MACRO CONCERNS CONTINUE TO DOMINATE

By Ruma Dubey

On the last day of last week, we had the IIP numbers which caused some depression and today, first day of the week, we have shocking inflation numbers which has only darkened the clouds.

WPI for April rose to 7.23% v/s 6.89% in March. The biggest culprit was food inflation which rose, MoM, from 9.94% to 10.49% and fuel was up at 11.03% v/s 10.41%.  In food, due to the scorching heat, price of seasonal veggies and fruits have risen. Overall vegetable costs have risen 16%, potato by as much as 40% and that of fruits by 11%. OMCs have demanded a price hike immediately of Rs.7/litre and recover part of old dues by an additional hike of at least Re.1/litre.

This sobering news apart, as though we had a dearth of negative news, following within few minutes of the inflation data, almost sadistically, Moody’s announced that it had revised ratings of three banks – ICICI Bank, Axis Bank and HDFC Bank. So the market which was kind of ready to shrug off the inflation number was once again pulled down.

We do have major domestic issues – with current account deficit at 4% of the GDP, falling exports, poor growth numbers and not to mention the way in which the Parliament functions, or should we say, does not function, things look bleak. So domestically we have issues and this is further accentuated with global factors also playing a negative role.

At this juncture, based on todays’ data, WPI is expected to be in the range of 7 to 7.5% in H1FY13 and core inflation at 5.5 to 6%. But this does not take into account the impending fuel price hike. The depreciating rupee is also not making matters easy.

The moment IIP or inflation numbers come, everyone looks at RBI. What will RBI do is always the big question. Well, RBI is scheduled to meet on 18th June and before that, on 31st May we have another set of IIP data for Q4FY12. And IIP for April will come in on 12 June, not to mention that we will see another set of WPI numbers too. Thus currently, based on these numbers alone, it would be too hasty to try and discern what the RBI might do. There will be more data coming in before it decides and hence best to see how that data pans out.

We also need to understand that what RBI does is important but more important is the fact that liquidity is getting tighter in the market and if such sobering macroeconomic numbers come in, all this will get transmitted and despite RBI rate cuts, we may never see that rate cut being passed on to the consumers.

But what we hope is that the manufacturers do not pass on costs – of rising food and if fuel price hike comes in. That will then cause a serious vicious cycle of all round inflation.

The market is today looking at global risk aversion more than anything else and any positive news on that front could be the only sustainable trigger for the market.