January retail inflation print came surprisingly higher, reinforcing the notion that the war against inflation is far from getting over and rates need to be raised and kept high for a longer time in order to ward off the harms caused by soaring prices.
According to data released by the Ministry of Statistics and Programme Implementation (MoSPI) on February 14, retail inflation, or inflation based on the consumer price index (CPI), jumped to 6.52 percent in January.
CPI rose at the fastest pace in the last three months, after declining to a one-year low level of 5.72 percent in December, owing to a spike in food prices.
As reported by Mint, the consumer food price index, which includes both manufactured and non-manufactured food articles, rose to 5.94 percent in January from 4.19 percent in December. Food accounts for 54 percent of the weight in CPI.
Economists were expecting CPI to come to 5.99 percent in January. Now, they expect retail inflation to remain over the 6 percent mark over the coming months due to sticky core inflation.
The surge in headline inflation has raised the possibility of further tightening of monetary policy in the next Monetary Policy Committee (MPC) meet in April.
A persisting concern
Inflation moderated in December due to softening prices of food items and commodities. However, core inflation, which is the focus of RBI, was elevated.
Core inflation is the rise in prices of goods and services, excluding food, energy and intoxicants prices. Thus, it tracks the long-run trends in inflation.
Madhavi Arora, Lead Economist at Emkay Global Financial Services underscored core inflation increased to 6.4 percent year-on-year and 0.5 percent month-on-month due to higher prices of personal care and effects (led by higher gold prices) and housing.
"Core inflation has been persistently above 6.2 percent for 14 of the last 15 months now, with the RBI stressing on this having second-round impacts on overall inflation," said Arora.
"We are currently tracking February inflation at nearly 6.3 percent, while Q4FY23 inflation may now be 50bps higher than the RBI’s revised estimate of 5.7 percent. Having kept its options open, the RBI may now hike rates by another 25bps in April," said Arora.
Srikanth Subramanian, CEO of Kotak Cherry emphasised that the outlook for inflation still is not clear and will be a key factor for central banks, both domestic and global in deciding the future course of interest rate hikes. Any sort of uncertainty is bound to make investors nervous.
Analysts now pin hopes on the May-June monsoon for a fall in inflation. However, there is a risk of commodity inflation because of China reopening.
"Core inflation remains stubborn, and it still adds to investors’ concerns. There are chances of inflation peeking out, and a fall in inflation is likely to be seen after May-June depending on the monsoon. There is a risk of commodity inflation picking up again because of demand from China," said Arpit Jain, Joint MD at Arihant Capital.
What should be the investment strategy?
Subramanian said investors should brace for more volatility and avoid making aggressive bets.
"The only thing certain is that volatility is going to prevail in the near term. Investors should not leverage their positions as drawdowns can be there in the event of any negative news," said Subramanian.
"One should deploy a staggered investment approach and can look at lumpsum deployment in course of corrections. Debt as an asset class also offers an attractive space with yields inching up and we reaching closer to the peak interest rate regime. One should also consider allocating some portion of their portfolio to overseas markets," Subramanian said.
Jain of Arihant Capital advises investors to take a stock-specific approach as the Indian market may remain rangebound.
The economies have opened up and investors are exiting the Indian markets due to high valuations and the impact of high commodities prices on margins.
"The Indian markets will remain range-bound. It will be prudent to take a stock-specific approach, but with elections right around the corner, investors have to be cautious while investing," said Jain.
"It will be good to have a steady approach than investing aggressively in the absence of upside triggers in the Indian markets. I also think that investors should increase cash allocation on an overall basis in their portfolio," Jain said.
Jain has a positive stance on the automobile, infrastructure, capital goods, defence, metal and mining sectors.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.