After nearly 6 months of falling inflation

After nearly 6 months of falling inflation, retail inflation has finally picked up the pace. CPI inflation moved higher to 2.57% for Feb-19 as the base effect started to wane. On a MOM basis, this represents a sharp rise in inflation from a 19-month low level of 1.97% in January this year. Most economists were of the view that the inflation may have bottomed out in most food components like pulses, cereals, and vegetables. Core inflation continues to be sticky above the 5.3% mark. Inflation is seen in tandem with the IIP data by the RBI policy committee, although the trend is still not visible.

Growth continues to falter, partly due to the base effect and partly due to a genuine slowdown. Index of Industrial Production (IIP) slowed to 1.7% in the month of January 2019. This IIP growth compares negatively with the 7.5% growth notched up in the corresponding period last year. The big reason was the slowdown in the manufacturing sector growth from 8.7% last year to just 1.3% in Jan 2019. Even the power generation segment has slowed from 8.6% last year to just 0.8%. Capital goods sector has contracted and this is critical ahead of the RBI Monetary policy.

The demand and supply pressures are holding Brent crude in a tight range. Saudi Arabia has promised further supply cuts as oil trended higher by 23 bps on Tuesday. Brent Crude closed higher at $66.73/bbl after having touched an intraday high of $67.39/bbl. The Saudi pledge to cut supply further in April and the power outage in Venezuela took prices higher. However, oil did meet some resistance above $67 levels as the glut of US shale and the fears of a global economic slowdown kept oil prices on tenterhooks. US-China trade talks could hold the key as that would determine oil demand.

The rupee has strengthened nearly by Rs.1.50 in less than a fortnight. Indian Rupee strengthened 18 bps on Tuesday to close at 69.71/$. The sharp inflows from FPIs in the last couple of weeks have given a leg up to the INR. The rupee decisively strengthened beyond the 70/mark as FPIs pumped in nearly $3.5 billion in the last 20 days of trading. Exporters have also been aggressively bringing back dollars into India and FPI buying is expected to continue on the back of smooth BREXIT and expected political stability. However, with Theresa May losing the vote, we may be back to a period of uncertainty.

Nifty and Sensex trended higher on positive BREXIT cues but could react negatively to May losing the vote for the deal in the house. The Sensex has already gained over 870 points in the last two days since the elections were announced. Sharp FPI inflows and a strong rupee helped boost the sentiments of the market. European markets were enthused by the steady progress towards an orderly BREXIT and that also rubbed off on India. However, experts have been advising caution at higher levels. Even technical indicators are hinting at the markets being oversold at current levels. The stock markets on Tuesday were led by consumer stories like auto and private banks as well as rate sensitive stories like NBFCs and reality. They were all the major gainers, even pharma moved up on a selective basis.

Mutual fund SIPs continued to flatter in the month of February. In a month when the mutual fund industry saw outflows and equity fund collections fell sharply, SIPs continued to show growth. In fact, SIP inflows in February amounted to Rs.8095 crore higher than the Rs.8064 reported in January. However, fund managers have expressed skepticism if these SIP flows would really continue if the market gave negative returns for a couple of more months. Interestingly, Indian domestic investors were net sellers in mutual funds for 5 years stretching from 2009 to 2014.

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