Weekly Economic Update
In the local economic news, retail inflation jumped to a 6-month high in the month of May. The inflation reading for the month stood at 6.3 per cent, which is above RBI’s inflation target range of 4 to 6 per cent due to higher food & fuel prices. While food inflation accelerated to 5.01 per cent during the month, up from a reading of 1.96 per cent in April, the Ministry of Commerce & Industry noted that ‘the high rate of inflation in May 2021 is primarily due to the low base effect and rise in prices of crude petroleum, mineral oils viz. petrol, diesel, naphtha, furnace oil, etc. as well as manufactured products as compared to the corresponding month of the previous year. Interestingly, the core inflation, which excludes the effects of food & fuel prices, rose 6.6 per cent during the month.
In other news, the country’s trade deficit increased to the US $6.28 billion in May from a level of US $3.15 billion, a year ago. While merchandise exports grew by 69.35 per cent from year-ago levels to the US $32.27 billion, imports expanded 73.64 per cent to the US $38.55 billion. Also, according to the brokerage firm, UBS Securities India, the economy may contract as much as 12 per cent during the first quarter of FY 21-22. The firm goes on to note that it expects the economy to only gradually gather pace after the recent lockdowns.
In the global economic & market news, the US central bank revised its inflation estimate for 2021 to 3.4 per cent from the earlier estimate of 2.4 per cent and also noted that it was moving up its timeline for interest rate increased to 2023 from the earlier stated 2024. While Federal Reserve did not state as to when it would reduce its aggressive bond-buying programme of the US $120 billion per month, a few market watchers expect them to begin talking about this later this year as the economy continues to grow at a strong pace after the US vaccination success. Both the equity & bond markets reacted to the announcement - while stocks fell post this news, the bond yields rose on expectations of higher rates in 18 months from now.