India's retail inflation in April surged to an eight-year high of 7.79 percent, thanks to a sharp uptick in food and fuel prices, raising fears that the RBI will hike rates more aggressively in its next policy meet in June.
April inflation print was above the estimates as a Mint poll of 24 economists had estimated retail inflation at 7.5 percent in April.
Retail inflation has now remained above the RBI’s upper tolerance band of 6 percent for the fourth consecutive month. It was at 6.95 percent in March, 6.07 percent in February, and 6.01 percent in January.
Kotak Securities believes inflation has likely peaked out, but the persistence of supply-chain disruptions and resurgence in Covid cases in China will keep the trajectory’s descent prolonged.
"We expect CPI inflation to average 6.7 percent in FY23E necessitating frontloaded policy withdrawal. From current levels, we pencil in cumulative repo rate hikes of 90-110 bps in the rest of CY22 with 35-40 bps of the repo rate hike and another CRR hike of 50 bps in June policy," said Kotak.
BofA Securities highlighted that going forward, even though base effects turn favorable, sequential increases in prices of vegetables and edible oils are expected to keep headline CPI inflation elevated. Higher petrol and diesel prices are also likely to exert further pressure.
"We are currently tracking May CPI inflation at 6.7 percent year-on-year (YoY). Given another higher than expected CPI inflation print and lack of any administrative support in the form of a cut in excise duty on petrol and diesel and/or cut in import duty on edible oil, etc., we further revise up our FY23 average CPI inflation forecast to 6.8 percent YoY now, higher than RBI's 5.7 percent YoY forecast announced in April 2022," BofA Securities said.
Sit on cash or deploy?
A higher inflationary environment is tough to navigate as the outlook of growth weakens while investors have less disposable income to invest and spend which erodes the demand scenario also.
"This is the season of headwinds for markets. The positive side is that all bad news is already known and factored in by the market. Since the market is oversold, a bounce back can be expected but the texture of the market remains weak. For long-term investors, high-quality financials and IT provide investment opportunities," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
"Earnings visibility and rupee depreciation make IT stocks safe bets in this turbulent market. High-quality financials, particularly leading banks, are attractively valued. Broadly, the services sector will do better under inflationary conditions since it will not be impacted by the rise in prices of commodity inputs," said Vijayakumar.
Many investors have started to ask whether they should sit on cash or deploy more in equities amid high volatility.
Vijayakumar underscored that investors should not move to cash now since another five percent correction in the market will trigger buying. Long-term investors can use the current weakness in the market to slowly accumulate high-quality stocks.
Deepak Jasani, Head of Retail Research, HDFC Securities said investors who have the cash to deploy may start deploying it in stages as the bottom formation may be some time away.
"Portfolio review and rebalancing should be a regular feature. Consistent nonperformers may be weeded out even at a loss and stocks showing potential may be studied and then gradually invested in," said Jasani.
However, Mitul Shah, Head of Research at Reliance Securities, believes in this type of inflationary situation along with steep correction in the market, having higher cash keeps one at a great advantage, giving better opportunity to buy at lower levels. Even portfolio reshuffling is also advisable.
"As we all know higher inflation impacts consumption pattern and so the consumer companies in terms of volumes as well as on margins. Therefore, one should stay away from consumer sectors for the time. On the other hand sectors with the least impact of inflation on their revenue as well as on cost side, should be preferred over other sectors," he said.
"To our mind, IT sector post recent sharp correction of nearly 25 percent from its recent peak provides valuation comfort to us. Moreover, favorable exchange rates, increasing digitization and rising contribution from clouds would continue to boost the performance of IT companies. Therefore, we prefer the IT sector at present," said Shah.
Inflation is expected to remain elevated for a longer period so investors must realign their portfolios and buy good bluechip stocks as when the economic outlook is hazy, it is the largecaps stocks that usually outperform mid and smallcaps.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies and not of MintGenie.