The inflation data released today as per the new WPI series has given an inflation figure for the month of August at 8.5% as against inflation as per the old series at 9.5%. Although the full one percentage point figure is disconcerting to look at I would like to believe that the new series is more representative of the current consumption patterns and given the fact that the data points for the same have been sourced from 11.000 quotations vis a vis the 4000 odd quotations in the old series this figure seems to be more credible. The other more important factor is that this series takes into account the current consumption patterns and includes several new products like microwave ovens, flat screen TV’s, Video players, mineral water, washing machines, computers etc. etc. which were totally missing from the old series as at the time when the old series was formulated these products did not form a major part of the consumption basket of Indian consumers. Although given the rate in change of consumption patterns and the increasing rate of obsolesce of new products such revision should be more frequent, given the fact that here the series is of 2004-05 it would be a good representation for now. Given the fact that increasingly the consumption patterns in India are shifting more towards greater secondary products than primary products the lower inflation of the new series was something to be expected as the price of computers, mobiles, TV’s , washing machines etc. have been generally declining/steady over the last few years.
The revision in CPI inflation could be even more drastic if the new series with the current consumption patterns is introduced for the consumer price index also.
So given that inflation going forward will actually be lower than that as per the old series what will the RBI do day after. I think they will still hike rates as this might be the last opportunity they get to do so as the reported inflation will keep on declining at a rapid pace over the next few months. The other good thing that might come out of this series is that the volatility of inflation figures will come down with a greater number of products being in the basket and lower weight age to each individual product category.
The markets have been on a roll over the last 15 days and have rallied nearly 9% as against my expectation of a 5-7% rally for this month. The breakout from the range of the last 12 months has been extremely strong and led by large cap stocks which is a positive. The key is to evaluate what lies ahead. On this one has to take a short term and long term view.
Short term- Given the pace of the rally and the fact that it has been led largely by the financials with most other sectors under performing the market indices it looks difficult for the markets to rally significantly from where they are in the short run. The counter point to that is that after a breakout from a range in which the markets were trapped for nearly 12 months the rally should continue. However at this stage I would not look at the markets only technically and would also take into account the current valuations. As such my view in the short run would be that the markets would need to show some consolidation/correction from the current levels over the next few weeks before we can see another up move up to the year end target of 20500-21000.
Long Term – The long term picture of the market has become much more exciting and I believe that the level of 5400 on the Nifty and 18000 on the Sensex will now become the base for this bull market. Any move towards these levels should be used as an opportunity to buy for the strong upmove over the next 18-24 months. There are today several macro factors that are working favourably for India. The good monsoons combined with higher cultivated area should result in an 8-10% increase in agricultural produce for the current season. This not only alleviates food inflation but would also contribute strongly to economic growth due to the direct contribution as well as higher rural spending. The industrial production is holding up a higher levels and is likely to sustain at 10% plus due to a combination of higher consumption growth as well as an improving investment cycle. Services also seems to be coming back to its long term trend growth of 9% plus. The other positive factor is that inflation seems to have finally peaked and is now looking to decline to 5-6% by the end of the current Fiscal. Overall trend earnings growth for India should be at 20%.
The global macro picture still remains unclear with the global markets reacting to news flow on a daily to weekly basis. However the overall trend seems to be that things are not deteriorating if not improving and I believe that this scenario works for India.
Overall still looking for the 20500-21000 index at year end, however accompanied with greater volatility from here on.
“The only real valuable thing is intuition” – Albert Einstein