Too much of a good thing may not always be a good thing. Just like the time you hope it rains to douse out the heat, until it rains so heavily that your family’s plans of a weekend outing go for a toss. Similarly, we expect the price of stuff to go down, so that we can buy them more economically, however, if the market prices did start to fall across the board, it might not even benefit you. After all, your income depends on the product, service, etc. that your company sells. Yet, Beauty lies in moderation.

Over the last 5 years, India struggled with the escalating prices of life’s essentials; captured by the movement of Consumer Price Index (CPI). The Reserve Bank of India (RBI) has done remarkably well to contain inflation below a target mutually set by the government and the central bank.

The original target the RBI set out to achieve by January 2016 was 6.0% with a margin of error of +/- 2%. In August 2015, inflation fell to 3.74%. In other words, it is undesired if inflation slides below 4% and if it continues to descend thereafter, that will hurt Industrial Growth. September saw the retail inflation rise up to 4.41%. So, is this good for you? Let’s find out.

Since September 2015, the RBI had expected inflation to increase into the next quarter; so the jump we experienced in retail inflation doesn’t come as a surprise. Speaking about growth in the fourth bi-monthly monetary policy statement, RBI said that, “monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognizing that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth.”

Index of Industrial Production (IIP) is considered as an important indicator to gauge the level of manufacturing growth in India.
 

Rise in Inflation and Industrial Output Data as on October 12, 2015
(Source: MOSPI, PersonalFN research)  

When asked about inflation undershooting the targeted disinflation path at the conference call with researchers and analysts, the RBI Governor said, “we intend to be on the path and avoid over and/or undershooting. Some would argue that given the past history of failing to deliver on low inflation one should be more worried about having excessive inflation, an overshooting, and others would say, given the state of the world economy, given the state of the domestic economy, one should be worried about undershooting, that is too low inflation and some people are actually talking about deflation. So long as there are enough voices on both sides, we are pretty happy staying in the middle.”

Highlights about rising inflation:
 

• Barring housing and food and beverages category, the rate of inflation has stayed high.
• Retail prices rose at 4.29% in the food and beverages category (September’15); the housing category has seen a jump of 4.74% on a year-on-year basis.
• Clothing and footwear witnessed a 6.0% rise (September’15)
• Rate of inflation in the fuel and light category came in at 5.42%.
• Clothing and footwear witnessed a 6.0% rise (September’15)
   

Growth in IIP reaches a 34-month high:
 

• Manufacturing growth looks impressive at 6.9%.
• 21.8% jump in capital goods segment and 17% rise in consumer durables suggests that there is substantial pickup in the industrial as well as consumption activity.
• Growth at 5.6% in electricity and allied sectors is decent fare.
• Mining sector grew at 3.8% in September putting a break on overall industrial growth.
   

Impact on markets
Equity and debt markets seemed to have factored in the impact of these events before the data was out. Equity markets have been volatile with a negative bias but this is unlikely because of the rise in inflation. Markets have not reacted positively to the rising IIP either, suggesting that movement of IIP has been in line with investors’ expectations. Similarly, bond yields have remained steady. It’s possible that markets are expecting an incremental flow of data before yields can move up or down.

Charting the way forward…
The RBI has projected inflation to reach 5.8% by January 2016. This means, so long as the actual inflation stays below 5.8%, investors are unlikely to press the panic button. Having said this, RBI will closely monitor the quality of inflation. If food price inflation keeps climbing, at some point it will start antagonizing the central bank. The category of food and beverages has a weightage of about 54% in the Consumer Price Index (CPI). If food inflation rises at an undesired rate, it will negatively affect the overall inflation number. The price of pulses shot up by a whopping 29% in September 2015 alone. Such volatility in food prices may negatively affect the inflation expectation of households. Inflation expectation affects monetary policy stance of RBI to a great extent.

As far as industrial growth is concerned, performance of the agricultural sector will affect rural demand. With 14% deficit in monsoon, rural demand may stay vulnerable and high food price inflation may put a pressure on the ‘discretionary’ incomes of urban households. As corporations are unready to absorb high risk for various reasons, a surge in the output of capital goods segment may prove to be ephemeral.

The RBI has already clarified that, while its “stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed. The Reserve Bank will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflationary path.”

It’s time for the government to stay in the game with the RBI and make tough decisions to fulfill the lofty promises made during election campaigns. When life essentials such as pulses increase at 1% rise everyday for a month, no justification pacifies the common man.

As far as the question of your investments remains, it may prove impossible for you to predict trends in industrial growth and inflation accurately every time. So why even try? Instead focus on your goals, adequately diversify your portfolio across asset classes, and most importantly, stick to your asset allocation.

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