Inflation Is Getting Real

After being severely impacted by the Russia-Ukraine conflict in the beginning of the month, the markets saw a sharp rebound through the middle of February 2022. This was primarily led by:

1. Hopes of a ceasefire between Russia and Ukraine

2. The BJP killing it at state elections

3. The Fed increasing rates, but still expecting growth and employment to remain strong

But then last week, the markets didn’t really do much. They were more or less, flat.

So, what’s up?

What’s concerning the Indian markets?

The single largest reason we see the markets not moving higher is inflation. Let’s divide the inflation threat into two parts to understand the impact fully.

1. Global - This has been a legit fear even before Russia got itself into Ukraine. The Fed finally increased interest rates to curb inflation, and said it would do so in the rest of the 6 meetings in 2022 as well. This marks a reversal of expansionary central bank policy that has been pretty much a norm since the global financial crisis.

2. Domestic - The RBI has been foreseeing inflation in a band of 2-6% through March 31, 2026. However, retail inflation for both January and February was a shade higher than 6%. And then came the war, and prices have risen sharply after. While the RBI still calls this transitory, price hikes across businesses have been adding to pressure not only on corporate profits, but also on end-pricing, which can affect demand too.

India and inflation

Petrol and diesel prices were hiked thrice in the last week - but you probably already know this. What you probably didn't know (or missed) - Prices were increased after 137 days of no change.

Now that assembly elections are done with, and crude jumped up US$30 in just the last month, here we are with some real inflation pressure.

But it’s just not petrol and diesel, price hikes have been seen across several other goods. To name a few:

• LPG - Linked directly to crude

• CNG - Gas prices across the globe have been rising because Russia is a major exporter

• Cement - Prices have been raised by 3-4% across most parts of the country

• Pet coke - Used widely as fuel to heat furnaces up, prices have been up ~25% in the last month

• Cars - Another price hike coming up in April 2022 after already increased prices through 2021

• Wheat - Russia and Ukraine form nearly a third of global wheat exports

• Edible oil - Prices up 25-40% as the Russia-Ukraine conflict chokes up global supply

• Packaged food - Increase in prices of wheat, palm oil and packaging material likely to result in >10% increase in prices of branded packaged goods

What next?

• An increase in prices across the board is kicking in, and fast! Inflation is getting real, and starting to hit both businesses and consumers.

• Pressure will rise on both corporate profits (as input costs increase), and growth (as demand gets hit because of higher prices to consumers).

• Although the RBI has been pro-growth and sees high inflation as transient, the negative impact is already hitting, even if temporary; and that will weigh upon the markets.

• A reversal in Fed’s stance, and rate increases in the US through the year are likely to take money out of emerging markets as the US starts offering better risk-reward. This will add to some pressure on the Indian markets too. Not much though because the Indian market’s dependence on foreign investments has come down dramatically over the last couple of years.