Nomura’s proprietary indicators suggest that the cyclical recovery, which started in H2 2017, is set to continue through Q2 2018. However, it is difficult to see this as sustainable due to tighter financial conditions, an adverse terms of trade shock and slower investment activity ahead of elections, especially in H2 FY19 (October-March). In the near term, strong activity and elevated core inflation should set the stage for another 25bp rate hike in August. However, as growth looks set to slow again, policy rates could be kept on hold thereafter.
Nomura’s heat-map of high-frequency data indicates that the cyclical recovery continued in Q2 (April-May), driven by investment and consumption demand. The aggregate growth momentum remains robust; our monthly activity indicator stood at a seven-year high of 12.3% y-o-y in April versus 10.8% in March. Consumption demand is holding up well, although there has been a slight moderation in indicators such as diesel consumption and two-wheeler sales in Q2 relative to Q1; we believe that rising fuel prices may be starting to bite, although growth rates still remain healthy. Investment demand appears to have remained resilient so far in Q2. External sector data also suggest a pick-up in export volume growth and a moderation in import volume growth, indicating a higher net export contribution to GDP growth in Q2. On the supply side, performance is mixed in the industrial sector: strong cement and coal production, but weak power generation. Services—both transportation and financial services—broadly improved in Q2.
The Nomura Composite Leading Index, which has a one-quarter lead over non-agricultural GDP growth, increased from 100.8 in Q1 to a near three-year high of 101.2 in Q2. Consistent with this, we expect GDP growth to rise to 7.8% y-o-y in Q2 2018 from 7.7% in Q1. However, as noted already, we do not see the current cyclical recovery as sustainable.
The Nomura Economic Surprise Index for India improved to -0.2 in mid-June from -0.3 in mid-May, in line with its mean-reverting property in the window of ±1sd. The index suggests that while negative data surprises are still likely, their probability will reduce in the next month, followed by a phase of positive data surprises. The Nomura RBI Policy Signal Index, which closely tracks Reserve Bank of India policy decisions, increased to 0.29 in June from 0.10 in May, moving clearly into rate hike territory (>0.2), due to higher core inflation, strong growth, rising oil prices and US rate hikes.
Edited excerpts from Nomura Asia Insights’ India Proprietary Indicator Watch report (dated June 21, 2018)