Is market sleeping on inflation?

Is market sleeping on inflation?

market-inflationIn May, retail inflation prints came in at 6.30 percent, much higher than April’s 4.23 percent. Wholesale inflation also saw a strong rise in May, coming at 12.94 percent against 10.94 percent in April.

Rising Inflation has been flagged as one of the biggest concerns facing equity markets by many analysts and market participants of late.

“Rising inflation is becoming a major concern for the market. CPI inflation print for May indicates that inflation may overshoot RBI’s target unless reversed in June and July. Rising inflation can constrain RBI’s pro-growth accommodative monetary policy,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Shankar Sharma, VC and Joint MD of First Global, told Moneycontrol a few days ago that inflation and the resultant hardening of bond yields are the biggest risks for the Indian market.

“The risk to India right now is really an inflation problem. If that somehow is contained and the bond yields don’t go up, I think we are going to enjoy a very long-lasting bull market in India without any doubt. I mean, I’m pretty clear that the risk-reward equation is extremely skewed towards rewards right now,” Sharma said in an interview with Moneycontrol.

Inflation is likely to remain elevated in FY22. “With food prices staying elevated and energy prices continuing to inch higher, we continue to see scope for CPI inflation to remain close to the top end of the band, tracking CPI in June 2021 to around 6.6 percent year-on-year,” said Rahul Bajoria, Chief India Economist, Barclays.

On June 4, the Reserve Bank of India (RBI) Governor Shakuntala Das said CPI inflation for FY21-22 was projected at 5.1 percent. For the first quarter of FY 22, inflation is expected at 5.2 percent, Q2 5.4 percent, Q3 4.7 percent and for the fourth quarter the forecast is 5.3 percent.

RBI’s quandary

Even though the RBI has stated that its focus will be on growth, a consistently high inflation print will be a cause of concern for it.

“High global commodity prices, rising global inflationary trends, WPI inflation in the teens and sharp volatility of retail inflation bode ill for the RBI, which is committed to supporting growth,” said brokerage firm Anand Rathi Share and Stock Brokers.

“Much of the recent growth recovery is on account of the low base and stimulus effect. Accordingly, monetary policy accommodation is likely to continue for now. Yet, unless inflation is tamed, the extent of accommodation can come down,” said the brokerage.

Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services, said the broad-based higher-than-expected rise in inflation is concerning but it is unlikely to result in any monetary tightening. It also rules out any further easing.

Market sleeping on inflation?

While inflation remains a major concern for the market, equity benchmarks Sensex and Nifty hit their fresh record highs of 52,869.51 and 15,901.60, respectively, in intraday trade on June 15.

It appears that the market is not focussing on higher inflation and taking comfort from falling COVID-19 cases, the unlock measures announced by the states, anticipating that a good monsoon will help keep the food inflation in check.

“The current mood of markets is high because of falling COVID cases, lifting off lockdown restrictions and positive global cues. However, the rapid rise in inflation is somehow being ignored by the Street. The buying spree may persist for some time due to positive expectations of stock prices in certain heavyweight stocks,” said Vishal Balabhadruni, CapitalVia Global Research.

“The reason why inflation risk is being ignored is due to lack of any particular trigger. Q4 results of 2020-2021 have been good and therefore it kept markets afloat even in the second wave of the pandemic. The effect of inflation is expected to be seen in the Q1 and Q2 of 2021-2022 earnings,” said Balabhadruni.

Shrikant Chouhan, Executive Vice President, Equity Technical Research at Kotak Securities said the market is focussing on US Fed’s announcements this Wednesday.

“There is no as such any major news but I feel the clarification from the NSDL and Adani Group is the reason to cheer. There is one thing on which market participants are focusing is the meeting of Fed which is due on Wednesday. Participants are expecting a neutral stance from the Fed chief and that’s the reason the market is moving upward,” said Chouhan.

Technically, the market is trading in the new territory and that is also supporting the momentum.

“Nifty continues its bullish trajectory and seems headed to 15900-16000. Despite multiple sessions of nervousness, the Nifty has been successful in respecting the 15,700-15,750 levels of support. As long as we do not break that on a closing basis, this trend is here to stay,” said Manish Hathiramani, Proprietary Index Trader and Technical Analyst, Deen Dayal Investments.

The best way to ride this trend will be to accumulate long positions on dips. That would be the most prudent way of being a part of the larger trend, he said.

Vijayakumar is of the view that one should remain invested in IT, pharma and metal stocks which are unlikely to be impacted by negative macros like rising inflation.