Financial Markets: Inflation risks deepen, but market bulls may not loosen their grip on D-St just yet.

NEW DELHI – As Russia’s military aggression in Ukraine shows little sign of abating, the next big domestic event scheduled for financial markets is the Reserve Bank of India’s monetary policy statement in about 10 days.

In the period between the last RBI policy statement in early February and the next, the event with the most significant implications for India is a multi-year rise in world crude oil prices, given that the country imports more than 80 per cent cent of oil. needs.

In the past, an increase in oil prices of such a magnitude, up to 50 percent in 2022, would have been a strong argument for the central bank to veer towards tighter monetary policy, especially when domestic inflation is already high. .

In an era where central bank communication has become as powerful a tool as actual policy decisions, there are plenty of signs from the RBI that growth-supportive conditions are here to stay for some time, despite the inflation risks.

The key point that several members of the Monetary Policy Committee have emphasized recently, including RBI Governor Shaktikanta Das, is the different nature of inflation in India and advanced economies, and therefore the need to take different approaches.

Yes, the latest data shows that consumer price inflation is a little above the RBI’s comfort zone of 2 to 6 percent, but the central bank, which has recognized the risk of high oil prices , has made his assessment of what is driving inflation crystal clear: a statistical base effect and certain supply-side problems, which have been exacerbated by the war.

“If you start to start a premature compression of demand through the action of monetary policy, then it would be counterproductive. Monetary policy addresses problems on the demand side. In inflation, there is a demand side problem and there is a supply side problem,” Das said last week.

The RBI governor was talking about resisting the urge to raise interest rates when inflation was high during the early phase of the pandemic, but a look at India’s growth trajectory shows that the demand side has a long way to go. way to go.

In the second advance estimate of national income, the National Bureau of Statistics lowered the GDP growth estimate for the current fiscal year to 8.9 percent from the previous 9.2 percent.

Meanwhile, GDP growth for October-December registered 5.4 percent, slower than previous quarters this year.

“In essence, India’s growth story remains as weak as it was at the time of the 2013 tantrum. The recent fallout from the war has, in fact, tipped the balance of risks downward,” said the RBI Deputy Governor Michael Patra on March 11.

When taking into account that MPC members have spoken out about the government’s room to reduce fuel taxes and compensate for high consumer prices, it seems clear that monetary policy will not seek to hit demand. Food to go? Abundant liquidity in the system and low interest rates.

One of the most visible theaters where the abundant liquidity allowed by the RBI has made its mark is the performance of the stock market.

In a telling sign of faith in India’s growth prospects, and the political push to secure those prospects, the BSE Sensex has lost just 1.5 per cent so far in 2022 despite headwinds. of rising oil prices and a US Federal Reserve all guns blazing when it comes to raising interest rates.

In fact, when viewed from a year ago, the benchmark is still 15 percent higher.

It is this abundant liquidity, much of which has poured into the stock market amid declining yields on fixed income instruments, that has equipped the stock market to cope with the largest outflows abroad since the 2008 global financial crisis.

Simply put, domestic investors, both institutional and retail, have stepped up and absorbed a large part of the stocks that foreign players are dumping.

“So the RBI governor ensures that there will be enough liquidity support internally and that is something that we are looking at as well. DII numbers are encouraging despite continued FII sales,” said Ajit Mishra, VP of research at Religare Broking.

Over a 12-month monitoring period, domestic investors have put $28bn into shares, while FIIs have withdrawn $36bn, ICICI Securities wrote earlier this month.

The excess cash flowing through the system has also coincided with an increase in retail money flowing into mutual funds and then into the stock market, and this change in investment behavior that has accelerated during the pandemic is structural. Indian mutual fund accounts tripled to Rs 13 crore in February 2022 from Rs 4 crore in December 2014, ICICI Securities said.

In the current environment of high commodity prices and cost price inflation, shares of fast-moving consumer goods companies may lose, and analysts say even recent price gains may not offset the margin pressure.

“The market now expects them (consumer-facing companies) to have to make one more series of price increases; Not only that, they may have to make some adjustments to the quality, cost and quantity of the products they offer,” said Vinod Nair, head of research at Geojit Financial Services.

“They will have to make these adjustments to maintain their margins. A considerable degree of correction has already started, some stocks are down 20 to 30 percent, but until we see clear stability with inflation and the war situation, there will be some doubt.”

Even as the banking sector has seen some volatility of late, with Bankex down 7 percent so far in 2022, Nair expressed optimism about the long-term outlook for the sector.

“They are quite valued now, quite, I would say attractive now. Lower than the long-term averages and the stable liquidity that the RBI mentions will provide them with stability and their NPA numbers are also going down.” According to the RBI, banks’ gross NPAs are currently at an all-time low of 6.5 percent.

Also, now that the economy has largely opened up, banks could also see volume growth, while tourism-related stocks could also do well, Nair said.

The IT sector, which as an export-oriented industry benefits from the rupee’s depreciation, could also gain, analysts said.

“One should be in sectors that are not affected by recent developments. From what we’re seeing, TI is one, where we’re seeing favorable developments and aside from that, selectively in metals and pharmaceuticals; that’s something you can look at,” Religare’s Mishra said.

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