Breaching the upper limit of RBI's threshold of 6 percent for the third consecutive month, India's retail inflation surged to a 17-month high at 6.95 percent in March, government data showed on April 12.
Inflation, as measured by the CPI (Consumer Price Index) was 6.07 percent in February and 6.01 percent in January.
The rise in retail inflation prints was led by the ongoing Russia-Ukraine war which kept food prices at elevated levels due to disruption in global grain production, supply of edible oils and fertiliser exports. Food prices account for nearly half the inflation basket.
Inflation was expected to come on a higher side but the prints beat market expectations. A Reuters poll had estimated India's retail inflation to a 16-month high of 6.35 percent in March.
Analysts now believe retail inflation may remain elevated for the next couple of months and the market will closely track the trend of commodity prices from hereon.
Should investors be worried?
There are strong market headwinds emerging for the near-term and inflation is one of the most prominent ones among them.
As the market had been expecting higher inflation, signs of easing inflation from here may trigger a relief rally in the market. However, the current quarter and the next quarter are expected to reflect the impact of high raw material prices on the margins of companies and market participants will focus on management commentary on this front which will influence the mood of the market.
"Inflation in the US at 8.5 percent in March, dollar index above 100 and the imminent monetary tightening by Fed which might lead to a recession are negatives for global equity markets. In India, the March inflation print has come above estimates at 6.95 percent which will push up the 10-year yields. Since only some of these negatives are discounted by the market, there can be more selling particularly from FIIs who have again turned big sellers," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Are there inflation-proof sectors?
The important question now is what investors should do? Analysts are advising to focus on export-oriented sectors for the time being while some say stronger, largecap companies can withstand the near term headwinds better so the focus should be on them.
"Safety is now in segments which are unlikely to be impacted by inflation and potentially rising interest rates. Companies with high market share and pricing power will withstand the headwinds. It is also important to remember that in the early stage of inflation earnings of companies will go up," said Vijayakumar.
Santosh Meena, Head of Research, Swastika Investmart advises buying the stocks of commodity producers instead of commodity consumers.
However, the prices of commodity producers companies have already rallied a lot therefore there is a low margin of safety, Meena pointed out.
"Investors should focus on sectors that are less sensitive to commodity prices like banking and financials, telecom, and IT while investors should look for high-quality stocks which are under temporary pain due to inflation," said Meena.
G Chokkalingam, Founder & MD of Equinomics Research & Advisory said one can think of pharma, IT services and exchange businesses that will not be impacted directly by inflation. However, he added that further sharp rise or current elevated inflationary levels sustaining for very long will impact the whole equity markets.
He believes that inflation will moderate from Q2FY23 as the Ukraine war is likely to end and oil and metal prices will have moderated by that time.
Some analysts also advise looking at index funds, ETFs and cryptocurrencies for investments during the high inflation period.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.