Cooling inflation, rising industrial output push stocks to new highs

27/08/2021

Indian stocks touched new record highs Friday after data showed retail inflation eased and industrial output rose while the government promised more steps to accelerate economic growth. The consumer price index fell to a three-month low of 5.59% in July from June’s 6.26% as food prices moderated, as per data released by the National Statistical Office (NSO). Food inflation eased to 3.96% in July from 5.15%the previous month. Fuel inflation slipped to 12.38% from 12.68%. Core inflation, which excludes food and fuel, fell to 5.7%from 5.9%. A separate set of data showed that industrial output climbed 13.6% in June from a 16.6% contraction a year earlier.

Manufacturing, which accounts for three-fourths of industrial output, rose 13% in June. Mining output grew 23.1% and power generation rose 8.3%. What this means Inflation is now within the Reserve Bank of India’s range of 2-6%. This eases pressure on the central bank to reverse its accommodative stance and increase interest rates immediately.

The RBI had kept rates unchanged at its monetary policy meeting earlier this month. The increase in the index of industrial production means the low base effect of last year is waning. Factory output was severely hurt in the April-May period of last year when India was under a strict lockdown, but production had started picking up after June. The twin data sets paint a positive picture for the economy, pushing benchmark indexes to record highs. The 30-stock BSE Sensex jumped to a new high of 55,317.07 while the Nifty 50 inched above 16,500.The BSE FMCG index was up 0.85% while the IT index gained 1%. The capital goods index was 1.5% higher around noon.

What govt, analysts say Finance Minister Nirmala Sitharaman said Thursday the economy hadn’t reached a level where the central bank could begin pulling back surplus liquidity. This added to the bullish sentiment. Analysts expect the RBI to start tightening monetary policy next year as inflation is likely to remain sticky for some time. Aditi Nayar, chief economist at ratings firm ICRA Ltd, said inflation will likely remain in the 5-6% range over the next three quarters and may even cross the RBI’s 6% comfort level in case of any disruptions. Nayar expects the RBI to start normalising monetary policy once demand picks up and starts overshadowing inflationary pressures. She thinks the RBI could change its stance to neutral from accommodative in February next year and hike rates by 25 basis points each in April and June 2022 reviews.

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