Retail inflation, as measured by the CPI, fell to 4.1% year-on-year in January from 4.6% in December
However, rising crude prices is a threat to the overall economic recovery and may take the shine off Indian markets rally as the oil prices are headed towards $65 per barrel
Mumbai: Encouraging domestic macroeconomic data and firm global rally drove Indian markets to new record highs on Monday. The BSE Sensex hit 52000-mark for first time ever to close 609.83 points or 1.18% higher at 52,154.13. The 50-share Nifty gained 151.40 points or 1% before ending at 15,314.70.
With China and Hong Kong markets closed for the Lunar New Year holiday, Japan’s Nikkei led the way, climbing 1.9% to reclaim the 30,000-point level for the first time in more than three decades. Global shares rose for the 11th day in a row to reach a fresh peak on the optimism about the rollout of covid-19 vaccines and new fiscal aid from theUS, while tensions in the Middle East drove oil to a 13-month high.
Later in the week, all eyes will be on the release of minutes from the US Federal Reserve’s January meeting, where policymakers decided to leave rates unchanged, for hints to the likely direction of monetary policy.
“Indian equity benchmarks after a week of consolidation, clocked yet another session of record highs on the back of strong December quarter earnings. Strong corporate earnings have ignited hopes of faster economic recovery while buoyant global markets also aided risk sentiment. Moreover, better than expected December IIP number and January CPI number – which fell to 16-month low, boosted market sentiment," Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.
Retail inflation, as measured by the Consumer Price Index (CPI), fell to 4.1% year-on-year in January from 4.6% in December, mainly due to much lower food price inflation, whereas core inflation surprised on the upside. Headline inflation is close to the Reserve Bank of India’s medium-term target of 4% .As a result, economists are expecting the RBI to focus on funding the high fiscal deficit at reasonable yields to nurse recovery.
“The comfort on headline inflation should allow the RBI to maintain its status quo on rates, stance and liquidity for now. However, as growth normalizes, so should the policy. We expect the process of liquidity normalization to begin in mid-2021," said Nomura.
Indian markets have jumped over 10% after the Union budget was presented in the parliament on 1 February. However, rising crude prices is a threat to the overall economic recovery and may take the shine off Indian markets rally as the oil prices are headed towards $65 per barrel.
“The growth recovery is gaining momentum. If this trend is sustained, corporate profits will surprise on the upside in FY 22, bringing the stock valuations down. Rising crude price is an area of concern," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Corporate earnings grew at a robust pace in the December quarter in a bright spot for the Indian economy that is seeking to ride out of the brutal effects of the pandemic. Out-of-home consumption, festive demand and improved consumer sentiment, besides benefits of tight cost control led to better-than-expected earnings growth during the quarter.
Analysts are cautious that some of the cost rationalization measures by companies taken in previous quarters are likely to reverse as the economy starts to open up. Rise in prices of major commodities is feared to hit gross margins but analysts expect companies to offset the impact through product price increases and cost-saving initiatives.