{"id":380700,"date":"2024-06-12T12:38:09","date_gmt":"2024-06-12T07:08:09","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=380700"},"modified":"2024-06-12T12:38:10","modified_gmt":"2024-06-12T07:08:10","slug":"its-the-economy-stupid-to-cut-or-not-to-cut","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-to-cut-or-not-to-cut","title":{"rendered":"It\u2019s the economy, stupid! To cut or not to cut"},"content":{"rendered":"\n<p><em>We love IndiaDataHub\u2019s weekly newsletter, \u2018<\/em><a href=\"https:\/\/indiadatahub.substack.com\/\"><em>This Week in Data<\/em><\/a><em>\u2019, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own.\u00a0<\/em><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<div class=\"wp-block-group has-background has-medium-font-size is-nowrap is-layout-flex wp-container-core-group-is-layout-ad2f72ca wp-block-group-is-layout-flex\" style=\"background-color:#dedede\">\n<p class=\"has-background has-small-font-size\" style=\"background-color:#dedede\"><strong>KEY TAKEAWAYS<\/strong><\/p>\n\n\n\n<ul style=\"background-color:#dedede\" class=\"has-background wp-block-list\">\n<li class=\"has-small-font-size\">The RBI has kept its repo rate at 6.5% for the 8th time in a row.  But some dissenting voices are emerging within the MPC<\/li>\n\n\n\n<li class=\"has-small-font-size\">Central banks from various developed markets have started cutting their policy rates. The United States, however, is keeping firm &#8211; perhaps due to a robust labour market. <\/li>\n\n\n\n<li class=\"has-small-font-size\">High frequency data from May has been dismal. Automobiles have stagnated, GST collections have grown at a 4-month low, petroleum consumption is down, and toll collections are decelerating. <\/li>\n\n\n\n<li class=\"has-small-font-size\">What do the Lok Sabha results mean for policy-making? Wait and watch, says IndiaDataHub. <\/li>\n<\/ul>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-sixteen-months-of-status-quo\"><strong>Sixteen months of status quo<\/strong><\/h2>\n\n\n\n<p>The RBI\u2019s Monetary Policy Committee (MPC) met last week to look at the repo rate, among other things. We\u2019ve written about the \u2018repo rate\u2019 is <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/this-week-in-data-for-dummies-monetary-policy-consumer-confidence-china-deflation-and-more\">before<\/a>, but here&#8217;s a quick recap: fundamentally, the repo rate decides how expensive money is for banks. This is a delicate matter. The cheaper money is for banks, the more they can lend it out to everyone else \u2014 and when there\u2019s too much money in people\u2019s hands, everything becomes expensive.<\/p>\n\n\n\n<p>The MPC has kept this rate at 6.5% \u2014 a relatively high figure \u2014 since February last year. Last week, it voted to keep it there for the eighth time in a row.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"964\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5.jpeg\" alt=\"\" class=\"wp-image-380721\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-300x199.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-1024x678.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-768x508.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>But let\u2019s step behind the scenes. The MPC has six members: three from the RBI, and three from outside. Till December last year, all six thought it best that things were left unchanged. Then, in February, Prof. Jayanth Varma \u2014 one of its external members \u2014 started voting for a rate cut.<\/p>\n\n\n\n<p>This time around, Dr. Ashima Goyal \u2014 another external voice \u2014 has asked for a cut as well, alongside Prof. Varma. Of course, the majority still wanted <em>status quo<\/em>, and that\u2019s the way the committee has gone. For now.\u00a0<\/p>\n\n\n\n<p>Who knows what happens the next time around, though? In case another member flips, there\u2019ll be a tie. The RBI Governor will have the casting vote, and can resolve the tie as he prefers. If <em>two<\/em> members flip, however, a rate cut will pass with the majority vote.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"903\" height=\"189\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-3.png\" alt=\"\" class=\"wp-image-380720\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-3.png 903w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-3-300x63.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-3-768x161.png 768w\" sizes=\"auto, (max-width: 903px) 100vw, 903px\" \/><\/figure>\n\n\n\n<p>That said, as things stand, a flip is unlikely in the near future. For one, the high repo rate doesn\u2019t seem to have affected the economy much, so there\u2019s no tearing hurry to change things. If anything, the MPC is more optimistic about the economy than it was two months ago, upgrading its FY 2025 growth estimate to 7.2%, from April\u2019s 7%. Moreover, India\u2019s food inflation refuses to go down, making it hard for the RBI to perform its job of bringing prices under control. One of these has to change before a rate cut is likely.\u00a0<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-rates-around-the-world\"><strong>Rates around the world<\/strong><\/h2>\n\n\n\n<p>Of course, RBI isn\u2019t the only central bank that\u2019s thinking about rates.&nbsp;<\/p>\n\n\n\n<p>Three central banks from developed markets have cut rates this year. The Swiss Central Bank cut rates by 0.25% back in March. Then, last week, both the Bank of Canada and the European Central bank had their own 0.25% cuts, down to 4.75% and 4.25% respectively.\u00a0<\/p>\n\n\n\n<p>On the other hand, the United States has neither cut rates, nor is it likely to do so. The markets think there\u2019s more than a 90% chance that rates remain where they are in July. They&#8217;re only giving the Fed a 50:50 chance that they go down by September.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"958\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-7.jpeg\" alt=\"\" class=\"wp-image-380725\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-7.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-7-300x197.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-7-1024x674.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-7-768x505.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Like the RBI, the US Fed is probably taking heart from its economy to maintain the <em>status quo<\/em>. Despite higher-than-usual rates, America&#8217;s job market is remarkably stable. In fact, it just threw up a pleasant surprise last month, as the country\u2019s workers added 272,000 new jobs in May \u2014 well over the expected 182,000.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"959\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4.jpeg\" alt=\"\" class=\"wp-image-380719\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-300x198.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-1024x674.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-768x506.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-an-unremarkable-month\"><br><strong>An unremarkable month<\/strong><\/h2>\n\n\n\n<p>We have new high frequency data for May. The verdict: this has been a bang average month for India.\u00a0<\/p>\n\n\n\n<p>Let\u2019s start with automobiles. A vehicle is a big purchase, and people only buy one when they feel confident about how they\u2019re doing. Which is why it&#8217;s worrying that people haven&#8217;t been too keen on buying one last month. Cars and tractor sales declined slightly in the month, compared to May last year, while two-wheelers only saw a modest 2% growth rate.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"962\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5.png\" alt=\"\" class=\"wp-image-380723\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-300x198.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-1024x677.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-5-768x507.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p><br>GST data also shows something similar. The government\u2019s GST collections grew at 11% compared to May last year. This is in the double-digits, yes, but it\u2019s a four-month low. Since GST collections are a function of the total business happening in the country, this possibly tells us that India\u2019s business activity is decelerating.&nbsp;<\/p>\n\n\n\n<p>People consumed 1% less petroleum products than they did last May. The last time it fell was in November, but only because that\u2019s when we celebrated Diwali, when many truckers take a break. Leaving Diwali aside, however, the last time our petroleum consumption fell was in January 2022 \u2014 right in the middle of the COVID-19 pandemic.&nbsp;<\/p>\n\n\n\n<p>There\u2019s a slight silver lining: power generation was up by 14% year-on-year, last month. Then again, that might be because this May was the <a href=\"https:\/\/timesofindia.indiatimes.com\/india\/may-2024-was-the-hottest-may-in-recorded-history-global-temp-likely-to-exceed-1-5-degree-c-threshold-temporarily-between-2024-28\/articleshow\/110743201.cms\">hottest May in recorded history<\/a>.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"962\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4.png\" alt=\"\" class=\"wp-image-380722\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-300x198.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-1024x677.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-4-768x507.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Toll collections, which tell us about the number of vehicles on Indian roads, tell a dismal story as well. In May, they grew by a meagre 3.6% year-on-year \u2014 dropping from 7.5% in April and 10% in March.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"970\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-6.jpeg\" alt=\"\" class=\"wp-image-380724\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-6.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-6-300x200.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-6-1024x682.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-6-768x512.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>So then, why has the Indian economy performed so poorly in May? Could it be that the elections played havoc with the economy? Was it simply too hot to work? If this is a temporary, one-off thing, we\u2019ll find out soon enough.&nbsp;<\/p>\n\n\n\n<p>If it isn\u2019t, though, we may be staring at a shift in the economic cycle.\u00a0<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-happens-now-the-elections-are-done\"><strong>What happens now the elections are done?<\/strong><\/h2>\n\n\n\n<p>Nobody expected the elections to go the way they did. But one way or the other, they\u2019re done. What happens now?&nbsp;<\/p>\n\n\n\n<p>The easy answer is that the government will have to take populist measures, and structural reforms like disinvestment may slow down \u2014- after all, it needs to make sure everyone stays happy. To IndiaDataHub, though, that\u2019s a simplistic hot-take. After all, if there&#8217;s something this election has taught us, it&#8217;s that one should be humble while trying to predict the direction national politics shall take.  <\/p>\n\n\n\n<p>We don\u2019t yet know how the BJP itself interprets the seats it has lost. We\u2019ll have a better sense of that in the revised budget it will present in July. That\u2019ll set the tone for what is to come through this Lok Sabha term. We\u2019ll be watching.\u00a0<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<p>That\u2019s all for the week, folks. Thanks for reading!<\/p>\n\n\n","protected":false},"excerpt":{"rendered":"<p>The RBI keeps its repo rate at 6.5% for the 8th time in a row. The Indian economy stutters in May. And more stories. <\/p>\n","protected":false},"author":242542,"featured_media":377378,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[532],"tags":[826,827,623,625,621,824,704,681,825],"class_list":["post-380700","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-subtext","tag-automobiles","tag-elections","tag-energy","tag-gst","tag-high-frequency-data","tag-monetary-policy-committee","tag-rbi","tag-repo-rate","tag-united-states"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.5 (Yoast SEO v26.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>It\u2019s the economy, stupid! To cut or not to cut &#8211; Z-Connect by Zerodha<\/title>\n<meta name=\"description\" content=\"The RBI keeps its repo rate at 6.5% for the 8th time in a row. The Indian economy stutters in May. And more stories.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-to-cut-or-not-to-cut\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"It\u2019s the economy, stupid! To cut or not to cut\" \/>\n<meta property=\"og:description\" content=\"The RBI keeps its repo rate at 6.5% for the 8th time in a row. The Indian economy stutters in May. 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