📰State Of The Economy

Hello. Yesterday, the Reserve Bank of India released its monthly bulletin, revealing underlying drivers in India’s economy. We’ll tell you what you need to know, and then close with Gupshup, a round-up of the most important headlines.

Also, our Future of India event will be moved from November 7 to February to accommodate events relating to the U.S. presidential election that week. All ticket holders will be contacted directly in the coming days with the option to get a full refund or transfer their ticket. More details will be announced as they come.

BTW: Climbing Mt. Everest is a great feat undertaken by approximately 800 people every year. Unfortunately, the path to the peak lacks bathrooms, meaning climbers will leave their fecal matter on the mountain. How many pounds of human excrement is left on Mt. Everest every year? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

Takeaways from RBI’s October Bulletin

Every month, the Reserve Bank of India (RBI) publishes its "RBI Bulletin," a comprehensive collection of speeches, research studies, articles, and data sets. The October bulletin, released yesterday, offers several important insights into India's economic landscape.

Consumer Prices    Inflation, which recently stood at a 5.5 percent year-on-year increase, was notable for its wide disparities between price increases across sectors, with food inflation remaining the primary concern.

In an early October speech, RBI Governor Das reaffirmed the use of FIT, or flexible inflation targeting, as the central bank’s primary framework to address inflation. FIT, first adopted in 2016 and readopted for the 2021 to 2026 period, sets the central bank’s inflation target to 4 percent with a +/- 2 percent band. Prior to 2016, the RBI did not have a formal inflation target. Das highlighted that the FIT served well as a benchmark, provided forward guidance for MPC meetings, and increased the central bank’s credibility as an independent institution separated from the government’s overall growth-oriented policies.

Inflation has been on a downward trajectory, but the decline has been gradual and uneven. Core inflation appears to be stabilizing, driven by slower growth in services and wages, yet persistent food inflation continues to keep the overall headline rate elevated. Additionally,, rising metal and oil prices, influenced by geopolitical tensions in the Middle East and China’s economic stimulus, have added pressure. While durable disinflation is taking hold, the delayed effects of earlier rate hikes—typically felt 12 to 18 months later—are now beginning to more significantly impact the economy, leading to a more sustained period of higher rates.

The RBI's intervention to ensure currency stability is recognized as a crucial strategy in managing consumer price levels. A 5 percent depreciation of the Indian rupee (against the baseline could push inflation up by about 35 basis points (bps), while GDP growth may rise by 25 bps due to short-term boosts in exports. Conversely, if the INR appreciates by 5 percent, inflation and GDP growth could both moderate by roughly 35 bps and 25 bps, respectively. This dynamic reflects how currency depreciation makes exports more competitive, stimulating growth, but also raises import costs, adding inflationary pressure. Meanwhile, India’s position as the fastest-growing major economy, along with strong macroeconomic fundamentals and potential inclusion in global bond indices, continues to attract foreign investment.

Indian Banks Adopt AI   The RBI penned research showing the quick adoption of artificial intelligence by the Indian banking system to improve fraud detection and operations. In marketing, AI enables more precise consumer segmentation, allowing for highly targeted advertising. Indian banks are leveraging AI to develop mobile apps that cater to the distinct needs of various customer groups, particularly by wealth tiers. On the risk side, AI automates credit scoring and ensures compliance with regulatory standards, allowing banks to monitor suspicious activities and issue penalties more efficiently than before. Data also shows that AI adoption in Indian banking has increased sixfold since 2016.

Economic Growth   The RBI projects economic growth of 7-7.2 percent for the coming year, driven by consumption, investment, and government spending. Key upside factors include strong government capex, which remains high as the BJP consolidates electoral gains and pushes infrastructure projects, and moderating global inflation. However, inflation could remain sticky as central banks pivot toward rate cuts.

Manufacturing Output   Manufacturing serves as a key indicator of economic and inflationary trends due to its relationship with consumer spending and cost transmission. Optimism for Q3 2024-25 has strengthened, as reflected in the July-September business sentiment surveys. Both services and infrastructure have seen significant improvements, likely driven by heightened demand from China and expectations for a strong holiday season. However, investors should note that survey results often reflect an overly optimistic outlook compared to actual outcomes, although this shift in sentiment is encouraging, especially following two consecutive quarters of more pessimistic views.

Macro

• India is looking to examine scrapping windfall taxes on crude exports. Tarun Kapoor, an advisor to PM Modi, says the oil ministry is looking to end these taxes. The taxes were put in place during 2022 when oil prices skyrocketed but recent weakness has made the government reconsider protectionism. (BBG) 

• India scraps floor pricing on white rice exports to entice buyers. In the past there was a minimum price of $490 and a 10 percent duty on parboiled grades of rice. This is meant to help Indian farmers compete with other Southeast-Asian countries and boost earnings as well with expected global demand. (Economic Times) 

Equities

• Hyundai India drops 7 percent after much-anticipated IPO. Experts indicated that Hyundai's lackluster initial performance was attributed to a lofty valuation, short-term declines in vehicle sales, and a rise in the royalty rate the company pays to its South Korean parent. "The high pricing of Hyundai's shares appears to be impacting its listing negatively," noted Arun Kejriwal, founder of Kejriwal Research. (Reuters)

• Unilever India misses profit estimates due to low demand.reported that volume growth came at 3 percent last quarter, still higher than the 2 percent in 2023, which is not sustainable for the higher inflationary atmosphere. Growth in urban areas (compromising ⅔ of volume) was moderate while rural areas were recovering.  (Reuters)

Alts

• Asia’s gas users continue to produce in full swing. India sees natural gas as a bridge fuel on the route to sustainability due to lower emissions compared to coal. Energy demand is mostly from heavy machinery and fertilizer production which are both too high use for renewable forms to replace conventional coal fully. (BBG) 

• Statkraft, a renewable energy business, is planning on divesting from India. The company is focusing on key business areas in Europe though in the past they were attempting to enter Asia. (BBG)

Policy

• Modi and Xi Jinping had their first talks in years plus Modi was positive on Putin. Both leaders plan on strengthening communication to reduce conflict, starting with border controls earlier this week. Modi, on a televised portion, admitted to India and Russia having “close and deepening” ties. (BBG)

Oh, and about 26,500 pounds of human feces are left on Mt. Everest every year.

See you Friday.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.07 Indian Rupee