Increase in the CPI inflation forecast
Analysis on Indian Economy by Shibani Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company–
Last week, markets reacted to the increased risks of a global recession and persistently higher inflation. Inflation has clearly taken centre stage and is one of the key factors driving monetary policy stance and impacting the direction of equity markets.
With headline US CPI inflation at 8.6% YoY in May 2022, and wage inflation at 5.2%, the US Fed announced a 75bps hike in the Fed fund target rate to 1.5%. The US central bank is clearly embarking upon a tight monetary policy stance, which is expected to drive up the policy Fed fund rate to 3.0-3.5% by end-2022 and 3.5-4.0% by end-2023. The Fed has also initiated the process of substantial quantitative tightening of its USD 9tn balance sheet by deciding to stop reinvestment of treasury redemption (USD 15bn) ahead of the planned taper of USD 47.5bn in the first three months followed by a rundown of USD95bn per month.
Back home in India too, RBI raised rates once again and increased their inflation expectation for FY23. Based on the current macro-economic situation and outlook, the Monetary Policy Committee (MPC) unanimously voted to hike the policy repo rate by 50bps with immediate effect to 4.9%. The central bank has retained their FY23 growth estimate at 7.2% and increased the CPI inflation forecast for FY23 to 6.7% from 5.7% earlier.
On the domestic economy front, headline CPI inflation in May dropped marginally to 7.04% compared to 7.79% in April, while April IIP registered a growth of 7.1% YoY (March: 1.8%). FPI (Foreign Portfolio Investor) outflows continued during the week while DIIs (Domestic Institutional Investors) remained net buyers.
In the near term, key factors that are to be important to track include inflation and monetary policy, the trajectory of commodity price movement especially oil, any development on the Ukraine-Russia war and outlook on domestic demand and corporate earnings.
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