Global Inflation

Global inflation spooks markets

Markets corrected marginally over the last month partly due to rise in global inflation & talks of interest rate hikes. Markets have corrected ~10% from all time highs. We expect 2022 to bring significant relief & hope for everyone due to economic revival, though inflation remains the primary concern. December quarter earnings have been mostly disappointing & need to improve in subsequent quarters to support markets at current levels.

FII have been selling heavily in Indian equities over the ten months of FY22 barring September 2021. After being net buyers to the tune of Rs.913 cr in September 2021, they have been net sellers to the tune of Rs.1.42 lakh cr in the last four months. They have continued to be net sellers to the tune of Rs.13,966 cr till 14th February 2022. At a time when FIIs have continuously been selling, DIIs have provided some support to the markets.

As per AMFI, the AUM for equity schemes stood at Rs 13.56 lakh cr in January. Equity funds saw a healthy inflow of Rs 14,887 cr in January, marking a dip from Rs 25,082 cr a month back, possibly because of fewer NFO. With 26.51 lakh fresh accounts being added, the number of SIP accounts crossed 5 cr, for the first time in history. The monthly SIP inflow was Rs 11,516 cr in January 2022. The cumulative SIP inflow was Rs 1 lakh cr in the first ten months of FY22 compared with Rs 79,370 cr last year. As for debt funds, January 2022 saw an inflow of Rs 5,081 cr, a staggering rise from the net outflow of Rs 49,037 cr it recorded a month earlier.

Gold prices in India were firm, tracking gains in international rates near 3-month high of ~Rs 49,500/10 gms. Gold is likely to remain supported by geopolitical tensions around Ukraine. In global markets, spot gold was near 3-month highs of $1,860/oz. But gains were muted as the dollar and safe-haven currencies held gains, while yields on the benchmark U.S. 10-year Treasury note edged higher. Higher yields dent the appeal of bullion by raising the opportunity cost of holding non-interest-paying gold, while a firmer dollar makes it less attractive for overseas buyers.

Over the past year, Brent crude prices have risen by over 50%, also helped by recovery in demand as covid-19-led restrictions eased globally. Import-dependent India may stand to suffer as geopolitical tensions drive crude oil to fresh seven-year highs of ~96/bbl as escalating fears of an invasion of Ukraine by Russia, a top energy producer, added to concerns over tight global crude supplies. The International Energy Agency raised its 2022 demand forecast and expects global demand to expand by 3.2 million barrels per day (bpd) this year, reaching an all-time record 100.6 million bpd.

Inflation in USA Inflation is running way ahead of where everyone, including the Federal Reserve, expected this year. Consumer price index (CPI), which measures the price of everyday goods and services rose by 7.5% in January, the highest rate since 1982. The greater-than-expected surge has added more pressure on the Federal Reserve to raise interest rates and contain inflation and consumer demand. There is a high probability of a 50-basis point rise at the Fed’s next meeting in March.

Consumer Price Index inflation (CPI) jumped to a seven month high of 6.01% in January 2022 from 5.66% in December 2021, due to an unfavorable base effect. The RBI has forecast that CPI inflation will average 5.7% in the first quarter of 2022. As such, inflation is expected to edge lower in the remaining two months of January-March 2022.  Food inflation shot up to 5.43% from 4.05%. Apart from food and beverages, the fuel and light segment rose 9.32%, clothing and footwear gained 8.84% and the housing segment inched up 3.52%. The RBI’s Monetary Policy Committee (MPC) had noted in its statement on 10th February that cost-push pressures on core inflation may continue in the near term. However, the central bank’s surveys suggested “some softening in the pace of increase in selling prices by the manufacturing and services firms going forward, reflecting subdued pass-through”, the MPC had added.

Wholesale prices based inflation eased for the second consecutive month in January at 12.96% as against 13.56% last month, even though food prices hardened. WPI inflation has remained in double digits for the tenth consecutive month beginning April 2021. Inflation in food articles, however, spiked to a 10.33% in January 2022 from 9.56% in December 2021. Inflation in manufactured items was 9.42% cent in January, against 10.62% in the previous month. In fuel and power basket, the rate of price rise was 32.27% in January, a tad lower than 32.30% in December.

The Index of Industrial Production (IIP) slumped to 0.4% in December 2021 from 1.3% the previous month, the slowest in 10 months. The manufacturing sector, which makes up over three-fourths of the IIP, contracted by 0.1% y-o-y in December 2021. This is the first such contraction of the sector since February 2021. The contraction in capital goods, consumer durables, and consumer non-durables, along with a feeble growth in the remaining categories ranging from 0.3% to 2.8% in December 2021, add heft to the Monetary Policy Committee’s (MPC) decision to remain growth supportive in light of the incomplete recovery

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) was at 54.0 in January, down from 55.5 in December and signaling the weakest improvement in the health of the sector since last September. The seasonally adjusted India Services Business Activity Index fell to 51.5 in January, down from 55.5 in December, pointing to the slowest rate of expansion in the current six-month sequence of growth. For the sixth straight month, the services sector witnessed an expansion in output. The escalation of the pandemic and reintroduction of curfews had a detrimental impact on growth across the service sector. Both new business and output rose at slight rates that were the weakest in six months.
The Composite PMI Output Index — which measures combined services and manufacturing output — fell from 56.4 in December to 53.0 in January.

As per Federation of Automobile Dealers Association (FADA), passenger vehicle (PV) retail sales last month fell by 10.12% to 2,58,329 units. Similarly, two-wheeler retail sales declined last month YoY, by 13.44% to 10,17,785 units. Tractor retail sales fell by 9.86% to 55,421 units. However, the commercial vehicle (CV) retail sales rose by 20.52% to 67,763 units last month. In spite of good demand, passenger vehicle continues to face the brunt of semi-conductor shortage resulting in void of a healthy inventory.

GST collection crossed Rs 1.38 lakh cr in January, a growth of 15% over the year-ago period, on pick-up in economic activity and anti-evasion measures. January is the fourth month when GST collection has crossed the Rs 1.30 lakh cr, and seventh month in a row when it crossed the Rs 1 lakh cr mark. CGST is Rs 24,674 cr, SGST is Rs 32,016 cr, IGST is Rs 72,030 cr (including Rs 35,181 cr collected on import of goods) and cess is Rs 9,674 cr (including Rs 517 cr collected on import of goods).

The Reserve Bank of India has pegged the economic growth rate for 2022-23 at 7.8%, down from 9.2% expected in 2021-22, in view of uncertainties on account of the pandemic and elevated global commodity prices. The RBI’s growth projection for next financial year is lower than 8-8.5% projected by the Finance Ministry in the recent Economic Survey which was tabled in Parliament earlier in the month. The government expects this growth to be fuelled by a massive capital spending programme outlined in the Budget with a view to making crowd in private investment by reinvigorating economic activities and creating demand.

Budget 2022-23 was presented on 1st February 2022 by FM, Nirmala Sitharaman, amid a challenging macro environment dented by multiple covid waves. The budget underlined the government’s commitment to support the economic recovery and fuel an investment cycle. The focus of the Budget speech was largely on infrastructure development through higher public capital expenditure. The government proposed to hike the capital expenditure allocation to Rs. 7.5 lakh cr as against Rs. 5.54 lakh cr budgeted in FY22 and Rs. 6 lakh cr as per revised estimates. Including the “grant in aid for creation of capital assets”, the total capex allocation works out to Rs. 10.7 lakh cr, which is 4.1% of the GDP and 27% higher than FY22 revised estimates.

As the frontline Indexes are range bound between 16800-17500, we feel proper stock picking will be critical. 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 the FED expected to raise rates by 50 bps in March, what reaction RBI takes will be keenly watched. With crude above $90/bbl further retail price hikes post elections are on the cards. 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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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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