Soon after the Indian Meteorological Department (IMD) came out with a forecast of below average monsoon this year; speculations about higher inflation gathered pace. Also, unseasonal rain showers and extended heat wave were expected to severely push up the prices of fruits and vegetables across the country. However, actual inflation data for May 2015 shows that things didn’t turn out to be as bad as expected earlier.

Retail inflation as measured by the movement of Consumer Price Index (CPI) came in at 5.01% in May 2015 as against 8.28% recorded in May 2014; but, it is a tad higher than 4.87% registered in April 2015. Interestingly food price inflation, at 4.80% was the lowest since December 2014. It has happened only twice over last 1 year that food inflation came lower than the overall retail inflation.
 

Growth and Inflation Well Balanced? Data as on June 12, 2015
(MOSPI, PersonalFN Research)  

Rate of inflation in selective segments of food articles
 

• Cereals and products - 1.80%
• Oil and fats- 1.95%
• Fruits-3.84%
• vegetables- 4.64%
   

On the Other hand, industrial growth as suggested by the movement of Index of Industrial Production (IIP) picked up in April 2015. IIP grew at 4.1% in April. Manufacturing sectors did well as they collectively recorded a growth of 5.1%. Mining industries witnessed growth of 0.6%. However, growth of -0.5% in power and electricity sector dragged the IIP. The index has managed to stay in positive for 6 consecutive months.

Is economy catching up?

Growth in Gross Domestic Product (GDP) for FY 2014-15 hinted at economic revival, however, the dependability was always questioned. Although other indicators are yet to confirm the pick-up in activates, things might have started turning around. Have a look at this,
 

• Performance of capital goods sector was impressive in April as it registered over 11% growth.
• Consumer durable segment grew at 1.3% which was the highest growth number in last 11 months.
• Retail inflation still remains in the comfort zone of RBI which has set a target of containing it below 6.0% by January 2016.
• Indirect tax collection in first two months of FY 2015-16 has grown by around 39%.
   

These indicators are encouraging but shouldn’t be treated with undue optimism. Rise in industrial activities as denoted by rising manufacturing output and pick up in capital goods sector has so far proven to be fragile and uneven.

Rise in indirect tax collection is largely on account of adjustments made by the Government in recent times. Hike in excise duty on petrol and diesel, levy of clean energy cess and reintroduction of excise duty on consumer durables and automobiles.

RBI has been predicting that, inflation may show uptick in the second half of FY 2015-16. Crude oil prices have started going up in the international market which may impact inflation in Indian, going forward. Let’s not forget that sharply falling crude oil prices had contributed significantly in the fall of retail inflation.

How markets have reacted
Capital markets have responded cautiously without reading too much into data. Until recently it was widely believed that, RBI may continue slashing rates aggressively; but markets changed this perception after 2nd bi-monthly monetary policy was announced. Now the consensus has taken a U turn. Equity and debt markets now expect RBI to maintain status quo for considerable time now.

What to expect?
It is too early to jump to a conclusion that economy is reviving rapidly. Indian banking system has a pile of stressed assets. Balance sheets of many corporates are in a bad shape. Stressed assets ratio of Indian banks has jumped to 10.9% in March 2015 from 10.0% registered in March 2014. This ratio indicates how much as a percentage of gross loans issued by banks have turned non-performing or have been restructured. As reported by the Hindu Business Line on May 6, 2015, the Indian banking system has close to Rs 7.05 lakh crore worth stressed assets. Non-food credit growth of banks has been poor (3.6%) even in the first two months of FY 2015-16.

As far as inflation is concerned, impact of monsoon may drastically alter the inflation expectation. IMD has predicted rain to be 88% of Long Period Averages (LPA) this session. A better number than this may encourage consumers, investors and policy makers as well. However, if monsoon turns out to be lower than expected; there will be a negative impact on inflation expectation and so as on policy decisions and markets. Crude oil prices may also play a crucial role in deciding where inflation goes from here.

PersonalFN believes, RBI may hold rates unchanged until it sees transmission of benefits of policy rate cuts accorded till now to the borrower and inflation expectation eases up. Unless, improvement in economic growth translates into higher corporate revenues and profits, equity markets may not be impressed much. Rather, factors such as performance of the Government in the monsoon session, impact of monsoon on agricultural output and inflation and global events to name a few, would drive the equity markets up or down. As far as bond markets are concerned, performance of banking sector, monetary policy stance and state of Government finances would be the factors affecting bond yields.

PersonalFN is of the view that, you shouldn’t speculate on any of these events and invest in different asset classes after considering your risk appetite, current state of finances and your financial goals.

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bhupendramadhiwalla@yahoo.com Jun 16, 2015 I am sorry to say but WPI and CPI has absolutely no meaning to 90% of the people who go daily in the local market. These indices depend upon the basket of items and individual weight given to each of them. It is natural for any government to design (DESIGN) the index in such a way that it does not look alarming, just as the definition of BPL. Further BPL list of any village is full of error of both types, non-BPL in the list, real BPL out of the list! I am involved in rural development since 2003 and I know how ridiculous these indices are on the ground. It gives me pain to read articles and data on economy because I am a 'dehati'. Warm regards Bhupendra Madhiwalla, IIMC First Batch (1964-66) Mumbai

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