The CPI came in more or less as expected by most analysts. It was at 7.01% for June, almost a status quo vis-à-vis 7.04% of May.
This ‘unchanged’ position was mainly on account of one cancelling the other – though price of vegetables remained up, lower prices of edible oil, pulses and housing helped keep the headline food price at 7.75%, up by 0.5% (MoM). The excise duty cut in fuel is expected to reflect fully only in July.
A quick word on IIP, which at this juncture seems a bit meaningless – for May it came in at 19.6% v/s 7.1% in April and 27.6% in May’21. Clearly, its only the low base effect at play here. But the reality, if one looks beyond statistics is that demand is low and rising costs are not helping too.
Inflation is clearly a poisonous snake in the paradise but even before the IIP and CPI came in today, it was taken for granted that pain will be there in the near term but the long term story is slowly but surely improving. We say this based on three facts.
Firstly, the RBI Governor on Saturday said that inflation is expected to start cooling down from October, minimizing the need for RBI action.
Secondly, another pointer to this fact - downside risks to inflation are materializing with a cooling of commodity prices, led mainly by cooking oil, prices of which have slumped to their lowest levels due to better increased supplies. The impact of these lowered edible oil prices is already seen in the June CPI and will only accentuate in coming months is the trend continues.
Add to this third factor - the 20% drop in crude oil prices since a peak in March while wheat, soymeal, rice, sugar and corn prices have also come down.
Crude oil has dropped about 20% since a peak in March, soybean oil has lost a third of its value since late April, while wheat and corn have also declined.
All this means price pressure will start easing in H2FY23 but what it also means is that till then, RBI will not let down its guard; its fight against inflation will carry on, meaning definite policy action in coming policies till Oct. At this juncture, nothing will be done to dilute the fight.
On the other hand, growth will remain a challenge. CMIE has already indicated that jobs remain stubbornly below pandemic levels. The data points out to a very high demand for work under rural jobs guarantee scheme, meaning the dependence on agriculture and the informal sector stays as it was before the pandemic. What we are seeing thus is a very anemic kind of recovery.
So why are the markets still doing fairly well, despite these economic factors? The answer is simple – the existing organized sector is doing well, bouncing back the best from the pandemic as we have seen from the record profits from majority of the listed companies.
But the truth is that the informal sector recovery is sluggish and this gap, till it is bridged will anchor down growth. And for growth to take off, only solution – more and more investment from the private sector, mainly in the private sector and not merely road building projects. There have been many brown as well as greenfield projects taking off, but it’s not enough to generate employment and thus good growth. Again, with interest rates on the rise, new project announcements will take a while to get announced; maybe all are waiting for more clarity on inflation trajectory till Q3FY23.
August 4th will be watched – will RBI hike rates once again and by how much? And there is also the US Fed interest rate decision on 27th July. Till then, the market is expected to more or less rally the way it is doing currently, with earnings specific movements driving the trades.
Advice – keep calm and stay invested. Long term economic story is good.