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Business News/ Markets / Stock Markets/  What does high retail inflation mean for markets?
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What does high retail inflation mean for markets?

Markets have been on a tear recently, recovering from the lows of March last year, led by better-than-expected earnings, a rebound in economic indicators after September and improved consumer sentiment, besides the influx of foreign liquidity

Domestic equities have risen over 70% in the current fiscal so far but the rise in inflation may break the rally.Premium
Domestic equities have risen over 70% in the current fiscal so far but the rise in inflation may break the rally.

MUMBAI: Domestic investor sentiment will likely take a hit, given concerns about rising inflation and contracting industrial production. India's Consumer Price Index, or CPI-based inflation, accelerated to 5.03% in February, from a 16-month low in January, as the pace of food and fuel price rises quickened to 3.87% and 3.53%, respectively, data released on Friday showed. Index of Industrial Production (IIP) or factory contracted 1.6% in January, after registering growth in December.

Analysts feel that given the data, economic recovery will take some more time.

Steep increase in commodity costs, especially oil prices, has started to gradually worry markets about the likely impact on corporate earnings, leading to concerns that the central bank will be compelled to normalise liquidity by revising interest rates sooner than anticipated. The Reserve Bank of India has supported maintaining the existing inflation target of 4% within a band of 2 percentage points.

Nikhil Gupta, chief economist, Motilal Oswal Financial Services Ltd said, "Overall, the pick-up in inflation and fall in IIP is the worst possible combination. We hope IIP would come back into growth territory from February, though CPI may pick up further to 5.4% in Mar-21. Accordingly, we expect monetary policy committee (MPC) to maintain status quo in April's policy."

According to M Govinda Rao, chief economic adviser, Brickwork Ratings, there is a concern about elevated level of core inflation at 5.86%. "Going forward, the excess liquidity in the system combined with volatility in fuel prices can pose upward risk to inflation. In this situation, the MPC is expected to continue the pause though the RBI might take some measures to drain excess liquidity. The manufacturing sector continuing to contract at 2% shows that we still have some distance to cover before the economy recovers," Rao added.

Markets have been on a tear recently, recovering from the lows of March last year, led by better-than-expected earnings, a rebound in economic indicators after September and improved consumer sentiment, besides the influx of foreign liquidity. Domestic equities have risen over 70% in the current fiscal so far but the rise in inflation may break the rally, analysts caution.

"Markets will first react to the macroeconomic data that is IIP and CPI inflation, which came in after the market hours on Friday. Besides, updates on the covid situation and related news will remain on participants’ radars. Amid all, we’re seeing noticeable buzz in the primary market and three new IPOs are lined up next week for the subscription. On the global front, the market will be closely eyeing the US Fed meet for their stance on interest rates and plans to tackle the volatility in the bond yields," Ajit Mishra, VP Research, Religare Broking said.

"The sharp worsening in the performance of capital goods in January 2021 was led by an adverse base effect, which is expected to be transient. While we expect the central government's capital spending to display a quick pace in Q4 FY2021, the outgo from state governments is likely to be mixed, and the spending of the private sector may remain muted in the near term," Aditi Nayar, Principal Economist, ICRA Ltd said.

She said that trend in the IIP has turned volatile in the last three months, suggesting that the economy has entered into a consolidation phase with an underlying momentum that is relatively subdued.

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Published: 13 Mar 2021, 01:42 PM IST
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