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Sensex Flat; D-Street Gauges RBI's Stance on Inflation
Wed, 5 Oct 11:30 am

After opening the day flat, the Indian share markets have continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks from the information technology (IT) and energy sector witnessing maximum selling pressure. Realty stocks are, trading in the green.

The BSE Sensex is trading down 39 points (down 0.1%) and the NSE Nifty is trading down 15 points (down 0.2%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up 0.6%. The rupee is trading at 66.53 to the US$.

The Reserve Bank of India (RBI) yesterday surprised Indian stock markets by cutting the policy repo rate by 25 basis points. Post this development, the rate now stands at 6.25% from 6.50% earlier. The newly minted Monetary Policy Committee (MPC), which includes six members, voted unanimously on the decision.

While the rate cut was one of the most touted topic yesterday, the RBI's stance on inflation too was looked with equal importance. The logic behind the rate cut, as per the RBI, was cited to be slowing inflation. The MPC, headed by newly appointed RBI Governor Urjit Patel, stated it believes that food inflation momentum has moderated and opened up space for policy action.

The MPC expects an improvement in its food inflation outlook on the back of improvement in sowing and supply management measures. As the RBI statement noted, subdued momentum in food inflation in Q3 and the usual seasonal softening of food prices in early Q4, notwithstanding a reversal of base effects in March 2017, improves the near-term outlook for inflation considerably.

Lately, India saw the problem of rising food inflation. This matters because food articles account for around 46% of the consumer price index (CPI) basket - the metric chosen for inflation targeting mechanism. So rising food price inflation could mean higher CPI and in turn breach the inflation target set by the government. Being on the topic, Vivek Kaul, editor of Vivek Kaul's Diary, has explained some of the causes of rising food inflation in India.

As regards the overall inflation, the government has set an inflation target of 4%, plus or minus 2%. This inflation-targeting regime would be monitored by the MPC. The span, during which the MPC will have to adhere to this target, is set up until 31 March 2021. The target, however, is fraught with risks. The Pay Commission and GST implementation could have near-term impact of enhanced consumption demand and would mean an increase in the CPI in the months to come.

While the inflation-targeting regime is a step in the right direction, we believe that India needs more of structural reforms rather than temporary monetary stimulus. Low inflation target for some years ahead will provide a sense of reassurance for the common man. However, without structural changes, it also raises doubts regarding its longevity of low inflation in the long run.

To keep a tab on the inflation story in India and other macroeconomic trends, we recommend the Vivek Kaul Letter (subscription required). Vivek addresses a range of big issues in this unique newsletter - rising inflation levels, the government's handling of oil prices, the mess in public sector banks, the current state of India's real estate bubble...and a lot more!

In fact, as you read this, Vivek has just come out with a video that details all...including how these macro trends could impact you. Click here to watch the whole 58-minute video.

Moving to news from the commodity markets. Gold prices is trading flat today. At the time of writing, the yellow-metal was trading marginally higher by 0.1%.

The volatility in the prices of gold is due to global economic cues. The fall in global markets coupled with the lack of demand for precious metals weighed on gold.

Also, this volatility is followed by losses seen during the last week. Last week, gold registered losses on the back of a firm dollar and the fallout of US presidential debate. However, the decline in global stock markets due to lingering concerns over the stability of Deutsche Bank limited the losses for gold.

To keep a tab on the movements in gold and other commodities, you can read weekly market commentary from the Daily Profit Hunter team. Their weekly commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Oct 5, 2016

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