Asia week ahead: India in the spotlight

The usual Asian calendar highlights at the start of the new month are the purchasing manager indices and inflation figures for the previous month.

The advance PMIs for May from developed economies (the US, Eurozone and Japan) painted a mixed picture – the US and Eurozone’s revealed firmer activity in both manufacturing and non-manufacturing areas, whereas Japan showed weakness in both sectors. Big swings, however, were observed in services PMIs, and it looks like these are driven by the Covid-19 situation, which has been stabilising in the US and Europe but worsening in Japan.

We expect the PMIs from the rest of Asia to follow the same course – improving in countries with falling Covid-19 cases and weaker in those with rising infections. The most market-sensitive PMI data will be from China, which are expected to be solid like the US and Eurozone, while PMI data from Malaysia, Singapore and Taiwan should be in the weak camp.

Korea’s exports for May, the first export data for this month from the region, will be an interesting watch for what it says about the global semiconductor cycle and provide further insight into the export-led recovery in Asia. A 26% year-on-year rise in Korean chip exports in the first 20 days of the month was good news that the full-month data should confirm.

Lots of consumer price indices will reinforce elevated inflation pressure, though that mostly comes off the sharp inflation fall a year ago instead of any underlying demand strength currently. And the fact that this is going to be a brief phase of high inflation suggests that this data won’t work up the markets.

All this data offers a glimpse into unfolding growth-inflation risks for regional economies, though we don’t think this will sway central banks into altering the current easy policy settings just yet. This is because the downside growth risk from persistent global pandemic continues to outweigh upside inflation risk while the latter will be transitory anyway. Hence our view of on-hold policies by two regional central banks meeting next week – the Reserve Bank of Australia and the Reserve Bank of India. Not just us, but it’s also the consensus view.

The unchanged policy forecasts may render these policy meetings non-events. Yet, we anticipate some market interest in the Indian central bank meeting next Thursday (3 June) as the economy took a further beating from the second wave of Covid-19. Coming just days ahead of the RBI meeting, India’s GDP report for January-March 2021 or the last quarter of FY20-21 due on Monday (31 May) will be the timely input for the policymakers, although that’s not going to reflect the true damage from the second wave. We are looking for a 1.7% YoY GDP growth in the reporting quarter, up from 0.4% in the previous quarter and helped mainly by low base effects.

It’s the delicate policy balance the RBI ought to strike to revive growth without further stoking inflation. As the elevated inflation prevents the RBI from cutting policy interest rates further, the targeted easing remains their option. This is what underlined Governor Shaktikanta Das’s unscheduled announcement earlier this month (5 May) of additional liquidity support for the healthcare and small business sectors. We believe Governor Das will reaffirm that support next week, though without any recovery in business confidence all that may be in vain.