The Signal: The Week & More

1. What’s In Store This Month

An anniversary and a quarter past the first sighting of the Covid-19, has media of all formats paint vaccine vs virus battle as that of David vs Goliath. The many different vaccine distribution policies have birthed vaccine diplomacy – a practice which benefits one but not the herd. There is visible hesitancy in the health and wealth of the Indian economy due to the ongoing second wave as the country preps to fight the expected third. The macros and micros (India inc.) have however stood surprisingly resilient.

India Inc sees many global institutions revisiting their GDP estimates due to covid-related issues. As India embarks on becoming fastest growing economy of decade, it will first have to navigate these diseased waters. As an investor, view every forthcoming market dip as an opportunity to participate in India’s growth story. Enter markets in a calibrated method while keeping your risk acumen and appetite in mind.

2. CPI Inflation Update

Inflation recorded its highest figure in 2021 at 6.3%, exceeding RBI’s target range of 4 (+/-2) % for first time this calendar year, and after staying below 6% mark for five consecutive months. key reasons for spike is due to higher food prices due to seasonal factors and transmission of higher international fuel prices to retail level.

Inflation and corporate earnings are going to be directly determined by vitality in vaccine distributions. Surge in the virus can push interest rates and valuations as central banks around the globe will look to cut liquidity supply. RBI’s inflation projection at 5.1% for FY22 looks shaky in the near-term as current high print can skew figure to north of 5.5%+ per current trajectory.

3. WPI Inflation Update

India’s wholesale inflation rises to all time-high figure at 12.94% after touching its highest figures in last 11 years at 10.49% in the month prior. A low base effect and rising global commodity and oil prices imply WPI inflation to go up even further. Pass-through into consumer prices may seem inevitable if expected normal monsoon does not materialize.

Inflation trajectory over the rest of the year will be shaped by the Covid-19 infections and the impact of localized containment measures on supply chains and logistics. Pass-through into consumer prices may seem inevitable if expected normal monsoon does not materialize.

4. IIP Update

IIP grew by 134.4% in April’21 courtesy of low base effect, leading to it recording its highest figures since the imposition of lockdown last year. The jumping of eight core sectors by 56.1% (due to low base effect) further lop-sides IIP growth as it accounts for 40.27% of the IIP index. The first half of this financial year is expected to carry similar patterns.

Resurgence of health risks in fragmented pockets of the nation, disrupted supply-side economics and overly cautious retail consumption continue to be prominent risks to India’s full-blown economic recovery. Most economists suggested looking through the exaggerated growth number, which presents a false sense of normalcy even as the rampaging second wave of the pandemic in April forced many states to impose lockdowns, hurting industrial activity.

5. RBI’s Minutes Update

RBI keeps repo and reverse repo rate unchanged at 4.0% and 3.35% respectively for sixth consecutive time. Maintaining accommodative stance, all four members of the MPC found merit in focusing on growth via policies and packages. Inflation outlook is alterable for the near-term, being influenced by either the vaccine or the virus.

The inflation-targeting framework of 4(+/-2)% band is adopted for the next five years up to March 2026, ending speculation about adoption of interest-expensive stances to boost growth. Any further loosening can undermine the central bank’s ability to set effective monetary policy. RBI is to use arsenal of unique liquidity and similar supportive strategies to maintain current pace of expedited growth.