Low CPI inflation lifts markets – Sensex, Nifty touch fresh highs

The markets have largely maintained their bullish run over the past several months, although there have been some corrections and breathers from time to time. The announcement of the retail inflation touching a 16-month low in January is expected to sustain positive sentiment in the market. Early trading on February 15, Monday, already shows the benchmark indices, BSE Sensex and the NSE Nifty, scaling fresh highs of 52k plus and 15,300, respectively on the back of Friday’s retail inflation data.

16-month low CPI inflation data

According to data from the Ministry of Statistics and Programme Implementation, retail inflation, which is measured by way of the Consumer Price Index, touched 4.06 per cent in January, as against 4.59 per cent in December. This was largely led by the decline in prices of key vegetables, apart from food and beverages. According to the Ministry data, potato prices for January dropped 9.61 per cent over one year back from a rise of 43.47 per cent in December 2020. Prices of onion have been dropping 36.16 per cent in January, after registering a drop of 46.48 per cent in December 2020. Overall, price rise rate in the food category was 1.89 per cent compared to a rise of 3.41 per cent in the month before. Food inflation is at a 20-month low, reports suggest.

Prices of household goods and services went up 2.8 per cent compared with an increase of 2.95 per cent the month before, while health inflation stood at 6.02 per cent compared to 5.98 per cent the month before. Inflation on the fuel and light front was at 3.87 per cent when compared to 2.99 per cent in December. Clothing and footwear inflation stood at 3.82 per cent when compared to 3.49 per cent in the month before.

In the RBI range

However, core inflation has remained the same at near 5.33 per cent levels in January 2021. The retail inflation data has largely remained in the Reserve Bank of India’s (RBI) target range for the second month in a row. It may be recalled that the RBI projections pegged retail inflation in the 5-5.2 per cent range during the first half of the coming financial year. It had dropped its retail inflation projections for the January-March quarter of 2020-21 at 5.2 per cent.

The RBI Governor had noted that the CPI inflation had dropped to under 6 per cent levels in December 2020 for the first time in the post lockdown timeframe. The Monetary Policy Committee (MPC) uses the CPI-based inflation as a key foundation for framing its policies. The MPC had indicated to leave repo rates untouched at 4 per cent and the RBI has ensured an accommodative position by not changing repo rates, during the monetary policy announcements this year. Although the new inflation rates raise expectations of a further rate cut, most experts feel that the central bank will continue with its policy of pause on interest rate cuts and exercise caution. Also, the CPI staying well within the RBI’s range won’t necessitate any rise in interest rates for some time.

Low inflation indicates well for the markets

The low CPI inflation means greater purchasing power. When inflation rises, the cost of living also goes up and lowers purchasing power. This affects the purchasing power of investors as well. Inflation and CPI make up for an important macro indicator for the markets. Also, interest rates can be kept low when inflation is low, which is another positive indicator for the market as there is greater liquidity and inflow into equities.

Along with CPI inflation, the other announcement that will lift market sentiments is the Index of Industrial Production or IIP which has seen a 1 per cent growth in December 2020 and stood at 135.9 in that month. According to data, IIP growth was 0.4 per cent in December 2019. The increase in IIP growth is on the back of manufacturing sector growth of 1.6 per cent to touch 137.5 and electricity sector rise of 5.1 per cent to 158. This increase is an indicator of revived economic activity, which will further lift the markets in the near to long term.

Conclusion

Along with low retail inflation and Index of Industrial Production growth both lifting market spirits, the recent inflow of foreign institutional investments and low-interest rates have also sustained market highs. The markets look to sustain a bull run in the near future as well as there is no likelihood of any interest rate increases thanks to a retail inflation level in the central bank’s expected range.