US surges, but India has more ammunition now
Given the dramatic revision in US GDP for the September quarter, from 2.8% earlier to 3.6% now—this takes it to a level last seen six quarters ago—and the equally impressive hike in employment data, market players are once again beginning to talk of a US taper later this month. While jobs growth in November was just slightly higher than that in October at 203,000, this is significantly higher than September’s 175,000 and, more importantly, the jobless claims are down significantly, taking the unemployment rate to 7%. The recovery also seems a bit more broad-based with manufacturing employment of 27,000 jobs in November, up three times since September. Even so, the nature of the recovery doesn’t suggest there is any reason to change our view that the taper will not take place for a few months more. For one, with the bulk of the hike in GDP growth taking place due to a hike in inventory levels, this suggests Q4 growth will be a lot weaker than previously envisaged, though it is true that at 54.7 for November, manufacturing PMI in the US hasn’t been stronger since January. A break up of the components of US GDP suggests the Fed may wish to look at data for a few more months before taking a call on the taper. Even after being revised upwards, the contribution of personal consumption was 1.04 percentage points which is lower than the 1.24 in the previous quarter and the 1.54 in the quarter before that. The growth contribution of gross private investment has been doubled to 2.49 percentage points from 1.45 earlier but over 0.8 percentage points of this has been due to an increase in inventory levels. The net export impetus has been sharply reduced. Most importantly, with the next deadline to finalise a deal on the US budget in a few days—Friday the 13th—the chances of another shutdown in January can’t be ruled out.
For India, fortunately, the swap agreement that RBI put in place ensured $34 billion more came into the economy and, more importantly, in recent months RBI found a way to remove a very significant part of the demand for dollars—$164 billion in a full year—from oil importing PSUs from the daily market for foreign exchange. While RBI managed to slow down the depreciation of the rupee by selling dollars directly to oil PSUs and then entering into swap agreements—this ensured forex reserves didn’t fall—with them for a date in the future, the markets always felt this would worsen matters when the PSUs returned to the market to make good their swap agreements. Governor Raghuram Rajan, however, saying that the swaps could be, if need be, settled in rupees, however, changed the dynamics of the market since, should the need arise, this demand can once again be taken out of the market were FII flows to once again turn negative after the US taper. Perhaps one of the smartest moves by RBI in recent months.