The Indian economy came out of contraction with a growth of 0.4% in Q3-FY21, a sharp improvement from -7.3% & -24.4% in the preceding two quarters. High frequency indicators across range of activities continue to show good growth prospects. However, recent surge in fresh Covid-19 cases could pose a challenge to the economical recovery.
GST collections for January increased to all-time high of INR 1.19 lakh crs, up 8.2% yoy and 4.1% month on month. Total GST collections so far this fiscal year (April-January 2021) has been INR 9 lakh crs, -12% yoy. GST collections have now been above INR 1 lakh crs for four consecutive months.
Retail inflation eased further to almost 16-month low of 4.1% in January compared with 4.6% in December 2020. Sharp decline in food inflation amidst a high base effect assisted the fall. Nonetheless, Core inflation continued to remain sticky & remained steady around 5.5%.
January trade deficit came at $14.5 bn, almost 5% lower yoy on back of positive growth in exports, which were up 6.2% yoy while Imports grew slower at 2% yoy. The trade deficit in January has narrowed from the previous month.
April 2020 – Jan 2021 bank credit growth was 3.2% compared with 2.8% in the corresponding period previous year on ytd basis. Credit off-take has been robust in agriculture (9.5%) and personal loans (6.7%). Services credit growth has been muted at 1.6% yoy while Industrial segment growth was -4.3%. Deposit growth has been healthy at 8.9% vs 5.2% in the corresponding period previous year.
Amidst the unprecedented economy disruption caused by the Pandemic, Finance Minister delivered a growth-oriented budget specifically targeted towards the sectors like health, infrastructure, and the financials. While it will be a medium term positive, it has also resulted in a substantially higher fiscal deficit for FY21 / FY22 at 9.5% / 6.8% respectively with a fiscal gliding path to 4.5% by FY26. Quality of the fiscal deficit is better with higher spend towards the capex and with part of the food-subsidy taken on its own balance sheet.
In first week of February – RBI’s MPC (Monetary Policy Committee) kept the status quo on policy rates and continued its accommodative stance on policy rates as long as it is necessary, at least during the current financial year and into the next financial year, for growth revival on a durable basis, while ensuring that inflation remains within the target, going forward.
Rates continued to maintain its hardening bias for the consecutive month. Negative surprise on high fiscal deficit & huge Govt borrowing in FY22 as announced in central budget along with the volatility in global market amidst inflation concerns led to steep rise of 25 – 45 bps across the yield curve in 1 – 10 year segment. Corporate bonds underperformed the G-Sec during the period.
Outlook
RBI has again re-iterated its accommodative monetary policy by giving a long-term visibility in to FY22. Additionally, RBI has indicated continued ample systemic liquidity and has delayed the full restoring of CRR (Cash Reserve Ratio) by 2 months. However, the MPC fell short on the market expectations of providing visibility on its OMOs (open market operations) for longer tenor G-Sec, although the Governor assured during the press conference that the FY22 G-Sec borrowing program will be completed in a smooth and a non-disruptive way.
Domestic retail inflation has moderated over past few months. However, it has a threat of sharp pickup in the commodity prices, especially the crude, which can put upward pressure on both the headline as well as core inflation, going forward.
Global paradigm has also seen a shift with market participants now expecting a faster economic recovery led by fiscal stimulus & covid-19 vaccination, which has led to hardening of interest rates across the fixed income market.
In the current fast evolving macro conditions, we suggest investors to look for risk-adjusted return opportunities. In the absence of a concrete action from RBI on absorbing record high G-Sec supply, we expect the yield curve to steepen going forward and the short term rates especially in 1 to 4 year segment to remain more attractive from risk-reward perspective on the back of surplus systemic liquidity and favorable demand-supply dynamics. While we believe that RBI may gradually reduce the excess liquidity in a market non-disruptive way, we expect RBI to continue to maintain surplus liquidity over the medium term to ensure conducive rate environment for borrowers to recover from Covid-19 led disruption. Longer end of the curve will be more dependent on RBI’s OMOs both in terms of quantum and timeliness.
Credit Environment has improved gradually with various measures taken by RBI and opening of economy now. We believe credit dispersion will continue, with very high-quality credits benefitting from this but the lower quality credits continuing to be avoided for the time being.