India climbed five spots to attain the third position among key emerging markets in January, the latest update to Mint’s emerging markets tracker shows. Rising exports, falling inflation, and greater manufacturing activity boosted India’s rank in January although it still remains a few notches below China.
Merchandise exports rose 6.2% in January from a year earlier to $27.45 billion, the second consecutive month of export growth. The rise in India’s exports are in line with trends globally, wrote analysts from Nomura in a note dated 2 February based on the provisional export numbers. While volumes improved, exports also benefited from rising commodity and input prices globally. Indonesia and Brazil, the other two countries to have reported their export figures in January, also recorded a growth of 12.2% and 2.2%, respectively, in their merchandise exports.
On account of faster rise in output, sales, and exports, India’s manufacturing PMI (purchasing managers’ index) reached a 3-month high of 57.7, the best figure among emerging market peers.
It was closely followed by Brazil, which has been leading the league table on this count for the past six months. Despite the fillip in manufacturing activity, jobs in the sector further declined in January. However, the pace of contraction was the slowest in the last ten months.
The decline in headline inflation has also helped India rise up the ladder. A decline in food inflation to 1.9% brought headline inflation down to 4% even though core inflation still remains sticky.
Mint’s Emerging Markets Tracker, launched in September last year, takes into account seven high-frequency indicators across 10 large emerging markets to help us make sense of India’s relative position in the emerging markets league table. The seven indicators considered in the tracker encompass both real activity indicators, such as the manufacturing purchasing managers’ index (PMI) and real GDP growth, and financial metrics, such as exchange rate movements and changes in stock market capitalization. The final rankings are based on a composite score that gives equal weightage to each indicator.
The improvement in real economy indicators has been accompanied by improving outlook on India’s growth prospects. The International Monetary Fund (IMF) expects the Indian economy to grow 11.5% in fiscal 2022 after declining 8% in the current fiscal year. This translates to a real (inflation-adjusted) growth of 2.6% compared to the pre-pandemic period (fiscal 2020). China is set to achieve the highest expansion compared to the pre-pandemic period according to IMF’s estimates, at 10.6%. Although India’s expansion will be lower than China’s, it will still be higher than several other emerging markets.
Improving growth expectations have ensured that India’s financial markets have remained resilient over the past few months. January was no exception. India’s stock market capitalisation grew 6% over the previous month, aided by net portfolio inflow of roughly $2 billion. Only Turkey (11.1%) and China (7%) showed better month-on-month gains in their stock market capitalisation.
Amid high capital flows, the rupee appreciated 0.7% against the greenback for the second straight month in January, reaching a four-month high on January 21.
Among EM currencies, only the Turkish lira (3.9%) and Chinese yuan (1%) gained more against the US dollar. With the US dollar depreciating against major currencies and global commodity prices rising, inflationary concerns encouraged the central bank to purchase more dollars, keeping rupee from appreciating further. Hence, India’s foreign exchange reserves continued to rise, reaching an all-time high figure of USD 590 billion in the week ended January 29, RBI data showed.
India’s quickening pace of vaccination and rising mobility suggests that the coming months could bring about a broader revival. While the gap with China is likely to remain, India’s economic momentum could outpace other large emerging markets in the coming months, as IMF’s projections suggest.
