India: Nomura's proprietary indices suggest growth consolidation ahead..

Nomura has launched five proprietary indices to gauge India’s growth momentum and the near-term monetary policy path: · The Nomura Composite Leading Index (CLI)·  India economic heat-map·  Monthly Activity Indicator· Nomura Economic Growth Surprise Index for India (Bloomberg ticker: NGISOINR) and· Nomura RBI Policy Signal Index (Bloomberg ticker: NMEIRPSI). Going forward, we will monitor our growth and policy indicators on a monthly basis for early signs of any further deterioration in growth outlook or possible room for further easing.Overall, our proprietary indicators suggest that growth is headed into a consolidation zone into Q2 2016. The ongoing growth recovery is not yet broad-based. While urban consumption is strong, investments have slowed slightly. Services activity is mixed and industry is still sluggish. This suggests some downside risks to our baseline forecast of 7.8% GDP growth in 2016 (7.3% in 2015). Meanwhile, Nomura’s RBI Policy Signal Index indicates there is still scope for policy easing, but space is limited. We continue to expect a final 25bp rate cut in April.

Nomura has launched five proprietary indices to gauge India’s growth momentum and near-term monetary policy path: The Nomura Composite Leading Index (CLI), India economic heat-map, the Monthly Activity Indicator, the Nomura Economic Growth Surprise Index for India (NESII 2.0, Bloomberg ticker: NGISOINR) and the Nomura RBI Policy Signal Index (NRPSI, Bloomberg ticker: NMEIRPSI). While the CLI is a quarterly index, NESII 2.0 is a weekly indicator; all others are monthly (to learn more about the methodology behind our indicators, please see the Appendix).

•       The Nomura Composite Leading Index, a leading indicator for non-agriculture GDP growth suggests that growth is headed into a consolidation zone into Q2 2016.

•       Our economic heat-map indicates that the ongoing growth recovery is not yet broad-based. While urban consumption is strong, investments have slowed slightly. Services activity is mixed and industry is still sluggish.

•       The Nomura Economic Surprise Index shows data has surprised negatively. However, it is close to a turning point, with a rising likelihood of positive data surprises in coming months (due to low expectations).

•       The Nomura RBI Policy Signal Index indicates there is still scope for policy easing, but space is limited. Its latest value suggests a high likelihood of a 25bp rate cut. In our baseline, we expect the Reserve Bank of India (RBI) to deliver a final 25bp rate cut in April, utilising the room afforded by lower commodity prices (and weaker growth momentum).

•       Overall, our proprietary indicators suggest an uneven nature of the recovery, which together with the weaker growth momentum in end-2015, suggests some downside risks to our baseline forecast of 7.8% GDP growth in 2016 (7.3% in 2015).

Economic recovery losing some steam

The Nomura Composite Leading Index (CLI), which leads India’s non-agriculture GDP growth by two quarters, suggests that the economic recovery, which began in Q4 2014, is headed into a consolidation zone into Q2 2016. The Nomura CLI is constructed using monetary, financial, domestic and external demand indicators and helps identify turning points in the growth cycle (Figure 2). A softening in non-oil imports growth and lower equity returns contributed to the softer growth momentum. However, with the latest reading still above 100, we believe the CLI suggests a mid-cycle consolidation, rather than the start of a downturn.

Our economic heat-map of high-frequency data, where the green shading denotes high growth and red shading denotes low growth, suggests that the growth recovery is not yet broad-based (Figure 1). Urban consumption demand (passenger cars, aviation traffic, diesel consumption, consumer credit) remains the brightest spot in the economy, boosted by higher real disposable incomes and lower commodity prices (lower costs), although car sales have eased lately. Rural consumption demand (for example, of two-wheelers) remains subdued. The services sectors, although not as strong as urban consumption, appear to be chugging along at a mixed pace, with the transportation segment (medium and heavy commercial vehicles) the strongest component. On the investment front, capital goods output growth has slowed slightly, probably reflecting weaker private sector demand, while public (government) capex continues to grow at a healthy pace. In contrast, both the industrial and external sectors remain in the red, suggesting continued stress. 

Overall, of the 32 indicators in our heat-map, the proportion indicating a pick-up in growth rose to 52% in December from 24% in November. Our Monthly Activity Indicator, a weighted average growth combining the high-frequency data in the economic heat-map, is tracking 7% in December, down from an average of 8.2% in Q3 2015, indicating slight softening in growth momentum towards end-2015 (Figure 3).

The Nomura Economic Surprise Index for India (NESII 2.0) fell to -0.25 in January from -0.06 at end-December 2015, indicating negative surprises for incoming data relative to consensus expectations. A lower-than-expected reading on the manufacturing PMI and industrial production, along with a higher CPI reading were responsible. Indeed, the growth-inflation mix has been disappointing lately (see India: Disappointing growth-inflation mix, 12 January 2015). However, since NESII is mean-reverting by nature, its current value suggests that the likelihood of positive data surprises in the coming months (due to low expectations) is rising (Figure 4). 

The Nomura RBI Policy Signal Index (NRPSI), which measures the relative probability of monetary policy tightening or loosening in the near term, indicates a high likelihood of a 25bp rate cut. The NRPSI is historically seen to have a strong indicative power of policy actions. In January 2016, the NRPSI stood at -0.24 (similar to December) and similar to its level in end-2014, which was followed by 25bp rate cut. The sharp fall in oil prices (-35% y-o-y), CPI inflation tracking below the Reserve Bank of India’s inflation target (6% for January 2016) and a continued double-digit contraction in exports, is currently driving the NRPSI in the dovish zone. Historically, NRPSI values close to -0.5 have coincided with larger than 25bp, or a series of 25bp rate cuts in quick succession, while values close to 0 have indicated a neutral policy stance. Therefore, January’s NRPSI value indicates there is still some scope for policy easing, but space is limited.

Fig. 1: India economic heat-map (Green = high growth; red = low growth)

Source: CEIC and Nomura Global Economics. *Index values. Note: The period of comparison is 2012 to date. Dark green shading suggests the fastest growth since 2012, while dark red suggests the slowest growth since 2012.

Fig. 2: Nomura CLI and Non-agriculture GDP growth Source: CEIC and Nomura Global Economics

Fig. 3: Weighted average monthly activity indicator Note: The Monthly Activity Indicator is a weighted average of the 3-month moving average growth rates of 21 of 32 high frequency indicators in the heat-map. Weights assigned to each indicator are based on the corresponding sectors share in GDP (of which it is an indicator). All indicators within a particular sector are assigned equal weight. Source: CEIC and Nomura Global Economics

Fig. 4: The Nomura Economic Surprise Index for India Source: CEIC, Consensus survey and Nomura Global Economics

Fig. 5: Nomura RBI Policy Signal Index Source: CEIC and Nomura Global Economics

Conclusion: Overall, Nomura’s proprietary indices for India, together with the high-frequency data, indicate some slowdown in the growth momentum towards end-2015 and a high likelihood of further monetary policy easing. While improving urban consumption demand and a robust transportation sector are supporting growth, weak external conditions and sluggish investment demand are weighing on the pace of the recovery. The uneven nature of the recovery, together with weaker growth momentum in end-2015, suggests some downside risks to our baseline forecast of 7.8% GDP growth in 2016 (7.3% in 2015). We expect the RBI to deliver a final 25bp rate cut in April, utilising the room afforded by lower commodity prices (and weaker growth momentum). Beyond that, we expect the RBI to stay on hold until end-2016. We will monitor our growth and policy indicators on a monthly basis for early signs of any further deterioration in growth outlook or possible room for further easing.