The inflation numbers for July are a bit dated because the fall in commodity prices happened this month. Nevertheless, there are two important data points to look out for—food inflation and non-food manufacturing inflation. These are important because food inflation is entirely a domestic phenomenon and would be largely unaffected by the global fall in commodity prices.
The Reserve Bank of India (RBI), in its last monetary policy statement, said there were risks to the outlook for food prices. Lower food price inflation is, therefore, crucial for a change of stance by RBI. Non-food manufacturing inflation, on the other hand, is a measure of the strength of domestic demand, which, too, is a factor that the central bank will take into account to determine its stance.
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How have these two components of inflation done in July? The index for food articles rose by 1.4% month-on-month, from 190.1 in June to 192.8 in July. Robert Prior-Wandesforde, head of India and South-East Asia economics for Credit Suisse, points out, “The weekly readings for primary articles inflation in the second half of July (it rose to 12.2% in the week ended 30 July from 10.5% in mid-July) suggest there is a risk that this component will move higher again in August.”
Non-food manufacturing inflation, which is also RBI’s proxy for “core” inflation, was up 7.5%, a bit higher than June’s 7.2%. However, lower commodity prices might help here because companies may pass them on. Nevertheless, RBI’s last monetary policy statement compared the current rates of core inflation “with the average non-food manufactured product inflation of 4% over the last six years”. Core inflation is likely to stay well above that 4% rate. Also interesting is the fact that the HSBC services sector Purchasing Managers’ Index showed the sub-index for prices charged accelerated in July.
Moreover, while the year-on-year rise in the Wholesale Price Index in July may have been on expected lines, the 9.22% increase is unlikely to do much to lower inflationary expectations, which continue to be very high.
The inflation numbers are important for the stock marketbecause those will determine whether RBI takes its foot off the brake. So far, despite all the talk of India being relatively insulated from slower growth in the West, the Sensex has taken quite a hammering.
One would have expected that since the current problems are in Europe and the US, the stock markets there would be the worst affected this month. The chart shows, however, that the Sensex has fallen more than the Dow, or FTSE, or even the Spanish index.
The MSCI indices tell a similar story. The MSCI India index for August (till 15 August) was down 9.97%, compared with a fall of 6.8% for MSCI US, 8% for MSCI UK and 7.75% for the MSCI World index.
Is this because of the high beta of emerging markets, which makes them more volatile? Well, the Shanghai Composite and the Jakarta Composite have done much better than the Sensex. Fears of inflation remaining high seem to be weighing on the Indian market.
Graphic by Naveen Kumar Saini/Mint