The Indian economy has retained its luster with some red flags

This firm stance is particularly favorable to the Narendra Modi government approaching the Lok Sabha elections, especially at a time when recession bells are ringing in Europe. However, the recent depreciation of the rupee, rising food prices and weakness in private consumption raise red flags.

In the EM Tracker, which ranks 10 countries across seven indicators, India stood out mainly due to 8.4% GDP growth in October-December, 11.9% growth in exports and 4% month-on-month rise in stock market capitalisation. With a score of 83 out of 100, India significantly outperformed its closest rivals, the Philippines (65) and Brazil (64).

EM Tracker is one of two economy trackers powered by Mint. In a second tracker that tracks the economy's performance over time, eight of 16 high-frequency indicators were above their five-year average trend in February (were „in the green”) — an improvement from January.

These include Purchasing Managers' Index, Non-Food Credit and Inflation. However, a sharp decline in passenger vehicle sales (an indicator of urban demand) and tractor sales (an indicator of agricultural demand) and a shortage of steam in labour-intensive export sectors are a concern.

Market dynamics

Despite the ups and downs, India's stock market has emerged as one of the best performers globally this fiscal, driven by consistently strong GDP figures. A rise in global stock markets, particularly in the US, further contributed to this momentum.

„Corporate India's rising profitability coupled with a strong GDP growth rate led to a rally in the markets,” said Harsimran Sawhney, Executive Vice President, Head Treasury, Anand Rathi Global Finance. To the positive market sentiment, Sahni added.

Meanwhile, the rupee's performance has been relatively stable in recent months, but despite India's strong foreign exchange reserves, it fell to record lows last week, sparking outrage in a heated election season. „Reserve Bank of India's (RBI) recent intervention (to reduce depreciation) in the foreign exchange market has had a positive impact on the rupee, thus contributing to stability,” Sahni said.

Gaining speed

After being depressed for most of 2023, cargo shipments have seen a gradual improvement in the past three months. In February, India's exports grew 11.9% year-on-year, its highest level since June 2022. The increase was led by a 54.8% growth in electronic products, a 22.2% rise in pharmaceuticals and a 15.9% rise in engineering products.

“Overall, exports have shown resilience in the face of unfavorable global conditions. To be sure, they are getting support from the depreciation of the rupee,” Crisil said in a statement last month.

However, despite the encouraging numbers, a sense of caution is warranted, the report said. „Global tensions and increasing disparity in global growth will make maintaining the export momentum no easy task,” it added.

Meanwhile, exports from eight labour-intensive sectors tracked by Mint remained under pressure last month with a 2.7% decline, highlighting the need for policymakers' attention.

Constant inflation

India's core retail inflation was steady at 5.1% last month, while core inflation excluding food and fuel and light groups eased 20 basis points to 3.4%. However, inflation remains significantly higher than the Reserve Bank's medium-term target of 4%, with additional risks from volatile food prices. Food items account for nearly 40% of the inflation basket and influence the headline rate.

Also, seasonal trends affecting crop production with erratic rainfall have added uncertainty to inflation's path towards the target. Even after decelerating in recent months, food inflation averaged 7.4% in April-February. „Large and repeated food price shocks tend to interrupt the pace of inflation by curbing core inflation,” the RBI's Monetary Policy Committee said last month. Hence, economists do not expect central bank policy to start easing the repo rate. Until the election is over.