Optimism is rampant as the markets hit unprecedented highs, with the Nifty 50 up about 3% in the last week and 9% in the last month, with renewed faith, a risk-on mentality and a whole lot of potential to make money, bringing India to the position of the 7th largest stock market in the world, overtaking Hong Kong!
Yet, amid this exuberance, a certain something has made a re-entry into conversations, making it a little tougher to remain this optimistic - our old friend, inflation.
What Are The Numbers Saying?
As of November 2023, retail inflation has hit a 3-month high of 5.55%, a 0.5% increase from the October print, but a 0.3% reduction on a YoY basis. While this is still within the parameters of the 2-6% range set by the RBI, it is awfully close to the upper end.
The main driver for this close call is none other than food inflation, specifically vegetable prices. While this might be your chance to get out of eating vegetables, now that onions and tomatoes are 40-50% more expensive than they were a month or so ago, inflation cannot discount this effect.
It is pretty evident that while core inflation (excluding food and fuel) did ease, with November seeing a 0.2% decline from October figures (on the back of moderate input cost pressures and weakening of demand), food inflation is still a very real problem (and it, unfortunately, carries a weight of 46% in the overall inflation number).
The not-so-great news is that this rise in food prices might be sustained in the near term, putting pressure on overall inflation and pushing the barrier of what is permissible according to the RBI.
The government has been stepping in to control food inflation as much as it can. Over the last year, it has:
Reduced the stock limit of wheat that traders, wholesalers, millers and retailers can hold
Released an additional stock of wheat to increase supply
Banned exports of wheat and non-basmati rice
Directed sugar mills to not direct production towards making ethanol
Additionally, the RBI has been on alert and has been watching the situation closely. It has built options to control inflation by tightening liquidity if it comes to that.
Other than Inflation
While inflation has been a bit of a temporary bummer, there are a lot of other positive things going around.
India has exhibited significantly promising growth prospects, with the recent data’s surprising 7.6% growth in GDP
Factory output, as measured by the Index of Industrial Production (IIP), rose to a 16-month high of 11.7% in October, due to overall pick-up across sectors such as mining, manufacturing, electricity and capital goods, making this a 16-month high number - a good sign of demand coming back
Hot Take (Not Really)
While inflation numbers have inched higher, and are expected to maybe even touch 6% in December, there are enough reasons to believe this is transient.
With the economy running hot, foreign money flowing in, and political stability expected to continue over the next 5 years, the inflation worry seems like it will get shadowed by the positivity.
But with the markets at an all-time high, and the bulls becoming rather a consensus, administering a certain level of caution while investing that new pay check might not be a bad idea!
All in all, while the RBI is mildly concerned about the near-term effects of all this (which means December inflation might touch that dreaded 6% upper limit), it is fairly resolute on its decision to not change rates to contain this rise.