March saw unprecedented volatility in commodity markets on back of Russia-Ukraine conflict. Oil prices saw a 7% increase on top of the big increase in February as the Russia-Ukraine conflict continued to impact global commodity prices. March also saw US Federal Reserve Bank increase interest rates by 25 bps, its first interest rate increase after more than three years. Domestic demand conditions remain firm as reflected through PMIs, credit growth and high frequency indicators, albeit with rising price pressures.
Headline CPI inflation hardened to an eight-month high of 6.07% y-o-y in February from 6.01% in January. The sequential hardening in the CPI inflation in February 2022 was driven by food and beverages, and clothing and footwear. The inflation for the food and beverages sub-index rose to a 15-month high of 5.9% y-o-y in February from 5.6% in January 2022. This was largely driven by meat and fish, vegetables, eggs, spices and cereals and products. There was a moderation in the inflation for oils and fats to 16.4% y-o-y from 18.7% y-o-y in previous month supported by removal of import duty on some varieties of edible oil. Clothing and footwear continued to chart an uptrend for the tenth consecutive month, reaching a high of 8.9% y-o-y in February 2022 from 8.8% in previous month. While international oil prices have risen rapidly, transport and communication index only increased by 8.1% y-o-y vs 9.3% in previous month. This is because of lack of pass-through of higher oil prices into domestic prices, albeit with pass-through expected in coming month. Pass-through of higher gold prices was visible in personal care and effects index which increased by 5.4% y-o-y vs 3.5% in previous month. Even household goods prices rose by 7.2% y-o-y. Core inflation (excluding food and fuel) was stable at 6% y-o-y. The backdrop of higher international food, oil and industrial metal prices implies upside risk to inflation outcomes in the coming months.
India's fiscal deficit for February came in at INR 3.8 trillion (higher than INR 1.8 trillion in January) driven by higher transfer to states and higher non-capital spending. This puts Apr-Feb 2022 fiscal year to date (FYTD) fiscal deficit at 6.1% of GDP vs revised estimate (RE) of 6.9% of GDP. Through the first eleven months of the fiscal year, the cumulative deficit is only 82.7% of the total budgeted deficit for the full fiscal year, the lowest ratio at this point in the fiscal year in the last 9 years. Direct taxes fell marginally in February to INR 0.7 trillion driven by a decline in corporate tax while income tax remained flat. However, corporate and income tax have held up well compared to last year and compared to pre-Covid levels. Indirect tax collection increased due to higher GST revenues. Net revenue receipt after netting out allocation to states fell sharply from a surplus of INR 1.1 trillion in January to a deficit of INR 0.5 trillion driven by higher tax allocation to states. Total expenditure grew 11% m-o-m, driven by higher non-capital spending (21% m-o-m) while capital spending contracted marginally (-5% m-o-m). The government has spent around 80% of the budgeted allocation on capital expenditure up to February.
Manufacturing Purchasing Managers Index (PMI) declined to 54 in March 2022 from 54.9 in February 2022. Although weaker than the preceding month, the PMI reading for March 2022 marked the ninth consecutive month of expansion. New order inflows continued to increase in March 2022, according to manufacturers. But, the pace of increase in order inflows eased to a six-month low. Production volumes rose for the ninth consecutive month to cater to rising demand. Price indices increased since February 2022, signaling mounting input cost pressures. Inflation concerns dampened business confidence, which fell to a two-year low in March 2022. Services PMI rose to 53.6 in March 2022 from 51.8 in February 2022. This is the highest rate of expansion displayed by the index since December 2021. Strengthening demand conditions, particularly in the domestic market, new business wins and greater consumer footfall due to the relaxation of Covid-19 restrictions led to this upturn in the Services PMI. In March, services companies recorded the fastest expansions in sales and activity in 2022 so far. But, business confidence remained subdued due to inflation concerns. Input costs surged in at their fastest pace in the last 11 years. Services companies have absorbed most of this cost burden.
Core sector growth accelerated to 5.8% y-o-y in February 2022 compared with 4% y-o-y in the previous month due to low base (February 2021, the core industry contracted by -3.3% y-o-y). On a m-o-m basis, core output decreased by 5.3%. On a y-o-y basis, acceleration in core is led by natural gas at 12.5%, refining at 8.8% and coal at 6.6%. Uptick was also visible in steel at 5.7%, cement at 5% and electricity at 4%. During April-February 2022, core sector reported an increase of 11.1% y-o-y. Cement and natural gas have driven the rebound at 22.4% y-o-y and 20.4% y-o-y respectively. Steel output has seen an increase of 18.5% y-o-y.
Trade deficit narrowed in March 2022 to USD 18.7bn vs USD 20.9bn in February. For FY22, trade deficit has widened to USD 192.4bn compared with USD 102.6bn a year ago and USD 161.4bn seen in FY20. Exports reached an all-time high in March to USD 40.4bn from USD 34.6bn in February 2022. During FY22, exports stood at 417.8bn (USD 17.8bn higher than USD 400bn target) displaying an impressive growth rate of 43.2% y-o-y as compared to 7.5% decline in FY21. Over a 2-year period, exports in FY22 were higher by 33.3%. Export growth was broad based led by petroleum products (104.4%), electronic goods (24.3%), cotton (16.8%), organic and inorganic chemicals (15.7%), textiles (16.5%) and engineering goods (12.6%). Whereas rice and pharma exports reported slight moderation. Imports increased on a sequential basis by 6.5% m-o-m to USD 59.1bn in March as compared to USD 55.5bn in February on the back of higher oil (USD 3.1bn) and electronic goods imports (USD 2bn). Gold imports fell significantly in March to USD 1bn from USD 4.7bn in February. FX reserves were lower by USD 14 bn at approximately USD 617.6 bn.
India reported a current account deficit of USD 23 billion in the quarter ended December 2021. The current account deficit amounted to 2.7% of GDP. Current account deficit was 1.3% of GDP in the preceding quarter and 0.3% in the year-ago quarter. Merchandise trade deficit widened to USD 60.4 billion in the quarter ended December 2021 from USD 34.6 billion in the year-ago quarter. Net earnings from services, on the other hand, rose to USD 27.8 billion from USD 23.2 billion in December 2020 quarter. Net outflows amounting to USD 11.7 billion were seen on primary account, while secondary account saw net inflows of USD 21.3 billion. Among financial flows, net foreign direct investment (FDI) inflows dropped to USD 5.1 billion from USD 17.4 billion in the December 2020 quarter. The quarter witnessed net foreign portfolio investment (FPI) outflows of USD 5.8 billion, as against net inflows of USD 21.2 billion a year ago.
March month E-way bill generation for goods transportation came in at 78 million, up 9.7% y-o-y and 13% m-o-m. The increase was largely due to the relaxation of lockdowns introduced in many states in January-February to contain the spread of Omicron virus. The government collected INR 1.42 trillion in GST for March 2022. These are the highest ever monthly collections. GST collections in March 2022 were higher by 14.7% y-o-y and 6.8% m-o-m. Bank credit growth for March 2022 came in at 8.5% y-o-y vs 7.9% in February 2022 and 6% for March 2021.
Whilst domestic demand and activity levels have maintained momentum in March, input price pressures are being felt and will likely keep core inflation high. Global geo-political situation remains tense and volatile with the Russia-Ukraine war. This has caused major commodity prices to jump up significantly. In addition developed market central banks have started to raise interest rates which will likely cause some tightening in global financial conditions. India’s foreign exchange reserves continue to remain strong giving protection from any external spill-overs. Financial sector remains in a strong condition to aid slowly increasing credit growth.