Key Economic Updates from Last Week

 1. India’s Flash PMI

Composite PMI: India's Flash Composite PMI surged to 61.4 in April 2024, up from 60.8 the previous month. This marks the third strongest growth since July 2010. The Service PMI also showed robust growth, increasing to 61.4 in April from 60.8 in March 2024, while the Manufacturing PMI slightly moderated to 62.4 in April from 63.0 in March 2024.

Export Orders: The latest data indicated significant strength in new export orders across both manufacturing and service sectors. At the composite level, international sales expanded at the fastest rate since the series began in September 2014. Panellists reported gains from diverse regions including Africa, Asia, Australia, the Americas, Europe, and the Middle East.

Employment Trends: Employment has been rising monthly for the past two years, with May experiencing the sharpest expansion rate since September 2006. Capacity pressures also intensified, contributing to this employment growth. Combined outstanding business volumes in manufacturing and services rose to the greatest extent in 21 months.

PMI Trends: The trend of Manufacturing and Service PMI for ready reference shows sustained growth in the service sector with a slight moderation in manufacturing growth.

2. RBI’s Record Fund Transfer to Government

Fund Transfer Announcement: The Reserve Bank of India (RBI) announced a record fund transfer of INR 2.1 trillion to the government for FY25, nearly double the market estimate of around INR 1 trillion.

Reasons for Higher Dividend Payout:

• High US Interest Rates: The RBI earned substantial interest on its forex reserves held in US T-bills due to historically high US interest rates.
• Forex Market Activities: To control volatility in the forex market, the RBI has been selling dollars, leading to higher capital gains. These dollars, accumulated over recent years, were sold at a higher price due to significant INR depreciation, stabilizing the forex rate regime while earning capital gains.

Expected Impacts:

• Fiscal Deficit Reduction: The government’s fiscal deficit is expected to decrease by approximately INR 600 billion, as the higher surplus may lead to the cancellation of some divestment plans.
• Increased Capital Expenditure: The final budget, expected in July 2024, may allocate higher expenditure towards capital projects, reflecting the BJP government's priorities.
• Boosting Consumption: Some surplus might be directed towards boosting consumption, fulfilling election promises, though this is not expected to be substantial.

Impact on Banking System Liquidity: The dividend payment is not expected to immediately increase banking liquidity, as the government cannot spend the money until June 4, 2024. Significant spending will likely occur post the final budget presentation in July 2024. This delay has led to repeated announcements of T-Bill/G-sec buybacks by the government, which have seen poor response, resulting in stronger government cash balances and a deficit in headline banking liquidity.

3. FOMC Members’ Reluctance to Reduce Rates

During the week, members of the Federal Open Market Committee (FOMC) of the US Federal Reserve expressed reluctance to reduce interest rates soon. They emphasized that a consistently long period of disinflation is required before they would consider lowering the Federal Reserve rate.