India: Stronger growth and a higher likelihood of tightening – Nomura

Nomura’s heat-map of high-frequency data indicates the recoveries in investment and consumption have continued, with the services sector following suit for the Indian economy.

Key Quotes

“Early indicators for April suggest a moderation in consumption demand but a slight recovery in net exports.”

“The Nomura Composite Leading Index, which has a one-quarter lead over non-agricultural GDP growth, increased sharply to 101.2 in Q2 from 100.7 in Q1 and 99.5 in Q4, suggesting the V-shaped cyclical recovery will continue until mid-2018.”

“In line with these data, we expect GDP growth to average 7.7-7.8% in H1 2018, up from 7.2% in Q4. We expect growth to slow to an average of 7.1% in H2 2018 on tighter financial conditions, rising oil prices and slower activity ahead of the general elections.”

“The Nomura Economic Surprise Index for India declined due to negative data surprises and has now reached the lower bound of +/-1sd. Given its mean reverting nature, positive data surprises appear more likely in coming months.”

“The Nomura RBI Policy Signal Index (NRPSI) rose to 0.10 in May from 0.01 in April, implying a higher probability of tightening due to rising crude oil prices and higher core inflation; although the index remains in the no-change zone. If crude oil prices remain at these levels, the NRPSI would cross the threshold of 0.2 in coming months.”

“In our base case (55% probability), we expect the Reserve Bank of India (RBI) to leave the policy rate unchanged but change its stance from ‘neutral’ to ‘withdrawal of accommodation’ on 6 June, followed by 25bp rate hike in each of August and October. June remains a close call; we assign a 40% probability to the RBI pre-emptively hiking by 25bp in June, followed by another 25bp hike in August.”