It is welcome news to the Indian economy (and music to the Government) to see September CPI down below 6.5% (at lower end of RBI's target zone of 6-8%) and WPI into 2-4% comfort zone. RBI should be happy with the positive (and favourable) down-trend to cut conflicts in growth-inflation dynamics, but may not get into immediate rate-cut action till confirmation on long term sustainability. It also means that the fear of rate hike in the event stubborn CPI (at higher end of 6-8%) is now behind and if the downtrend is established in the next 2-3 months, rate cut may not be delayed beyond Q4/FY15.
The bullish cues from domestic inflation is diluted by weak global cues, and limited signs of significant upside on domestic growth momentum. The ease is mainly from sharp reversal in commodity prices from global demand compression. In such a scenario, dovish monetary policy itself may not serve the purpose unless enough opportunities are created to put investor's monies to work; too much of money chase into domestic Gilts is risk for Rupee.
All taken, markets have not reacted favourably to the spark in inflation print when global investor sentiment is into heavy risk-off mode. The stake-holders are yet to sight the milestones between Vision and targeted goals, which is important to get clarity on ways, means and time frame from start to finish! It is not surprise to see NIFTY giving up gains from over 7915 to below 7865 and Rupee giving up recovery from 60.90 into 61.40 with 10Y bond yield steady at 8.35-8.40%.
The take-away at this stage is the comfort from high probability of turnaround in India macroeconomic fundamentals leaving the structural woes from growth-inflation, demand-supply and CAD-exchange rate dynamics way behind, all contributing to fiscal prudence! There is no need to get overly bearish on the markets, while retaining the post-Modi optimism!
Moses Harding
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