Higher Inflation on the Way? 🚦

Another good week for the markets as the Nifty 50 inches up by 3.5%, with numerous stocks in the power, banking and IT space ploughing through any possible red you may see in your portfolios.

The markets cheered RBI’s move to keep rates unchanged at the MPC meeting. With a majority vote, rates remained at 6.5%, for the 5th meeting in a row. The RBI however cited that the outlook for inflation remains uncertain, with near-term risks because of food inflation.

While the concern of inflation hasn’t been showing up in decision on rates, the RBI said it remains on high alert to monitor and act against any threat against the ongoing disinflation.

Inflation Risks High

In October 2023, India’s inflation had eased to a four-month low of 4.9%, from 5.0% in the previous month. However, food inflation, which accounts for nearly half the overall consumer price basket had risen slightly to 6.61%, compared to 6.56% in the previous month.

While the rise was minute, it has the potential to accelerate for November and December 2023. The rise in prices of onions and tomatoes, and high prices for pulses are likely to push food inflation higher, more than offsetting the easing of fuel inflation.

This may delay inflation from reaching RBI’s targeted level of 4%.

Fiscal Action Already On

The government has already sprung into action by reducing the stock limit of wheat that traders and wholesalers can hold by half to 1,000 tonnes, while also lowering limits for millers and retailers.

Additionally, the government said it is prepared to release an additional 2.5 million metric tonnes of wheat in the market to control prices.

India has also banned the export of wheat and non-basmati rice this year, along with capping sugar exports.

Last week, it also directed sugar mills to not direct their sugar production towards ethanol, so that sugar supply and prices can remain under check.

Tightening by the RBI

While the RBI maintained rates in the MPC meeting last week, it didn’t throw any surprise at the market. Like, back in August, the RBI introduced an incremental cash reserve ration (I-CRR) to take out excess liquidity out of the system.

And in October, the RBI said it could conduct Open Market Operations (OMOs) by selling bonds. This is often used as a liquidity-absorbing tool.

Although no OMOs were conducted after the comments in October, the option always remains open for the RBI to undertake if it has to either control inflation, or prevent the economy from overheating.

What Next?

The effort by the government on food inflation control, and the opening up of the option to use OMOs to tackle liquidity seem like prudent measures to tackle risks, thereby avoiding a rate hike.

After all, the risks seem near-term in nature, and if controllable by other measures, render the need to slow the economy down unnecessary.

India has exhibited significantly promising growth prospects, with the recent data’s surprising 7.6% growth in GDP. This even nudged the RBI to raising overall FY24 growth expectations for India to 7% (from the previous 6.5%).

While disinflation, RBI’s ‘withdrawal of accommodation’ stance, and India’s accelerating growth are great catalysts for the markets, higher-than-expected inflation might just be a short-term party pooper!