Major global economies seem to have left worst of inflation behind

Things are beginning to look up on the inflation front. Consumer Price Index (CPI)-based inflation slowed to 6.8 percent on-year in October from 7.4 percent in September. Experts expected the headline print to moderate due to a base effect and some sequential easing in cereals and pulses inflation.

However, vegetable inflation was a worry, as it continued to soar in the wake of  unseasonal rains in October, which hit production.

Core inflation remained sticky at 6 percent on-year. Its major components (clothing and footwear, recreation, personal care and effects) are up on-year, indicating recovering demand (especially in the festival season), which allowed producers to pass on higher input costs in selling prices.

Cautious optimism  

Experts are now cautiously optimistic that the worst of the inflation cycle is decisively behind us.

“With the latest CPI and WPI data it looks likely that the inflation peak is behind us. And even inflation in the US, which is important from a global perspective, the data seems to suggest that the peak is behind”, said Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital.

In the US, the CPI data has fallen to 7.7 percent from 8.2 percent in the previous month, below the expectations of 7.9 percent. This downward surprise provides a long-overdue and welcome signal that the Fed will start cooling down interest rate hikes, and according to Raj Vyas, Portfolio Manager, TejiMandi, there is a probability of a less than 75 bps rate hike in December.

With global commodity prices falling, the inflation trajectory will likely ease further, and experts believe that H2FY23 inflation could moderate to 6.2 percent. Though the trend is on the declining side, one might get negatively surprised by service inflation, which needs to be watched carefully.

Crude oil could prove to be a wildcard and, according to Nishit Master, Portfolio Manager, Axis Securities PMS, “any spike in energy prices due to either China opening up or geo-political tensions increasing could disturb this downward inflation trajectory”.

However, Arun Chulani, Co-Founder, First Water Capital Fund, is more cautious and suggests that one factor that has helped the inflation situation is the zero-Covid policy in China. Should China lift this, it is likely to give demand and prices a boost as they begin to kick-start their economy. Thus, “it’s too early” to be overly optimistic, he said.

What to expect from the Indian and world economy

The IMF, World Bank and Organisation for Economic Co-operation and Development (OECD) have been shaving their growth estimates in each forecast on the growth of economies due to high inflation and slowing economic activity. Though the unending global uncertainties have impacted the critical drivers of growth, India’s gross domestic product (GDP) for the April-June quarter of FY23 rose 13.5 per cent, per provisional estimates. The US economy rebounded to a real GDP growth rate of 1.8 percent YOY in its third quarter, after two consecutive quarters of contraction.

“Though inflation remains the cause for concern because it impacts both the supply and demand sides, the economic outlook depends on a successful calibration of monetary and fiscal policies, the course of the Russia-Ukraine war, and the growth prospects of respective countries,” said Anil Rego, Founder and fund manager, Right Horizons PMS.

According to the IMF, global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023 and India is projected to grow at 6.8 percent in the current year and 6.1 percent in 2023. Moody’s has downgraded India’s growth for 2022 from 7.7% to 7%, in light of inflation, rising rates and a slowing global economy. However, “relative to the rest of the world, it’s still not bad as it is still 7 percent,” added Chulani.

“The goalposts are slightly different for the Indian and global economy, primarily because the inflation devil is far more ferocious in the developed market,” said Pawan Parakh, smallcase manager & Fund Manager, Renaissance Investment. “In the Indian economy, we expect to see more of the same that we saw over the last 3-4 years i.e. increased focus on domestic manufacturing, reviving the capex cycle and gradual recovery in rural demand”.

In the global economy, things are a bit dynamic. “The US is likely to avoid a recession, or have a mild one in H1CY23. By H2CY23 things should be much better for the US,” said Gupta of OmniScience Capital. Also, by then all the interest rate hikes are likely to have happened and a reduction is possible. This would put the US in a strong economic situation in H2CY23. Europe could also go into a rate cut cycle, following the Fed, and this could create an economic uptick as by then the Ukraine-Russia war is also likely to have settled.

“Among large economies, China is likely to struggle but India, with strong domestic factors, robust capex plans of the Government and private sector, and strong consumer demand, is likely to have an economic boom over the next couple of years,” added Gupta.

Expectations from the RBI

Inflation is challenging to control and monetary policy tightening has a lag in its impact on economic activity.

The results season and management commentaries have given mixed signals with some alluding to stress in certain pockets owing to inflationary pressures, while others have remained positive on sustenance of the demand momentum.

“The RBI has to keep an eye on the delicate balance between inflation and growth and with a softening of the inflationary numbers, it is possible that it will moderate its hikes but, it is too early to say whether we are out of the woods yet”, added Chulani.

Even though domestic inflation is likely to moderate in the coming months and despite the fall in headline inflation for the month of October, experts expect the RBI to continue to hike interest rates since inflation continues to remain above its higher tolerance band.

“The RBI is likely to still go ahead with a 50 bps rate hike, more from the perspective of countering the possible 50 to 75 bps rate hike from the US Fed,” said Gupta. “Also, the RBI didn’t have a rate hike in November, when the Fed did, so, beyond that, the RBI is likely to signal only 25 bps rate hikes, as required to stabilise the Rupee against the Dollar.”

However, experts believe that aggressive rate hikes by the US Fed may force the RBI to hike rates by ~35bps in the December MPC meeting.

“We expect future hikes by the RBI to total around 50-60bps, with the next MPC meeting probably witnessing a rate hike of 25-35bps,” concluded Master.

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