Inflation global

Global Inflation drives G-Sec yields

Markets have been range bound over the last month as inflation increased leading to increase in 10 year G-sec rates globally. NIFTY & SENSEX were up 19.4% & 17.5% in FY 22. This move has largely been driven by DIIs due to strong inflows into mutual funds which offset strong FII outflows over last year.

FII have been selling heavily in Indian equities in FY22 to the tune of Rs.2.75 lakh cr. They have continued to be net sellers to the tune of Rs.8701 cr till 12th April 2022. At a time when FIIs have continuously been selling, DIIs have provided some support to the markets. With interest rates & bond yields increase globally & Ukraine-Russia conflict continuing we are seeing asset re-allocation towards gold & US bonds.

As per AMFI, the average assets under management (AAUM) for the domestic mutual fund industry grew 19.5% from Rs 32.1 lakh cr in March 2021 quarter to Rs 38.4 lakh cr during the March 2022 quarter. Strong inflows into equity and hybrid schemes coupled with sustained inflows through systematic investment plan (SIP) contributed to the growth in assets. Assets under management (AUM) of equity schemes rose by 39% year-on-year to Rs 13.7 lakh cr. Within equity, the highest AUM expansion of 176% was in multi-cap funds to Rs 54,932 cr.

Gold price has been ascending for some time now as future contract for June expiry on MCX has come close to Rs.53,000/10 gm levels. International spot gold price is above $1970/oz and it may go up further above $2000/oz as soaring global inflation and upcoming wedding season in domestic market is expected to push demand for ‘safe haven’. Any negative news flow in regard to Russia-Ukraine war may create fresh demand for gold. So, gold investors and traders are advised to keep an eye on developments in Russia-Ukraine peace talks.

Brent crude prices rose to a 13 year high above $130/bbl last month, has since cooled to ~$100/bbl. Oil prices might continue moderating this week as investors have been digesting the impact of sanctions on Russia, along with parties showing signs of negotiation towards ceasing fire. The Russia-Ukraine situation is very fluid and the market is going to be sensitive to developments on this front. Suggestions that parties may be willing to negotiate is likely weighing on prices somewhat. The longer crude remains at such elevated levels the higher the inflationary pressure, especially in India.

Inflation in US has hit fresh 40 years high and any upside in crude oil may further escalate inflation pressure on global economy. So, crude oil price may push gold price in spot and domestic markets. The ongoing Russia-Ukraine conflict, as the peace efforts between the two countries are floundering. After disappointing inflation data last week, whole world is eagerly waiting for US IIP numbers this week as it would indicate macro-economic status of the America economy. Any further disappointing figure from the US government would create fresh demand for ‘safe haven’ leading to sharp upside bounce in gold prices.

Consumer Price Index inflation (CPI) rose to a 17 month high of 6.95% in March against 6.07% in February. This is the third consecutive month that the CPI data has breached the Reserve Bank of India’s (RBI) upper margin of 6%. The Consumer Food Price Index (CFPI) or the inflation in the food basket also spiked on-month during March to 7.68%, from 5.85% in February. Apart from food and beverages, the fuel and light segment rose 7.52%. Core inflation, excluding food and fuel, rose to 6.53% in March, compared to 6.22% in February.

Wholesale Price Index (WPI) rose to a four-month high of 14.55% in March from 13.11% in February. The WPI inflation was 7.89% in March 2021. 10%-plus print means WPI inflation has now been in double-digit territory for 12 consecutive months. The WPI Food Index increased from 8.47% in February, 2022 to 8.71%t in March, 2022. For manufactured products, the inflation rose to 10.71%. The impact of the war between Russia and Ukraine seems to be spilling into non-fuel prices.

The Index of Industrial Production (IIP) witnessed a growth of 1.7% y-oy to 132.1 during the month of February, data released by the MoSPI showed. The IIP had slipped 3.2% in February 2021. The industrial growth so far in the fiscal year 2021-22 (April-February) has surged 12.5%, compared to a contraction of (-)11.1% in the corresponding period a year ago. The mining and electricity sectors rose 4.5% each. Apart from these, the key manufacturing sector saw a 0.8% growth. With the eight core industries accounting for 40.3% of the total weight of IIP, industrial growth tends to rise when the performance of these sectors improves.

The S&P Global India Manufacturing Purchasing Managers Index (PMI) fell to 54.0 in March from 54.9 in February, with companies reporting slowdown in fresh domestic and export orders. Escalating oil and commodity prices globally, led by the Russia-Ukraine war, have led to a sharp rise in domestic inflation, which if continues to remain high will impact demand. Services Business Activity Index, compiled by IHS Markit, stood at 53.6 in March against 51.8 in February. The above trend, the quickest in 2022 so far—was attributed to new business wins, strengthening demand conditions and greater consumer footfall due to the relaxation of Covid-19 restrictions. The Composite PMI Output Index, rose to 54.3 in March from 53.5 in February.

As per Society of Indian Automobile Manufacturers (SIAM) passenger vehicle wholesales in India declined 3.9% YoY to 2,79,501 units in the month of March. Two-wheeler dispatches to dealers also fell 20.8% to 11,84,210 units. Motorcycle sales plunged 20.88% to 7,86,479 units while scooter sales were down 21.4% at 3,60,082 units. All the segments are facing supply side challenges and the industry is yet to see complete recovery following the disruptions it has been facing since early 2020. Total commercial vehicle wholesales also increased to 7,16,566 units last fiscal as compared with 5,68,559 units in 2020-21.

Gross GST collection in March touched an all-time high of over Rs 1.42 lakh cr in March. CGST was Rs 25,830 cr, SGST Rs 32,378 cr, IGST Rs 74,470 cr (including Rs 39,131 cr collected on import of goods) and cess is Rs 9,417 cr (including Rs 981 cr collected on import of goods). The revenues for March 2022 are 15% higher than the GST revenues in the same month last year. The improvement in revenue has also been due to various rate rationalisation measures undertaken by the Council to correct inverted duty structure.

Last week, the Monetary Policy Committee (MPC) of the central bank unanimously decided to keep the repo rate unchanged for the 11th time in a row at 4% while maintaining an ‘accommodative stance’ but added that it will start focusing on withdrawing this stance to rein in inflation while supporting growth. During the meeting held last week, RBI projected CPI inflation at 5.7% during the financial year 2022-23 with Q1 at 6.3%, Q2 at 5.8%, Q3 at 5.4% and Q4 at 5.1%. But this will entirely be dependent on how crude plays out going ahead.

The World Bank has slashed India’s GDP forecast for fiscal year 2022-23 to 8% from 8.7% predicted earlier, citing worsening supply bottlenecks and rising inflation risks caused by Russia’s invasion of Ukraine. Meanwhile, the Asian Development Bank Outlook 2022 earlier said that India is likely to maintain its position as the fastest-growing major economy with a growth rate of 7.5% for 2022-23 on strong investment prospects against 5% for China in January-December 2022. The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) estimated that the GDP growth rate for Financial Year 2022-23 would be at 7.2% from 7.8% earlier.

Now all eyes will be on the Ukraine- Russia conflict as it is leading to high inflation, crude & gold prices. The frontline indexes are range bound between 17000-17800, we feel proper stock picking will be critical. We are in the middle of Q4 earnings season & initial results have been below expectations. The proposed LIC IPO could possibly come in May 2022 which will again drain out some liquidity. GST collections have been steady above Rs.1.3 lakh cr/month. GDP & IIP numbers have been low on a high base of H2FY21 and need to pick up. High inflation along with high fuel prices remain a concern. With crude above $100/bbl further rise in inflation is possible. With the FED expected to raise rates continuously & inflation on the rise in India, what reaction RBI takes will be keenly watched. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount. This is a very good buy on dips market & should be bought in a staggered manner.

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BLS International Services Ltd-Going places

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

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