Quick Summary
Indian Economic Update
The Centre has mopped up INR 25-30 billion in the first five weeks after it imposed a windfall tax on oil and gas companies for the export of fuel, ...as per media reports. It is likely that the Centre will continue with the tax, till the Indian crude basket is above USD 80/bbl.

As per RBI forward looking surveys, consumer confidence continued to rise in July (CSI moved to 77.3 vs. 75.9 in the previous round), while inflation expectations moderated as households’ median inflation expectation for the current period moderated by 80 bps to 9.3% and 3-month and 1-year ahead expectations also fell by 50 bps and 60 bps, respectively.

Domestic economic activity remains resilient”, the Monetary Policy Committee (MPC) of RBI said in its resolution released last week. Monthly Purchasing Managers’ Indices on manufacturing and services support MPC’s conclusion. Both PMI manufacturing and services have stayed above the critical threshold of 50 – this signifies expansion in economic activity over the last month – for the past 12 months. To be sure, MPC in its growth projections has noted that there will continue to be downside risks. However, what matters is that MPC has not made a downward revision to its growth projections between the June and August meeting. This is despite the fact that IMF’s August update to the World Economic update made a downward adjustment of 80 Basis Points (one basis point is one hundredth of a percentage point) to its April forecast of 8.2.

The Oil ministry has ordered the diversion of natural gas from industries to the city gas distribution sector to cool CNG and piped cooking gas prices, which have shot up by <70>% on the use of imported fuel. The use of costlier imported LNG was granted three months earlier to meet incremental demand for automobile fuel CNG and household kitchen gas PNG.

The Centre has released two instalments of tax devolution to state governments amounting to INR 1.16 trillion for August, against the normal monthly devolution of INR 583.3 billion to arrest a decline in their capital expenditure.

Bank credit inched up 14.5% YoY to INR 123.6 trillion and deposits grew 9.1% to INR 169.7 trillion in the fortnight ended July 29, as per RBI data.

Exports of approximately 1,800 India goods worth USD 7.9 billion to the EU will cease to get the benefits of low or zero-duty concession from 2023 as the EU would withdraw the benefits. This move will make Indian goods such as plastics, stone, machinery and mechanical appliances more expensive.

Sowing of summer crops in India was 3% lower this year with the fall in paddy area being close to 13% YoY. The sowing has been hit mainly due to severe deficiency in monsoon rainfall against the benchmark in key states — Uttar Pradesh (-40%), Bihar (-35%) and West Bengal (-25%).

MPC hiked the policy repo rate by 50 bps to 5.40% and the stance – “withdrawal of accommodation” – was also kept unchanged. Governor Das, in the post-policy conference, mentioned that MPC took a calibrated and measured approached, given that the 50 bps hike has become the new normal. With broad-based traction visible, the growth forecast was kept.

unchanged at 7.2% for FY23. Even though inflation outlook has improved, MPC kept the inflation forecast at 6.7% for FY23.

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Global Update
Even as inflation appears to be moderating, FOMC officials continue to provide a hawkish guidance. In this regard, the ...San Francisco Fed President Mary Daly said inflation is too high, adding that, she anticipates more restrictive monetary policy in 2023. She said her baseline for the September policy meeting is that of a 50 bps hike, but also open to 75 bps, if necessary.

Bank of England Chief Economist Huw Pill acknowledged that hiking interest rates to fight inflation will slow growth but argued that it’s necessary to stabilise the economy over the long term.

The US CPI slowed more than expected to 8.5% in July of 2022 from an over 40-year high of 9.1% hit in June and below market forecasts of 8.7%. A decline in gasoline offset an increase in food and shelter costs. Core inflation was steady at 5.9%, beating expectations of 6.1%.

Fed President Charles Evans said inflation remains “unacceptably high” and that “we will be increasing rates through the rest of this year and into next year.” Evans said he expects the target range for the Central Bank’s benchmark rate, which is now 2.25% to rise to 3.25% by the end of the year and to 3.75% by the end of 2023.

Fed's St. Louis President James Bullard said that he wants rates to be between 3.75- 4% by the end of the year. He said the Fed will be prepared to hold interest rates “higher for longer”, should inflation continue to surprise to the upside.

Russia reportedly suspended oil flows via the southern leg of the Druzhba pipeline, amid transit payment issues. The suspension of pipeline flow will cut 386K bpd crude oil supply to Slovakia, Hungary and the Czech Republic.

Chinese officials must avoid becoming “slack” and “war weary” when it comes to fighting COVID-19, according to a top Communist Party newspaper.

The UK is planning for several days over the winter when cold weather may combine with gas shortages, leading to organised blackouts for industries and households.

FOMC officials continue to provide a hawkish guidance. San Francisco Fed President Mary Daly suggested a 50 bps increase isn’t locked in at the US Central Bank’s next policy meeting, saying the Federal Reserve is “far from done yet” in bringing down inflation. Meanwhile, Governor Michelle Bowman said that Fed should keep considering large hikes, similar to the 75 bps increase until inflation meaningfully declines.

Taiwan reiterated it won’t succumb to pressure from China after days of military drills in the air and seas surrounding the island, sparked by Nancy Pelosi’s visit.

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Benchmark indices are likely to open lower tracking the subdued global equity markets amid ongoing uncertainty about the quantum ... of Federal Reserve rate hikes even as the US jobless claims hinted at a robust labour market and economic recovery. Focus today will be on the inflation, IIP data.

During the week Sensex gained 1.84% to close at 59462.78 while Nifty advanced 1.69% to close at 17698.15

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Government bond prices are likely to open steady as market exercises caution ...ahead of the release of inflation data post market hours.

10Y benchmark yield ended at 7.28% as compared to 7.31% of previous week.

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Brent crude oil prices reacted over the International Energy Agency which said soaring natural gas prices could push consumers to substitute in to crude oil markets ... for heating purposes, shoring up demand in that process. In contrast, the OPEC cut its annual demand growth outlook by 260,000 bpd to 3.1 million bpd although its expectations for demand remained higher than that seen by the IEA. Oil is trading at USD 98.73/bbl.

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Gold prices are hovering around USD 1800/oz led by soft inflation data. The US PPI rate eased to 9.8% YoY in July, ... signaling lower inflationary pressures. Weaker dollar coupled with improved risk appetite weighed on yellow metal. Gold is trading at USD 1802.80/oz.

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The USD/INR pair is likely to open flat ahead of the inflation data release. RBI is expected to intervene to prevent ...a downslide and curb any sharp movement in the pair. The Indian Rupee closed weaker against the US dollar in the previous trading session moving to the 79.64 level.

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During the week Sensex gained 1.84% to close at 59462.78 while Nifty advanced 1.69% to close at 17698.15
Bond Yields
-3 bps
10Y benchmark yield ended at 7.28% as compared to 7.31% of previous week.
Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and CRISIL.
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