Should you worry about inflation: What do past crises tell us

Indian equity indices remained volatile during the week gone by, but still moved well within their ranges. The distribution phase of the benchmark indices has taken over despite a negative performance by the Asia pack, especially Hang Seng, which struggled after the Chinese Government’s actions triggered regulatory fears over sectors such as technology and private education. Retail investors have turned cautious and FIIs have offloaded more than Rs 6,900 crore worth of Indian equities this past week. July saw the highest selloff since March 2020, as the market tread a rocky path with valuations at all-time high amid concerns over a third wave of Covid-19. Now there is still one big fear looming over Dalal Street and that is inflation!

But is it really a very big concern? If we see the during the past crises such as the 2000 dotcom bubble burst or the 2008 catastrophic global financial crises, inflation was well in the range of 6-7%. Hence, it appears that panic around current inflation trajectory shouldn’t be considered as a danger sign yet. There seems to be some more headroom for it to rise, before RBI muddles with investor sentiment and raises interest rates. More so, even the Fed Chair has refrained from tempering with current interest rates and continued to emphasize that the inflation pressures are transitory.

What added to the cracks in Mr Market this week was the lack of confidence from IMF, which lowered India’s economic GDP forecast from 12.5% to 9.5% for FY22, drawing attention to a sluggish revival of the economy from the ravening second wave and a slower-than-expected inoculation drive. Going ahead, a depreciating rupee and higher oil prices could be near-term overhangs for the market. But as lower interest rates continue to remain a boon for equities, any weakness in the market should be considered as a healthy correction as well as a buying opportunity for long-term investors.

Event of the week

Several big banks and shadow banks have expressed concerns over the rising stress in auto and CV loans. Unlike the first wave, where only the urban market’s asset quality for these segments had taken a hit, this time both rural and urban regions were affected and delinquencies spiked. This was exacerbated by reduced EMI collections as dues from these loans are generally collected door to door by collection agencies.

Difficulty amplified as there is no market for repossessed automobiles and impounding such vehicles has minimal advantage to lenders. While a surge of defaults will harm certain lenders more than others, the lenders are optimistic of a recovery in collections in Q2. But the scene can continue to remain bad as fears of a third wave looms large.

Technical Outlook

Nifty50 index continues to trade in a tight consolidation range. Key support and resistance are now placed at 15,600 and 15,900 level. Even though Nifty has not broken the support, it is trading below the trendline drawn from April 2021 lows, which is also a bearish sign. Traders are advised to maintain a neutral bias as long as Nifty does not break below 15,550. A break below the support is likely to trigger a short-term correction.

Expectations of the Week

RBI’s MPC meeting is scheduled for the coming week. However, the expectation is that RBI too, just like the Fed, will not tinker with the repo rate so as to continue supporting impacted sectors with cheaper credit. The Governor’s comments on inflation will throw some light on the economy and any future actions our central bank might take. Auto sales numbers, PMI figures along with the outcome of the earnings season will continue to drive stock specific movements on D-Street. Investors can continue investing in the market in a SIP format to accumulate quality stocks. Nifty50 closed the week at 15,763, down 0.59%.