Mukul Sharma Economics

Monetary Policy Decisions
• Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25% with immediate effect.
• Consequently, adjust the standing deposit facility (SDF) rate to 6.00% and the marginal standing facility (MSF) rate and Bank Rate to 6.50%.
• Continue with the neutral monetary policy stance, focusing on achieving a durable alignment of inflation with the target, while supporting growth.

Growth Outlook
• Global growth is below the historical average, though high-frequency indicators suggest resilience.The global economy faces challenges, including slower disinflation, geopolitical tensions, and policy uncertainties. The strong dollar is impacting emerging market currencies and increasing financial market volatility.
• Real GDP Growth for 2024-25 is projected at 6.4% YoY, driven by a recovery in private consumption, services, and agriculture sectors.
• Household consumption is expected to remain strong, aided by tax relief in the Union Budget 2025-26. Fixed investment is projected to recover, supported by high capacity utilization, healthy corporate balance sheets, and the government's focus on capital expenditure. Services exports will continue to support growth.
• Geopolitical tensions, protectionist trade policies, commodity price volatility, and financial market uncertainties could pose downside risks.
• Real GDP Growth for 2025-26 is projected at 6.7%, with quarterly growth estimates: Q1: 6.7%, Q2: 7.0%, Q3 and Q4: 6.5% each. Risks are evenly balanced.

Inflation outlook
• Headline Inflation softened in November-December 2024, down from a peak of 6.2% in October, driven by lower food inflation, particularly in vegetables. Core Inflation remains subdued across goods, services, and fuel components.
• Future Inflation Trends: Food inflation is expected to soften significantly, aided by good kharif production, easing vegetable prices, and favorable rabi crop prospects.
• Core inflation may rise but remain moderate.
• Risks: Upside risks to inflation come from uncertainty in global financial markets, energy price volatility, and adverse weather events.
• CPI Inflation Projections: For 2024-25: 4.8% with Q4 at 4.4%. For 2025-26: 4.2%, with quarterly breakdown: Q1: 4.5%, Q2: 4.0%, Q3: 3.8%, Q4: 4.2%. Risks are evenly balanced.

Repo rate decision
For the first time in five years, the RBI reduced repo rate by 25 basis point, lowering it to 6.25 per cent. It is the first such decision on repo rate cut since May 2020, when the RBI reduced the repo rate by 40 basis points to 4% during the Covid-19 lockdown. The central bank started raising rates in May 2022 due to the Russia-Ukraine war and paused in May 2023.

Neutral stance decision
The monetary policy will maintain a neutral stance, prioritising a steady alignment of inflation with the target while also fostering economic growth.

Rationale behind decisions
• The growth-inflation dynamics provide room for the MPC to support growth while focusing on inflation alignment.
• The combination of moderate inflation and slower growth allows for a policy space to reduce the policy repo rate by 25 basis points to 6.25%, aimed at supporting growth.
• Continued volatility in global financial markets, uncertainties over global trade policies, and adverse weather conditions present risks to both growth and inflation. These factors require the MPC to stay cautious and watchful of global developments.
• The MPC decided to maintain a neutral monetary policy stance, providing flexibility to adjust to changing macroeconomic conditions while balancing inflation and growth.
• A neutral stance allows the MPC the flexibility to respond to the evolving macroeconomic environment, ensuring it can adjust policy as needed to meet targets.

Additional announcements
• Flexible inflation targeting framework served India well.
• The global economic backdrop remains challenging. High frequency indicators suggest resilience.
• Indian economy, though strong and resilient, did not remain immune to the global uncertainties

• Mining and electricity are rebounding, business expectations remain upbeat as indicated by PMI numbers.
• Manufacturing activities expected to recover gradually.
• Economic activities expected to improve in the coming year, agri activities remain upbeat.
• The CAD for this year is expected to remain well within the sustainable level.
• RBI forex policy has remained consistent.
• On liquidity front, system liquidity did turn into deficit in December 24 and January 25.
• The system level parameters for NBFCs are healthy.
• Exclusive domain name for entities of financial sector to avoid frauds.
• RBI to undertake comprehensive review of trading and settlement timings of markets regulated by RBI.
• Less restrictive monetary policy is more appropriate at this juncture.

Highlights of Economic Survey released today 👆

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Key Takeaways of the article -
• Export and Import Growth:
• Exports surged from $76 billion in FY2004 to $437.1 billion in FY2024 (a six-fold rise).
• Imports skyrocketed from $76 billion to $678.2 billion in the same period (a nine-fold increase).
• Sectoral Contributions to Exports:
• Agriculture, meat, and processed food:
• Share reduced from 11.9% in FY2004 to 8.7% in FY2024, but absolute volumes rose to $48.5 billion.
• Key export commodities include rice, sugar, pepper, and coffee.
• Energy exports:
• Petroleum and related products rose from $8.9 billion in FY2004 to $89.3 billion in FY2024.
• Chemicals and pharmaceuticals:
• Grew from $6.6 billion to $60.8 billion, with their export share increasing to 13.9%.
• Machinery and electrical products:
• Increased from 3.3% share in FY2004 to 6.9% in FY2024, with export value rising to $30.1 billion.
• Traditional exports (textiles, garments, diamonds):
• Share dropped from 25.5% in FY2004 to 11.6% in FY2024, with diamond exports still significant at $78.6 billion.
• Sectoral Contributions to Imports:
• Crude oil and petroleum:
• Largest import category, contributing 42.3% in FY2004, but reduced to 33.8% in FY2024 (due to diversification).
• Electrical and electronic products:
• Share rose from 8.4% in FY2004 to 11.7% in FY2024, with imports totaling $79.4 billion.
• Machinery and computers:
• Imports reached $57.6 billion in FY2024, driven by domestic demand for smartphones, laptops, and other equipment.
• Import Dependence on China:
• 30% of India’s industrial imports come from China, including electronics, chemicals, and machinery.
• Sector-Wise Export Changes:
• Automobiles: Export share increased to 4.7% in FY2024, reflecting India’s growing strength in automobile manufacturing.
• Metals and minerals: Exports reduced to 6.9% share in FY2024 from 8.1% in FY2004, reflecting lower commodity dependency.

Summary

Between FY2004 and FY2024, India’s trade composition evolved, reflecting its growing industrial and technological capabilities. Exports diversified from traditional products like textiles to high-value items such as machinery, chemicals, and automobiles. While agriculture and energy products saw absolute growth, their share in the total export basket declined.

On the import side, crude oil remains the largest category, but there’s a growing reliance on electronics, machinery, and industrial components, much of which is sourced from China.

Conclusion

India’s trade story over the last two decades is a mix of impressive growth and emerging challenges. Diversifying away from Chinese imports, addressing logistical inefficiencies, and complying with global green regulations like CBAM are crucial steps for sustained export growth. With proactive policies, India is on track to hit its ambitious export target of $1 trillion by 2030.

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The report also suggests that the increase in wages for non-agriculture laborers has minimal impact on food inflation. The average daily wage rate for non-agricultural laborers and rural inflation has shown little correlation, indicating that wage increases do not contribute significantly to rising food prices.

The report shows that inflation levels among Indian states are converging towards the 4 per cent target level.

Middle- and high-income states have experienced a faster decline in food inflation over the last decade, compared to low-income states.

This trend is attributed to the migration of labor from low-income states to higher-income states in search of employment opportunities, resulting in a quicker disinflation process in the latter.

According to the Indian Council for Agricultural Research (ICAR), a 1°C increase in temperature beyond 30°C during the grain-filling period can reduce wheat yields by 3-4 per cent.

Notably, states like Madhya Pradesh, Uttar Pradesh, Punjab, and Jammu & Kashmir have seen growth in both fruit and vegetable production. However, many northeastern states have reported a decline in per capita production.

Per capita availability of fruits and vegetables has increased by 7 kg and 12 kg, respectively, over the past ten years, according to State Bank of India (SBI) report.

However, it highlights several challenges in the agricultural supply chain that continue to impact food consumption across the country.

Industries like drugs and pharmaceuticals, pearls and precious stones, telecom instruments, and ready-made garments have the highest exposure to the US, with over 30 per cent of their turnover tied to the American market.

On the other hand, sectors like carpets, electronic products, yarn products, and marine products have a high percentage of exports to the US despite their smaller overall export value.

The US remains a crucial market for several key Indian industries. In FY24, the top five export commodities to the US included drugs and pharmaceuticals, pearls and precious stones, petro products, telecom instruments, and ready-made garments, together accounting for 40 per cent of total exports to the country.

Other notable exports include yarn, marine products, and electronic goods, with the latter facing competition from other Asian countries

The report highlights that India's exports to the United States have followed a similar trajectory to the country's overall export growth since 1991, when India began economic reforms.

As of FY24, the US accounts for 18 per cent of India's total exports, a rise from 16.4 per cent in FY92 but still below the peak of 22.8 per cent in FY00 (financial year 2000).

Key sectors identified for enhanced cooperation include railways, pharmaceuticals, information technology, aviation, and cybersecurity.

Russia and India are on track to achieve the ambitious USD 100 billion trade target by 2030, bolstered by expanding collaborations and diversified trade opportunities.

bilateral trade between India and Russia has reached a record USD 66 billion in 2024, marking a fivefold increase over the past five years, with a 9 per cent rise in the first eight months of this year.

India buys palm oil mainly from Indonesia, Malaysia and Thailand, while it imports soyoil and sunflower oil from Argentina, Brazil, Russia and Ukraine.

The rise in imports of soyoil and sunflower oil lifted the country's total edible oil imports in November by 12% to 1.6 million tons

Refiners raised sunflower oil imports to meet robust demand from southern states and replenish depleted stocks caused by lower imports in September and October

Soyoil imports in November rose 20% from a month ago to 410,000 metric tons the highest in three months, while sunflower oil imports jumped 43% to hit a four-month high of 341,000 metric tons

Indians celebrated the Dussehra and Diwali festivals in October and November, increasing the consumption of sweets and fried food.

Festival season demand was good this year, which gave confidence to refiners to buy more to restock

Palm oil imports edged 0.5% higher in November from the previous month to 850,000 metric tons

Higher palm oil imports by India, the world's biggest buyer of vegetable oils, would help in bringing down inventories in producing countries and support benchmark Malaysian palm oil futures trading near their highest in over two years.

India's edible oil imports in November jumped to their highest level in four months as refiners raised purchases of palm oil, soyoil and sunflower oil to replenish inventories after robust demand during festival season

The World Bank International Debt Report, 2024, further said that net debt inflows during the year worked out to be USD 33.42 billion, while the net equity inflows was higher at USD 46.94 billion in 2023.

According to the report, external debt stock as a percentage of exports was 80 per cent, while debt servicing was 10 per cent of exports in 2023.

While the long-term debt stocks have risen 7 per cent to USD 498 billion in 2023, short-term debt stocks declined marginally to USD 126.32 billion in 2023.

India's total external debt has increased by USD 31 billion to USD 646.79 billion in 2023, according to World Bank International Debt Report. The report further said that interest payment increased from USD 15.08 billion in 2022 to USD 22.54 billion in 2023.

The composite PMI, the weighted average of comparable manufacturing and services PMI indices, dropped to 58.6 in November from 59.1 in October.

Manufacturing PMI fell to an 11-month low of 56.5 in November, according to the figures released earlier this week

Official data released last week showed that the services sector grew 7.1% in the second quarter of the current financial year, compared with 7.2% in the first quarter.

Employment growth was the fastest since 2005, helped by an increase in sales. Anecdotal evidence indicates a combination of both permanent and temporary hires boosting employment growth, according to the survey conducted by S&P Global

Finished steel imports from Japan and Vietnam more than doubled during the period, the data showed. China, South Korea and Japan accounted for 79% of total finished steel imports between April and October.

India's overall finished steel imports surged to a seven-year high of 5.7 million metric tons during the April-October period.

China, the world's biggest steel producer, mostly shipped stainless steel, hot-rolled coils, galvanised sheets, plates and electrical sheets, among other grades during the period

China, the world's biggest steel producer, shipped 1.7 million metric tons of finished steel to India during April-October, a 35.4% increase year-on-year

India's finished steel imports from China reached an all-time high during the first seven months of the current financial year from April

India's merchandise trade deficit - the difference between exports and imports - widened to a two-month high of $27.14 billion in October, compared with $20.78 billion in September. Economists also estimate a slowdown in deposit growth and monthly GST payments to have affected the system liquidity.

Core liquidity - system liquidity plus government surplus - reduced from peak surplus of ₹4.6 trillion on September 27 to ₹1.6 trillion on November 15. India's foreign exchange reserves fell by $17.8 billion in the week ended November 15, to reach a four-month low of $657.9 billion,

This also led to the weighted average call rate (WACR) moving 22 basis points higher than the policy repo rate at 6.72% on Monday, pushing up borrowing costs for banks. A higher WACR correspondingly pushes up borrowing costs also for companies raising funds through other debt instruments, such as certificates of deposits and commercial papers.

The liquidity deficit was because of the balance of payments turning negative in the ongoing quarter at $23 billion, due to persistent outflows from foreign portfolio investors (FPI) and the RBI selling dollars in the market to support the rupee

After running surplus liquidity of about ₹1.4 lakh crore for over two months, the banking system saw a decline in cash, prompting the Reserve Bank of India to inject ₹6,956 crore

India's fiscal deficit for Apr-Oct FY25 came in at Rs 7.51 lakh crore (46.5 per cent of BE) vis a vis Rs 8.04 lakh crore (45.0 per cent of BE) in corresponding period last year

The central government fiscal deficit stands at 46.5 per cent of its budget estimates in the first seven months of the current financial year 2025,

As per the data, 6,38,998 tonnes were exported in 2019-20 for USD 689.10 million; 8,88,179.68 tonnes for USD 1,040.95 million in 2020-21; 4,60,320.40 tonnes for USD 771.96 million in 2021-22; 3,12,800.51 tonnes for USD 708.33 million in 2022-23; and 2,61,029 tonnes for USD 494.80 million in 2023-24 financial year.

The country has exported 2,63,050 tonnes for USD 447.73 million till November 25 of the current fiscal

India has exported organic food products worth nearly USD 450 million till November 25 of the current fiscal year

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The Indian rupee weakened to its all-time low on Thursday, pressured by likely foreign outflows from local stocks and renewed strength in the dollar as investors tempered hopes of aggressive rate cuts by the U.S. Federal Reserve.

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Very useful handbook for all Indian economy data

* Trade Deficit Increased: India's merchandise trade deficit rose to its highest level in nine months in July.

* Exports Contracted: Overall goods exports decreased by 1.47% compared to the previous year.

* Imports Increased: Imports grew by 7.4%, primarily driven by a 17% increase in crude oil imports.

* Key Factor: High crude oil imports were the main reason for the increased trade deficit.

* Domestic Consumption: Increased domestic consumption of auto fuels contributed to higher crude oil imports.

* Positive Sectors: Engineering products, electronics, pharmaceuticals, readymade garments, tea, tobacco, spices, and meat & dairy products showed export growth.

* Full Year Outlook: Despite the July dip, overall exports are expected to surpass the previous year's level.

* Services Trade: Services exports grew by 8.4% in July, contributing positively to the overall trade balance.

Services exports in July grew 8.4% to $ 28.43 billion while imports were up 5.8% to $ 14.5 billion. In April-July the services exports grew 9.8% to $ 117.3 billion while imports during the period were up 6.3% to $ 62.95 billion.

despite the dip, the exports for the full year will be higher than the last year’s level of $ 437.1 billion.

The exports in July were supported by the performance of the engineering products, electronics, drugs and pharma and readymade garments. Engineering exports grew 3.6% to $ 9 billion, electronics exports grew 37.3% to $ 2.8 billion, pharma exports were up 8.3% to $ 2.3 billion while ready made garments exports expanded 11.8% on year to $ 1.2 billion. Significant growth was also seen in tea, tobacco, spices and meat and dairy products.

For April-July exports have grown at 4.15% to $ 144.2 billion while imports have grown 7.57% to $ 229.7 billion.

The key reason for the relatively higher deficit in July was a 17% increase in crude oil imports during the month to $ 13.8 billion while imports of petroleum products fell 22% on year to $ 5.2 billion

Exports contracted 1.47% on year to $33.98 billion in July, while imports rose 7.4% to $ 57.48 billion. The trade deficit of $23.5 billion registered in the month was the highest since October, when it touched $30 billion.

India’s merchandise trade deficit rose to the highest level in nine months in July on the back of high crude imports and a contraction in overall goods exports after three straight months of positive growth.

Trade

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