India Economics Weekly:CPI inflation bottoms amidst weak growth

We look at the state of investment, inflation, and trade in this Weekly.

    Investment: In FY16, real gross fixed capital formation growth was 6.1%yoy,private sector investment growth was just 1.9%yoy in FY16 (vs. 4.8%yoy in FY15).

    Clearly, investment is being held up by public investment (up 20.9%yoy, as perthe latest data). Similar trend has played out in FY17 so far. Looking at the last fewyears’ trend and recent evidences, we expect private investment to contract atleast 5%yoy in FY17, which even after factoring in strong public sector investmentgrowth would result in a contraction in total investment growth on a yoy basis.

    Inflation: Aided by a favorable base effect, India’s CPI inflation eased furtherto 3.2%yoy in January, from 3.4%yoy in the previous month. On a seasonallyadjusted basis, this however constituted an increase of 0.4%mom, with inflationmomentum (measured as the 3m/3m seasonally-adjusted annualized rate) risingto 2.6%, from 1.4% in December. Inflation momentum looks to have bottomed,but continues to be at comfortable levels.

    Trade: Rising oil price has begun to push up the trade deficit, which headedtoward USD10bn in January. Exports are up (+4.3%yoy), but imports more so(+10.7%yoy), with oil imports rising sharply (+61.1%yoy). The best readings ofexternal balance are likely behind us, unless exports were to pick up appreciably inthe coming months. We are keeping our expectation of external demand modestthough, and therefore see the widening trade deficit begin to weigh on the rupeethis year.