Markets not fully pricing in possibility of higher inflation: Analysts

Inflation is becoming a sore point for the markets, said analysts, who expect the frontline indices to fall further in case the galloping inflation is not tamed. At the current levels, the markets, they feel, are not fully factoring in a possible rise in inflationary pressures.

“The Sensex and Nifty can fall another 3 per cent – 4 per cent from the current levels if the inflation rise is not checked. The Russia - Ukraine war is also showing no signs of an early resolution. All this is adding fuel to the fire,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

India’s March wholesale price index-based inflation (WPI) surged to 14.55 per cent on rising edible oil prices and increase in power prices. WPI inflation in February stood at 13.11 per cent. On the other hand, the Consumer Price Index (CPI) inflation hit 6.95 per cent in March from 6.07 per cent in February.

“Inflation is becoming more of an issue in India where CPI has now been above the Reserve Bank of India’s threshold of 6 per cent for the past three months. This suggests that a doveish Reserve Bank of India (RBI) needs to start tightening monetary policy,” cautioned Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

Markets, meanwhile, slipped in trade on Monday with the S&P BSE Sensex tumbling over 2 per cent to below 57,000 mark as investors remained concerned about the rising inflation and below expectation March 2022 quarter results of Infosys and HDFC Bank.

“Food inflation in India has likely bottomed in 2021, and we expect it to creep higher with upside risks from global agricultural prices. Even after baking in lower oil prices of $125 a barrel in the second half of 2022 than our previous estimates ($135 a barrel), our inflation forecast in 2022 remains at 6.6 per cent y-o-y (average for 2022), materially higher than the RBI’s inflation forecast, with upside risk from food prices,” wrote Santanu Sengupta, chief India economist at Goldman Sachs in a recent note.

Aditi Nayar, chief economist at ICRA expects WPI inflation to remain in the range of 13.5 - 15 per cent in April, partly depending on where crude oil prices settle in the rest of April 2022 and how much petrol and diesel prices are revised further. 

“The sequential dip in the food and beverages index in March 2022, and the associated decline in its inflation rate has provided some relief, after the sharp rise seen in the CPI food inflation last week. The month-on-month decline in the food and beverages index in March 2022 was predominantly led by vegetables, eggs and tea, whereas many other items saw moderate increases. We remained concerned that even a normal monsoon may not be enough to douse the retail prices of those items that are pushing up food inflation, such as edible oils,” Nayar said.

U R Bhat, co-founder & director at Alphaniti Fintech suggests that the Nifty has good support at the 17,000 mark, which he expects the 50-share index to hold.

“The government needs to step in now to assuage market’s inflation-related concerns. The indices corrected sharply after the WPI data came out. The next support for the Nifty is around the 16,000 mark, which is too far away,” he said.

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