The likely hawkish stance from the US Fed will restrain the rally in the US markets and also keep the Indian market in a range, attracting selling at higher levels and buying at lower levels.
Puneet Wadhwa reports.
Elevated food price-led inflation could become a sore point for markets, which they seem to be ignoring at current levels, observe analysts.
Retail inflation in India — as measured by the Consumer Price Index (CPI) — came in at a three-month high of 6.52 per cent in January 2023, compared with 5.72 per cent in December and 5.88 per cent in November 2022.
The inflation print for February, according to Madan Sabnavis, chief economist at Bank of Baroda, will be critical for the Reserve Bank of India’s monetary policy committee.
If it remains above 6 per cent, there could be room for debate on a further rate hike.
“The market is not rejecting another rate hike in the months ahead, although it is agreed that the decision will be data-driven.
"The CPI inflation number has stoked debate on high cereal inflation, driven by wheat where the National Statistical Office has adjusted some weights, given that the public distribution system part now does not have a cost.
"Hence, there has been a loading of this weight on free market prices.
"But we believe this will account for not more than 0.2 per cent variation.
"Inflation will still be at 6.3 per cent or thereabouts,” said Sabnavis.
Another worry on the inflation front is the possibility of a subpar monsoon season in 2023.
The National Oceanic and Atmospheric Administration — the US government’s weather agency — has indicated the possibility of El Niño in 2023, which means less-than-normal rains.
This, say analysts, can impact sowing and result in lower crop yields in India, thereby hurting farm incomes and stoking inflation.
“The last El Niño event was in 2018, which coincided with below-normal rainfall in India.
"Since then, India has witnessed four successive good monsoons.
"Given the backdrop, the probability of a fifth normal monsoon appears faint at this stage.
"Clarity usually emerges only around April-May,” wrote analysts Abneesh Roy, Rushabh Bhachawat, and Jainam Gosar of Nuvama Research in a recent report.
The pan-Indian rainfall in 2022-23, according to Nuvama analysts, was about 6 per cent higher than the long-term average rainfall.
Yet, populous states, such as Uttar Pradesh, Bihar, West Bengal, and Jharkhand, reported a deficit, affecting paddy sowing.
Globally, sticky inflation seems to be a cause for concern.
Recently, two US Federal Reserve (Fed) officials suggested that the US central bank may need to keep interest rates elevated to rein in inflation.
The likely hawkish stance from the Fed, according to V K Vijayakumar, chief investment strategist at Geojit Financial Services, will restrain the rally in the US markets and also keep the Indian market in a range, attracting selling at higher levels and buying at lower levels.
As an investment strategy, select bank stocks, large-cap information technology, and stocks of capital goods companies, he suggests, are reasonable now after a recent correction and may be accumulated on declines.
“There is growing concern that equity markets are ignoring the risk of high inflation, which is declining very slowly. Comments from some Fed officials that they might have to remain hawkish for an extended period and might even support a 50-basis point rate hike in the March Fed meet are negative for equity markets,” he adds.