INFLATION EASES – WILL IT SUSTAIN?

The food inflation for July came in much lower at 3.96% v/s 5.15% (MoM) while CPI came in at 5.59% v/s 6.26%, which is below RBI’s target of 6%.

This was good news and the inflation trajectory is going very much where RBI expected it to go. The Governor did say that the inflation will start cooling down and it has. Food is what helped this CPI figure come down but core inflation remains a big challenge.

Core inflation has come in at around 6% or 5.96% v/s 6.2% (MoM) to be more precise but it is still too early to uncork the bubbly. Maybe the reduction in the imports of edible oil and pulses helped a bit but we are still contending with very high prices – fuel prices percolating down and inflating everything in its sight.

Till now, companies have not really been able to pass-on the rising inflation to the consumers as demand itself remains benign but once demand picks up full steam, companies too, to protect their margins are sure to hike rates. This in turn means that we need to wait and watch before we start to celebrate – lets keep our eyes peeled for rising inflation.

A quick look at the inflation internals: (MoM)

• Food inflation at 4.46% v/ 5.58%
• Vegetables (-)7.75% v/s 0.7%
• Fuel & light – 12.4% v/s 12.68%
• Housing 3.86% v/s 3.75%
• Clothing and footwear 6.46% v/s 6.21%
• Pulses 9.04% v/s 10.1%

IIP for June came in at 13.6% v/s 29.3% in May – very much in line with what was widely expected. With decent auto sales coming in during June, this was widely expected.

The good news is that we are slowly but surely looking at growth perking up. Many companies have announced capex plans, IPO markets have never been so bullish, companies are also reporting a good jump in order book; so overall, things are indeed looking up but on the longer term, we need to look at the horizon ahead.

Events which will have an impact over the next few weeks will be Q1FY22 earnings, progress of monsoon and more importantly, the third wave – is Covid going to hit us hard all over again or will vaccinations help keep things in more control than the second wave?

Consumer confidence currently is very low- as indicated by the RBI survey. As long as this remains low, demand will not pick up. People are not feeling too good about the economy and would rather hold on to the money they have on hand. Till this confidence does not pick up, one will have to tread very carefully.

So, as we move ahead into 2021, its once again events which are not in our control which control our lives – monsoon and the pandemic.

For now, RBI and the market will rest easy, unless of course USA decides to rock the boat!