Inflation Recession

Inflation zooms-Recession looms

Markets are trading with a negative bias as index is around 16000 NIFTY levels. Higher interest rates & inflation globally have led to fears of recession. Fed is again meeting on 25-26th July for another round of rate hike while RBI will meet in August. Given the high inflation print another 75-100 bps hike is on the anvil. Prices of crude among other metals & mining commodities declined sharply over the last fortnight due to fears of global slowdown.

FII have been selling heavily in Indian equities, to the tune of Rs.2.82 lakh cr in the first 6 months of this calendar year. They have continued to be net sellers MTD to the tune of Rs.9119 cr till 13th July 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 & a stronger USD, we are seeing asset re-allocation towards USD & US bonds.

The USD has been strengthening against all currencies. The dollar index is at a 20 year high of 108.5, up 8% in last 3 months & 17% in last one year. The Euro in contrast is at a 20 year low, at parity with USD while INR is at an all-time low close to touching Rs.80/$.

As per AMFI data, the asset base of domestic mutual fund industry witnessed an annual growth of 14% to Rs 37.75 lakh cr in the three months ended June on sustained inflows in equity schemes by way of SIPs. In terms of asset size, SBI MF continued to lead the pack with an average AUM of Rs 6.47 lakh cr (excluding FoF) during the quarter under review followed by  ICICI Prudential MF (Rs 4.65 lakh cr) and HDFC MF (Rs 4.15 lakh cr). Open-ended debt fund outflows were Rs 92,248 cr in June 2022. The selling was prominent in low duration funds, overnight funds, and money market funds, but even corporate bond fund saw heavy selling. On an overall basis, mutual funds saw net outflows of Rs.69,853 cr in June 2022, largely on account of outflows from debt funds; including arbitrage funds. All equity and passive fund categories saw smart inflows in June 2022. Despite the global headwinds and the domestic market volatility, the SIP flows were stable at Rs12,276 cr in June 2022.

Gold in global markets fell to nine-month lows as the USD is at 20-year highs. Spot gold was ~ $1,735/oz. The Euro was near parity to the dollar on concerns that concerns that an energy crisis could tip Europe into recession. Strength in the dollar makes greenback-priced gold more expensive for buyers holding other currencies. In India, gold rates have corrected sharply from last week’s highs amid softening global rates. Last week, gold had jumped to a high of Rs.52,300, has since fallen to Rs.50,500 levels.

Brent crude prices fell below $100/bbl on a strengthening USD, covid 19 curbs in China, and rising fears of global economic slowdown. Crude has corrected sharply by ~20% over the last month.  Russia cut off natural gas supply to parts of Europe via the Nordstream 1 pipeline for 10 days to carry out maintenance. EU economists previously said that the Eurozone will likely fall into recession if Russian gas supply stops. Lower crude prices could lead to a decline in inflation and slow down the pace of rate hikes globally.

Inflation in US is at a 40 years high of 9.1%. The US Federal Reserve, in its next meeting on 26th July is expected to take another 75-100 bps rate high, highest in 40 years. This is leading to recessionary trends as growth is slowing and the effect of the tightening in financial market conditions and removal of monetary policy have yet to hit the economy.

Consumer Price Index inflation (CPI) stayed largely unchanged at a high of 7.01% in June as against 7.04% in May. This takes average inflation for April-June to 7.3%, 20 basis points lower than the RBI’s forecast of 7.5%.  Inflation in the food basket in June 2022 was 7.75%, compared to 7.97% in the preceding month. Despite the cut in excise duty on petrol and diesel announced in late May, the index for the ‘fuel and light’ group of the CPI rose by 1% in June from May. The latest inflation number is unlikely to have any effect on the RBI’s rate hike plans, with June being the 33rd month in a row that CPI inflation has come in above the medium-term target of 4%. The central bank’s Monetary Policy Committee (MPC) is scheduled to next meet on 2nd-4th August.

Wholesale Price Index (WPI) eased to 15.18% in June y-o-y from 15.88% in May. The number has remained in double digits for the 15th consecutive month. For the fuel and power segment, the WPI number marginally eased to 40.38% in June from 40.62% in May as oil prices eased. Food inflation for June climbed to 12.41% as against 10.89% in the preceding month. The inflation in the manufacturing goods segment witnessed a decline to 9.19% in June as compared to 10.11% in May.

The Index of Industrial Production (IIP) growth zoomed to 19.6% in May as against 7.1% in April on a low base. The manufacturing sector’s output grew 20.6% in May this year. In May 2022, the mining output climbed 10.9%, and power generation increased 23.5%. Industrial production has been hit due to the Covid-19 pandemic since March 2020, when it had contracted 18.7%.

The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) fell to 53.9 in June from 54.6 in May, the weakest pace of growth since last September. The June PMI data pointed to an improvement in overall operating conditions for the twelfth straight month. S&P Global India Services PMI rose to 59.2 in June from 58.9 in May, the highest since April 2011, beating expectations. Companies said the upturn stemmed from ongoing improvements in demand following the retreat of pandemic restrictions, capacity expansion and a favorable economic environment. Composite PMI Output Index — which measures combined services and manufacturing output — was at 58.2 in June, little changed from 58.3 in May.

The India Meteorological Department (IMD) indicated that the southwest monsoon advanced into the remaining parts of North Arabian Sea, Gujarat and Rajasthan, covering the entire country six days before the normal date of 8th July. Rainfall deficit stood at 8%, within the ‘normal’ categorization of the IMD. The weather office terms it ‘below normal’ when the deficiency touches 10%. From 1st June to 1st July, the cumulative average monsoon rainfall was 171.5 mm, 5% less than the normal volume of 180.8 mm. Though uneven, rainfall has picked up over the last fortnight & we expect monsoons to be normal this year.

As per Society of Indian Automobile Manufacturers (SIAM) passenger vehicle wholesales in India rose by 19% y-o-y in June on the back of improvement in semiconductor supplies. Total two-wheeler wholesales increased by 23.4% y-o-y to 13,08,764 units last month. Motorcycle sales rose 9.2% to 849,928 units while scooter sales surged over 70% to 421,362 units. Total three-wheeler sales grew to 26,701 units last month against 9,404 units in June 2021. In Q1FY23, total commercial vehicle wholesales also rose to 2,24,512 units against 1,05,800 units a year ago.

The Goods and Services Tax (GST) revenue collections in June 2022 was up 56% y-o-y to over Rs 1.44 lakh cr. CGST is Rs. 25,306 cr, SGST is Rs.32,406 cr, IGST is Rs.75887 cr (including Rs.40102 cr collected on import of goods) and cess is Rs.11,018 cr (including Rs.1197 cr collected on import of goods). This is the fifth time the monthly GST collection crossed Rs 1.40 lakh cr mark since inception of GST and fourth month at a stretch since March 2022.

Nomura has cut India’s 2023 growth forecast to 4.7% from 5.4% earlier as it expects growth to slow down over the next year. Higher inflation, monetary policy tightening, dormant private capex growth, the power crunch and the global growth slowdown pose medium-term headwinds. For FY23, they see GDP growth at 7.0% and at 5.5% for FY24. The World Bank has cut India’s economic growth forecast for the current fiscal to 7.5% as rising inflation, supply chain disruptions, and geopolitical tensions taper recovery. In its third monetary policy of 2022-23, the Reserve Bank retained its GDP growth forecast at 7.2% for the current fiscal, but cautioned against negative spillovers of geopolitical tensions and a slowdown in the global economy.

Globally high inflation, rising interest rates coupled with a slowdown is worrying as there are fears of recession.  Further rate hikes are on the anvil and we feel proper stock picking will be critical. GST collections have remained above Rs.1.4 lakh cr. IIP numbers need to sustain. With the FED & RBI increasing rates continuously all eyes remain on the inflation number. Crude prices need to decline further below $100/bbl to control inflation. Most international currencies have been volatile with dollar strengthening, and need to stabilize.  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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