India’s growth recovery: V-shaped for demand, U-shaped for supply – Nomura

Nomura’s heat-map of high-frequency data suggest that non-agricultural GDP growth continues to recover, led mainly by investment and external demand, while consumption demand has been mixed, possibly due to weak monsoon rains and higher fuel costs, explains the research team at Nomura.

Key Quotes

“We see the recovery concentrated on the demand side, while supply side indicators are showing a slower pace of catch-up.”

“Nomura’s Composite Leading Index has risen to near a seven-year high in Q1, pointing to a V-shaped recovery in non-agricultural GDP growth. However, agricultural output has been hit by weak monsoons, and this may partly blunt the pickup in non-agricultural GDP growth in the near term. We forecast a sharp rebound in GDP growth to 7.5% in 2018 from 6.2% in 2017.”

“The Nomura Economic Surprise Index for India has moderated from its highs in January but remains significantly above its mean, indicating that there is a higher probability of negative data surprises in coming months.”

“The Nomura RBI Policy Signal Index moderated to 0.01 in February, firmly remaining in the “no change” zone. Despite upside risks to inflation, we believe that balance sheet stress, underlying inflation at ~4.5% and tighter financial conditions are why the RBI is still neutral. However, risks to food inflation are skewed to the upside due to government policies that are increasingly geared towards lifting rural incomes. We expect policy rates will be left unchanged through 2018, but see the risk of more hawkish rhetoric in Q2, when both growth and inflation look poised to pick up.”