MACRO NUMBERS – THUMBS DOWN

about 15 days ago
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Inflation is the snake in the grass.

We saw proof of this from USA and China earlier and today, as was widely expected, India’s Oct CPI came in at much at 4.48%, which still remains pretty benign, not reflecting what we all are paying on a day-to-day basis.

Food inflation came in at 0.85% v/s 0.68% (MoM) and vegetables inflation at (-)19.43% v/s (-)22.47%.

While WPI has consistently been in the double digits for the past few months, CPI for Sept came in low at 4.35% - this in itself was an indicator that companies are not passing on the costs to the consumers. And that is slowly changing now; at least that is what the CPI of October indicated.

Almost each and every company has red-flagged increase in raw material prices and they all are experiencing a squeeze on profits. Many companies have already hiked their own selling prices and many are announcing price hikes now. Consumer prices are seen accelerating further as a higher base of comparison from a year ago fades and this means as we move ahead, we are going to see higher CPI.

In this backdrop, the logical thing to do would be for RBI to hike interest rates. But like the US Fed, RBI too feels that price rise is transitory and once crop is harvested, higher food output will cool down inflation. But most economists are of the opinion that high inflation is here to stay for a couple of more quarters while at the same time, the tax cut on fuel will most certainly help bring down prices to some extent.

RBI’s MPC is scheduled to meet 6th to 8th Dec but it is expected to leave rates unchanged at 4%, with maybe a voice or two of dissent. We could see reversing the rate cycle only on Q4FY22 and it would be nothing ore than 25 bps.

And the IIP for Sept came in much lower at 3.1% v/s 11.90% in August – most economists say that excessive rains across the country is what impacted the growth rate in Sept. Most are of the opinion that there are ‘sharp shocks’ and one should not draw long term conclusions from these macro indicators.

Conclusion – these are not good macro numbers but let’s not assume the worst; its only when corporate earnings start sagging that we need to worry – that is when we can say that things are not good. For now, let’s be cautious and not rush into buying stocks which are already trading at highs.

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