Activity indicators weaker than expected

A look at recent activity indicators. The January reading of our India Surprise Index1 points to a fourth consecutive month of negative surprises, impacting asset prices. Other indicators of activity also show across the board weakness.

Other indicators to note: Foreign exchange reserves rose by US$1 billion after falling sharply by US$4.6 billion in the previous week. After a fortnight of interruption due to a trucker’s strike, WPI inflation started to move down again to 5.1%. Money market spreads have been moving lower since the start of the year, but are still high compared to pre-crisis levels.

Although industrial production growth was stronger than expected, exports and motor sales data was very weak. Exports fell 9.9% yoy and motor sales fell 11.8% yoy, pulling the surprise index down. The PMI Index contracted for a third consecutive month in January, although at 46.7 it rose slightly from the low of 44.4 in December. Domestic data on tax collections, commercial vehicle sales and domestic airline traffic fell rapidly.

Real policy rates are still high in India compared to the region, and we think that the RBI will cut rates further in the face of declining activity. Watch out for our preview on the budget, coming up soon.