Inflationary concerns continue to take centre stage locally as well as globally causing financial markets and economy to adjust in face of hawkish central banks. June month saw a steady growth in demand for goods and services, albeit with higher inflation and input cost pressures.
May CPI remained high at 7.05% YoY, though down from the 7.79% in April 2022. The moderation in May CPI inflation was led primarily by a favorable base and sequential slowdown in core inflation, which declined from 7.24% y-o-y in April 2022 to 6.41% in May 2022. Food inflation, on the other hand, at 8% (April 2022 at 8.3%) remained high and was the main contributor to headline inflation due to sequential surge in vegetables, meat and fish, spices, and oils & fats. While the fuel & light index rose by 1.4% MoM, lower than the 3% rise in April 2022 and Transport & communication CPI also eased to 0.3% MoM vs 3% in April 2022, prices of vehicles, tyres, public transport fares, air tickets – all showed strong upward price pressures. Housing CPI rose by 0.36% MoM.
Manufacturing Purchasing Managers' Index (PMI) declined to 53.9 in June 2022 from 54.6 in May 2022 and remained expansionary for the twelfth consecutive month. However, the expansion in June 2022 is the weakest reported since September 2021 as inflation concerns continued to dampen business confidence. Production of manufactured products, factory orders, stocks of purchases and employment reported softer growth in June 2022 compared to the preceding month. On the other hand, Services PMI rose to 59.2 in June 2022 from 58.9 in May 2022, highest level since April 2011. New order intakes by the services companies touched an 11-year high in the June 2022 quarter even as the input costs continued to rise in June 2022.
The index of eight core industries rose by 18.1% YoY in May 2022. The growth was broad-based with all eight industries reporting rise in production. Electricity generation rose by 22%, steel production by 15 % and cement production by 26.3% YoY. Cumulative output of eight core industries during April-May 2022 rose by 13.6% YoY.
Core sector growth accelerated to 5.8% y-o-y in February 2022 compared with 4% y-o-y in the previous month due to low base (February 2021, the core industry contracted by -3.3% y-o-y). On a m-o-m basis, core output decreased by 5.3%. On a y-o-y basis, acceleration in core is led by natural gas at 12.5%, refining at 8.8% and coal at 6.6%. Uptick was also visible in steel at 5.7%, cement at 5% and electricity at 4%. During April-February 2022, core sector reported an increase of 11.1% y-o-y. Cement and natural gas have driven the rebound at 22.4% y-o-y and 20.4% y-o-y respectively. Steel output has seen an increase of 18.5% y-o-y.
The merchandise trade deficit widened to a high of USD 25.6 bn in June 2022, driven by relatively weaker exports and higher imports. Export growth moderated to 16.8% YoY in June from 20.6% in May. Oil exports remained elevated, while other exports moderated sequentially to 4% YoY in June from 13.1% in May. Import growth remained elevated at 51% YoY in June with crude oil imports growing by 94.2% YoY, gold by 170 % and coal imports by 240%, the latter reflecting the power crunch. India’s current account deficit narrowed in Q4 FY2022 to -1.5% of GDP from a 36-quarter high in Q3 FY2022 of -2.6% of GDP. FX reserves as at the end of June 2022 decreased by USD 8 bn at approximately USD 593 bn.
GST collections were higher by 2.2% MoM at INR 1.44 trillion. Bank credit growth for June 2022 continued to be strong at around 13.2% YoY vs 12.1% YoY in May 2022.
Overall domestic demand and activity levels remain robust but input price pressures are being felt in manufacturing as well as exports, which will likely keep core inflation high. Whilst global commodity prices softened in June, they continue to remain at elevated levels with high volatility. As global central banks continue to raise interest rates, financial conditions have tightened. India’s banking sector remains in a strong position to support growth through stable credit growth.