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Domestic News:

Monetary Policy Committee (MPC): Traditionally, the RBI governor takes a call on
monetary policy based on the Technical committees suggestion. However, he maintains a
veto power over the setting of interest rates. While the new amendment of the government,
does not strip the veto power of the RBI governor, it makes room for a six member team three from the RBI and the rest from outside. Under the new system, the six member MPC
will decide Indias monetary policy - under the stewardship of the Governor. Members will
include representatives of structurally important commercial banks as well as domain
experts. In the committee, two members will be nominated by the Finance Ministry and
three will be from RBI.


( JULY 17, 2016 JULY 22, 2016)

Broadly, my belief is, todays value

of the rupee is pretty reasonable
and I dont think we should
emphasise moving one way or the
other as the answer to any
Raghuram Rajan, Governor, RBI.

Impact: This will improve the efficiency in monetary policy decision making by including
opinions of a wider expert group.

Consumer Price Index (CPI): The combined CPI inflation rose by 5.8% in June, 2016 versus
5.6% in May, 2016 (YoY). The primary driver has been food inflation that accounted for 40%
of CPI. The latter increased by 7.8% in June 2016, as compared to 7.5% in May 2016.
Impact: Prices of vegetables (+14.7%), pulses (+26.9%), and sugar (+16.8%) are the key
driving factors of food inflation. Vegetables and prices of pulses are likely to come down by
August with new crops coming in the market thanks to import agreements. Also, seasonal
vegetables are likely to reach the market by August. Therefore, SMERA believes that food
inflation is likely to fall in July. On the other hand, the base effect might impact general
inflation rates in the near future as July and August, 2015 rates were only 3.7%. We estimate
that CPI may surpass 6% this month as a result.




Food Weight in CPI




Non-Food Weight in CPI







Food inflation (in %)

Non-Food inflation (%)

Overall inflation (%)

Source CSO; SMERA Research





---------------------------------------------------------Index of Industrial Production (IIP): IIP increased by 1.2% in May, 2016 as against (-)
0.8% in the previous month. Manufacturing, which accounts for 75% in general IIP index,
recorded a 0.7% growth. On the other hand, capital goods, which account for 9%, continued
its negative trend for the seventh month and posted (-) 11.67% growth.
Impact: Status quo will be maintained; Capex still in negative territory. However, with the
implementation of the 7th Pay Commission and OROP, SMERA believes that there may be a
supply driven inflationary condition post August. Price rise will mostly be a function of nonfood goods.

Indias merchandise exports: The category broke the 18 months long negative trend with
expansion of 1.3% in June, 2016. Oil exports that account for 18% in overall exports have
fallen by 10.8%, whereas, non-oil exports increased by 3%. With 7.3% contraction, Indias
merchandise imports continued their negative trend. Oil imports accounting for 30% in
2016 | SMERA Ratings Limited

overall imports will remain lower due to lower oil price (impacting the absolute value of
Impact: Improvements in external demand will benefit the performance of the
manufacturing sector and strengthen the rupee against other currencies.

International News:
Chinas exports: Outward shipments declined by 4.8% while imports declined by 8.4% in
June, 2016. Retail sale/consumer demand in the economy recorded a sluggish growth rate of
10.6%. Despite contraction in exports and slower retail sales, the economy posted 6.7%
growth in Q2, 2016 (April-June quarter).

Impact: Fall in Chinas exports may provide an encouraging environment for Indian exports
and thereby improving trade balance with China. The current trade deficit (in Chinas favor)
between the two countries stands at (-) $53 billion as on 2015-16.

The U.S. consumer price index growth remained mute at 0.1%. CPI inflation (excluding
food and energy inflation) increased by 2.3% in June, 2016 as compared to 2.2% last month.
Similarly, producer price index (Pre-WPI) in the economy has increased by 0.3% verses (-)
0.1% in preceding month.

SMERA Economic
Research Team
Karan Mehrishi
Lead Economist
Economic Research Team
D: +91 22 6714 1118
E: karan.mehrishi@smera.in

Impact: The positive sign of the US CPI and PPI data indicates that consumer demand in the
US market is heading in a positive direction despite discouraging inflation numbers (not
meeting target). However, non-farm payroll data has been encouraging and gives us some
sense of demand rising in the near future.

Birabrata Panda
Junior Economist
Economic Research Team
D: +91 22 6714 1223
E: birabrata.panda@smera.in

Media Contact
Bedabrata Bagchi
D: +91 22 6714 1336
E: bedabrata.bagchi@smera.in

2016 | SMERA Ratings Limited