The Hindu Business Line : ‘High inflation is detrimental to equities in near term’

Mumbai, June 20 Taking market participants by surprise on Friday was the 13-year high inflation figure of 11.05 per cent. The Sensex nosedived 516 points on Friday, after the inflation figures were announced, ending the day at its lowest for the year 2008.

Rising fuel and food costs are pushing inflation well above the Government’s target of between 5 per cent and 5.5 per cent. Marketmen said that they were expecting double-digit inflation, but not as high as 11.05 per cent.

“Inflation of 11.05 per cent is definitely worrying and is a complete negative surprise against the consensus expectation of 10-10.6 per cent. The market sentiment will definitely get impacted severely looking at this inflation number and this is already reflected in the strong selling wave witnessed in the markets today,” said Mr Sudip Bandyopadhyay, Director & CEO, Reliance Money. “We were expecting around maybe 10 per cent or 10.5 per cent, but we were definitely not expecting 11.05 per cent,” said Mr Vijay L. Bhambwani, Chairman, Bhambwani Securities (P) Ltd.

Negative Surprise

“The repercussions of such high inflation would be detrimental for equities in the near-term, as this would invite considerable tightening measures from the RBI, which would have an adverse impact on the investment and consumption climate in the country. This consequently would put pressure on companies’ profits and profitability, which would render equity investments unattractive in the near-term,” said Mr Hitesh Agrawal, Head-Research, Angel Broking Ltd.

Interest-sensitive sectors such as real estate, banking and term-lending institutions will be impacted the most, as the Government will consider monetary measures, which will directly impact these sectors, said analysts.

“Continued double-digit inflation is expected to have a huge psychological impact on consumers, further fuelling inflationary expectations. Due to the social implications, we believe it will increasingly become a major political issue. We think there needs to be significant further tightening to arrest inflationary expectations, second-round effects and demand pressures. We now expect the RBI to hike another 100 bps through a combination of raising the repo rate and the cash reserve ratio over the next 3 months, with risks towards more tightening. Given the negative sentiments of high inflation hurting foreign inflows and elevated global oil prices, we expect the rupee to continue to weaken,” said Mr Tushar Poddar, Vice-President Asia Economic Research, Goldman Sachs.

Mr Paras Adenwala, Chief Investment Officer at ING Vysya Mutual Fund, though, thinks that inflation is most likely to moderate in the next six months as both the Government and the RBI are coming with many measures to rein in inflation.

Global phenomenon

“It is not just our country that is facing high inflation numbers, it is a global phenomenon. Globally everyone is trying to fight rising inflation. But this does not mean that the India story is not strong any more, our equity markets are a good place for those investors looking to stay invested for a long period,” added Mr Adenwala.

“Given the changing economic environment, we do see significant divergence in performance of individual companies, and from a risk-adjusted return perspective, investors, who buy into good quality names, will do well over a year or two years perspective,” said Mr Nirmal Jain, Chairman, India Infoline Ltd.

Mr Amitabh Chakraborty of Religare said: “With the anticipated RBI move on hiking CRR/Repo rates likely to get hastened, market will now focus on settlement next week and broader trend from Q1 results in July. While 4100 nifty remains a near term possibility, in our opinion short covering might lead to a bounce back from the current level ahead of the settlement next week, after weak opening on Monday.”

According to Mr V.K. Sharma, whole-time Director, Anagram Stockbroking, “both the Sensex and the Nifty have broken their supports and have made new lows of 14519 and 4316 respectively. The fact that the markets have closed nearer to their lows on Friday, it does not augur well as it spoils both the daily and the weekly charts and more selling could be seen when we resume trading Monday, unless crude backs off sharply.”

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