India Service PMI contracts for the first time, Global rate cut cycle pick up pace, RBI keeps policy rate unchanged - See GDP for FY25 at 7.25% and Rural Demand Recovery; US NFP - Continues

 

1. India Final PMI

 

1. India’s final PMI shows a continuous trajectory of growth both in manufacturing as well as service sector although the pace of momentum has slowed done.
2. For May’24 the Composite PMI came at 60.5% (61.7% for Apr’24) , the manufacturing PMI cooled off to 57.5 (Apr’24-58.4%) and Service PMI slowed down to 60.2 (from 61.4% in Apr’24).
3. The manufacturing growth cooled off due to softer rise in new order and output due to lower working hours driven by heatwaves in May’24. However new export order rose at fastest pace in the last 13 years. The Manufacturer were able to pass on a part of increase in input prices partially and hence the margin saw a contraction.
4. The Service PMI expanded albeit at a slower pace. Companies experienced additional labour cost due to overtime payment and salary revision. Several firms during the survey indicated having taken on extra staff.

 

2. ECB becomes the 4^th Central Bank to cut interest rate :

 

1. European Central Bank (ECB) has cut its deposit rate by 25 bps from 4% to 3.75 w.e.f. 12^th June 2024. ECB becomes the 4^th bank to cut rate after three other central banks i.e. Bank of Canada, Riksbank (Sweden), and Swiss National Bank (SNB) implying the beginning of the global easing cycle.

 

2. This rate cut came even though inflation continues to be above ECB’s target rate as the governing council based on an updated assessment found that it’s appropriate to moderate the degree of monetary policy restriction after 9 months of holding the rates steady.

 

3. Another interesting fact to note from the press release is the updated growth and inflation projection. The core inflation is expected to average at 2.2% next year (up from 2.1%) and the headline inflation is projected at 2.2% (up from 2%). The GDP growth projection is revised upward to 0.9% (from 0.6% earlier)

 

4. The central bank interest rate movement for the four central bank is shown below for ready reference

 

 

3. RBI in it’s latest MPC concluded today (7^th June 2024) have kept the Repo Rate unchanged as widely expected. The policy is expected to continue it’s disinflationary guidance mainly to target food inflation which may derail the current fall in the overall inflation rate. The Inflation-growth balance is moving favourably with the higher inflation so far not affecting the GDP growth and hence RBI would CONTINUE to remain focussed on withdrawal of accommodation to ensure anchoring of inflation expectation and fuller policy transmission.  The other key points to note were as below:

 

1. The GDP forecast for FY25 is increased to 7.25% against the 7% forecast for the earlier year.
2. Private Consumption is recovering as visible in the steady discretionary spending in urban areas (Retail sales of passenger vehicles increased by 7.7 per cent in April-May. Domestic air passengers rose by 4.6 per cent during this period, on the back of capacity constraints and a high base of 19.0 per cent growth a year ago.)
3. Revival in Rural Demand is visible in the reduction in the demand for MNREGA employment which declined 14.3% during May’24 reflecting continued improvement in farm sector employment.
4. Manufacturing sector continue to do well and the capacity utilization reached 76.5% (higher than the long term average of 73.8%)
5. The above average monsoon forecast by IMD is expected to boost kharif production and replenish the reservoir level (which stood at 22.6% of their capacity as at 6^th June, 2024)

 

4. US Non-Farm Payroll measures the no. of people employed outside the farm sector in US. The Non-Farm Payroll or the NFP for May’24 came better than expectation at 272K(expectation of 180K) employment that the labour market remained buoyant in US thereby literally washing off the expectation of any rate cut soon. The US treasury yield spiked up 16 bps to 4.45% (against the yesterday’s close of 4.29%). The unemployment rate though increased marginally to 4% (from 3.9%).

 

Impact on Indian rates: The increase in US rates along with possibility of rising inflation in India in H2CY24 are expected to keep the short term rate elevated as RBI may not be able to embark on a rate easing journey considering the strong GDP growth in India, impact of rate cut on exchange rate