s manufacturing sector may not be as hunky-dory as the quarterly GDP numbers project.

RBI Buys Gold

The Reserve Bank of India has bought gold for the first time in nearly a decade, signalling that the metal could be in demand as a store of value when returns and capital values of fixed-income bonds are declining in a rising rate environment.

The RBI added 8.46 metric tonnes of gold to its stock of holdings during the financial year 2017-18 that ended June 30, taking the level of gold reserves to 566.23 metric tonnes, according to its latest annual report.

It last bought 200 metric tonnes from the IMF to boost its reserves in November 2009.

Over the past nine years, the gold stock in RBI reserves was stable at 17.9 million troy ounce. But RBI has started adding to its stock since December 2017, data submitted to the IMF indicate.

Stock of gold, as of June 30, amounted to 18.20 million troy ounce or equivalent to 566.23 metric tonnes, up from 17.9 million troy ounce in November, 2017.

The RBI’s decision to buy gold is significant because unlike many other central banks such as the People’s Bank of China, RBI does not regularly trade in gold, although the RBI Act permits it to do so.

Economists reckon that investing in gold is a prudent treasury move by the central bank at a time of rising yields. RBI has already sold close to $10 billion worth US treasury securities between April and June, data with the US treasury department suggest.

Rising yields could trigger mark-to-market losses for RBI’s bond portfolio. Of the $405 billion worth reserves with the central bank, $245 billion were held in the form of bonds and securities as of June 30.

Diversifying reserves to include gold is a prudent measure at such times. The Annual Report points out that RBI continued diversification of foreign currency assets with attention to risk management. The gold portfolio had also “been activated,” said Bhattacharya.

The RBI did not say where it bought the gold from or the reasons for such transactions. But economists say that the central bank might also want to create a buffer to meet the redemption needs of Gold Bond Schemes through which it sold bonds worth more than ₹4,000 crore.

The RBI has to redeem the three- to eight-year bonds at the prevailing price of the metal and keep an extra stock of gold in its kitty to hedge against price risks.

Motown Musings : August 2018

Passenger vehicle sales in India fell for the second consecutive month in August, hurt by the floods in Kerala and due to the high base of last year.

Based on the numbers reported by automakers, August PV sales are estimated to be 2-3% lower than a year earlier, even as demand for commercial vehicles remained strong in the past month.

Industry sources estimate PV sales at about 2.84 lakh units, marginally lower than the previous month. Dispatches to Kerala, which accounts for 8% of the Indian passenger vehicle market, were affected in the second half of August.

Interestingly, the commercial vehicle segment continued its strong run, despite expectations that the new axle rules introduced by the government in July could pull down growth.

Only four of the top 12 carmakers registered sales growth in August. While Tata Motors and Toyota Kirloskar posted strong double-digit expansion of 28% and 17%, respectively, sales at Mahindra & Mahindra grew by 1.8% and at Ford by 3.4%.

Maruti Suzuki, the market leader that has been reporting double-digit growth month after month, too posted an about 3.6% drop in sales, causing the entire market to shrink.

Sales were hurt due to severe floods in Kerala and heavy rains in other parts of the country, claimed Maruti Suzuki. The floods in Kerala not only impacted the usual sales, but also a pickup in demand typically experienced during the Onam festival.

Rising fuel prices, increase in interest rates and new ruling by the insurance regulator to pay premium upfront for multiple years are factors that could pose headwinds in the coming months. However, with rising GDP, normal monsoon in most parts of the country along with the introduction of new models and festivities around the corner, vehicle makers are hoping for a bounce back in demand after a temporary lull.

In the commercial vehicle segment, sales continued to remain strong with the economy growing at its fastest pace in recent times. All the top four manufacturers — Tata Motors, Ashok Leyland, Mahindra and VE Commercial Vehicles — registered 25% or higher growth in the past month.

Core Sector Growth Slows to 6.6% in July

Core sector growth slowed marginally in July from the month before but still marked a strong start to the second quarter in the world’s fastest growing major economy.

The Index of Eight Core Industries, which measures the output of eight infrastructure industries, rose 6.6% in July against an upward revised 7.6% in June. The core sector had grown 2.9% in July 2017, suggesting a positive base effect for July this year.

The eight infrastructure sectors in the index are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. Five of them recorded slower sequential growth.

The eight core sector industries constitute 40.27% of the Index of Industrial Production, which grew at a five-month high of 7% in June. Electricity output rose 4.8% in July compared with 8.4% in June. Coal output grew 9.7% against 11.8% (marginally revised upwards from 11.5%) in June. Natural gas production declined 5.2% and crude output fell 5.4%.

Refinery products output rose 12.3% and steel production increased 6% from 3.4% in June. Cement production rose 10.8% against 13.2 % in June.

Vodafone Idea is here

Vodafone India and Idea Cellular completed their merger to create a giant telecom entity that’s in a stronger position to take on erstwhile leader Bharti Airtel and Reliance Jio Infocomm, having garnered the most subscribers and the biggest chunk of revenue.

“Today, we have created India’s leading telecom operator… As Vodafone Idea, we are partnering in this initiative by building a formidable company of international repute, scale and standards,” Kumar Mangalam Birla, chairman of the new company.

The combined entity has 408 million active subscribers and a revenue market share of 32.2%. Shares of Idea Cellular, to be renamed Vodafone Idea Ltd., dropped 0.7% to ₹49.50 at the close on the BSE.

The largest merger in the sector leaves three major private telcos and state-run Bharat Sanchar Nigam to battle it out for over a billion subscribers.

Demand for data is surging in India amid rock-bottom tariffs as the country progresses to the 4G mobile standard from 3G and smartphones become more affordable.

UK-based Vodafone Group owns a 45.2% stake in the joint entity while Aditya Birla Group has a 26% stake, although both partners have equal rights. The shareholding of both parties will be equalised over the next few years. Vodafone Idea’s board has 12 directors — three each nominated by the two partners and six independent directors — which met on Friday morning.

Vodafone Idea will be headed by Balesh Sharma as chief executive officer, who said the “company has the scale and resources to ensure sustainable customer choice and introduce new technologies”.

He added that the new team will cater to both retail and enterprise customers with “new products, services and solutions”.

The Vodafone and Idea brands will continue to operate separately.

The merger between the telcos, which had struggled individually in the face of a pricing onslaught by Jio, has been in the making for over a year and received final approval from the National Company Law Tribunal on Thursday.

The new company will start with revenue of ₹53,500 crore and a net loss of ₹12,300 crore for fiscal 2019, according to Deutsche Bank. It added that comparatively, Airtel’s mobile revenue is expected at ₹43,400 crore and Jio’s at ₹35,600 crore.

The two companies had a combined debt of ₹1.09 lakh crore at the end of June, but will start with a cash balance of ₹19,300 crore after equity infusion by the parents of both telcos and the sale of their standalone towers. The new company has the option to sell its 11.15% stake in Indus Towers, which would equate to ₹5,100 crore in cash, the companies said.

“The merger is expected to generate ₹14,000 crore annual synergy, including opex synergies of ₹8,400 crore, equivalent to a net present value of approximately ₹70,000 crore,” the companies said.

Some analysts were sceptical about the future of the new company, saying the main issue is not capital or cost reduction but revenue recovery, which is difficult with Jio unlikely to ease up on price competition.

Rupee hits 71

The rupee breached the 71 level and closed August at that level, recording the biggest monthly decline in three years. The local currency had weakened to 71.03 in intraday trade. Given that the Indian currency was trading at Rs.68.55 against the greenback on July 31, the drop this month is nearly 3.6%. The last time the rupee declined by over 3% in a month was in May this year.

The rupee came under pressure with emerging market currencies weakening. In Turkey, reports of the central bank deputy governor set to resign led to the lira falling sharply. The Indonesian rupiah fell to a 20-year low after fears that the currency crisis in Argentina and Turkey would spread to other emerging markets. What is adding to the pressure on the rupee is that the Reserve Bank of India has been saving its reserves and not intervening in a big way. According to bankers, the RBI seems to be sending a message that it is not averse to a marginal depreciation.

GDP growth accelerates to 8.2% in Q1

The country’s economic growth soared to an over two-year high in April-June quarter, powered by solid expansion in manufacturing, the farm sector and gathering strength in consumer spending, bolstering the government’s reforms record.

The economy grew 8.2% in April-June, the first quarter of the country’s fiscal year which starts in April, higher than previous quarter’s 7.7% and 5.6% in the first quarter of 2017-18.

This was the fastest expansion since the January-March quarter of 2016.

The manufacturing sector rose an annual 13.5% compared to a decline of 1.8% in the year ago quarter, while the crucial farm sector rose 5.3%, up from 3% growth in first quarter of 2017-18.

The data brought cheers to policymakers, who said it highlighted the measures taken to boost growth and pointed to a solid recovery underway.

The robust GDP number has helped India gallop ahead of China and retain the tag of the fastest growing major economy in the world.

The finance ministry said despite some headwinds like higher crude oil prices, uncertainties on trade front due to protectionist tendencies in some countries, the Indian economy has performed well.

Economists said a positive feature of the growth dynamics has been the buoyancy in employment-supporting sectors such as construction and manufacturing. For private investments to pick up, a strong and sustained revival in household spending is critical. Sustaining GDP growth at over 8% over the next few years would require significant traction in private investments and relentless implementation of reforms to raise productivity.

Separate data showed the fiscal deficit, the difference between expenditure and revenue receipts, at the end of July rose to Rs 5.4 lakh crore or 86.5% of the 2018-19 budget target, while the core sector growth slowed to 6.6% in July from previous month’s 7.6% expansion.