The inflation rate has started having an impact on the Sensex. The Sensex has started rocking because of the high inflation. With its widespread reach, inflation affects all aspects of the economy, and thereby the Sensex. The markets fell after a sharp rise in food prices heightened concerns that the central bank may tighten the monetary policy more than expected. The financial stocks were among the big losers as higher interest rates could douse the demand for loans and squeeze the margins of banks.
The food price index rose 18.32 per cent in the 12 months to December 25, the highest in more than a year. The fuel price index climbed 11.63 per cent. In the prior week, annual food and fuel inflation stood at 14.44 per cent and 11.63 per cent respectively. The primary articles price index was up 20.20 per cent in the latest week, compared with an annual rise of 17.24 per cent a week earlier. The Wholesale Price Index, the most widely watched gauge of prices in India, rose 7.48 per cent in November from a year earlier, compared with 8.58 per cent in October.
Though overall, inflation moderated to 7.75 per cent in November from 8.58 per cent in October, food inflation has increased rapidly in the first half of December. High onion prices coupled with that of milk were blamed for high food inflation. This may lead to at least a 50 basis point rate hike in January by the Reserve Bank of India (RBI). One has to be prepared now for a much larger rate hike series than what one was expecting say a month ago. The RBI is scheduled to review the policy on January 25.
Quarterly corporate results due from next week are expected to show robust growth, and investors would be watching for management comments on outlook for direction. Inflation is one of the issues hurting the markets. Earnings should provide more cues on direction. Foreign funds have bought around USD 270 million of equity in the first two trading sessions this year, after pumping in a record USD 29.3 billion in 2010. According to the prime minister's economic advisory council chairman C Rangarajan, the inflation rate could be considered comfortable only when it comes down to four per cent.
He said the rate hike by the RBI will depend on the price behaviour during December and January. If the inflation rate comes down significantly, there may not be any need for action. On the other hand, if inflation remains sticky, then action will be required by the RBI. The RBI last year raised policy rates six times to rein in inflation. However, in its mid-quarterly review in December, the RBI refrained from raising rates since the system was facing a cash crunch.
It, in fact, announced measures to inject Rs 48,000 crores into the system. The RBI, however, cautioned that its measures should not be interpreted as a reversal of the tight monetary stance since inflation still continues to be a major concern.
Foreign investors were net sellers to the tune of Rs.594 crore on Tuesday, while domestic institutional traders bought net securities of over Rs.271 crore. Investor wealth of over Rs.1.98-lakh crore was eroded.
While market watchers said that the RBI's 25-basis-point repo rate cut was in line with expectations, what gave cause for concern was the Governor's statement on a possible monsoon shock wreaking havoc with inflation and testing the central bank's limits in controlling it.
Dhananjay Sinha, Economist and research head, Emkay Global Financial Services, said the "negative surprise" for the market was the scaling up of the inflation projection for January 2016 to 6 per cent and downward revision of the real gross value added growth projection for FY16 to 7.6 per cent from 7.8 percent.
Equity markets have performed well in the recent past and have delivered good returns on the hope that economy will revive and growth will start moving upwards. A strong election mandate made investors believe this and discount it today in the prices. (S&P BSE Smallcap and S&P BSE Midcap posted 90.7% and 70.01% absolute returns while BSE Sensex posted 37.62% absolute returns since Sep-13) Confidence building in growth revival: Confidence building in growth revival: hence building in growth revival: Besides the broader improvement in corporate confidence, macro indicators have been encouraging off late. The latest Industrial Production data surprised for the third consecutive month. Composite Consumer Price Index reached its lowest level (7.3%) since the start of the index (early 2012). Merchandise exports grew in double digits for the second consecutive month. Urgency in the new Government's policy action too augurs well for the growth ahead.