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Monsoon, inflation, interest rates: Look, the bulls have plenty to deal with


By DK Aggarwal

The week gone by was one of the busiest weeks of the year for global central banks such as Japan, India, Brazil, the US and England. And they were busy narrating their respective economies. All the central banks are on different paths with Japan and Brazil working on accelerating demand while India, the US and England trying to uphold a balance between growth and inflation.

Global stock markets are facing threat from the trade war concern and the rising trade protectionism poses a grave risk to the global growth outlook. The confidence has been dented, adversely impacting investment, disrupting global supply chains and hampering productivity. Besides, geopolitical tensions and surge in oil prices are continuously posing risk to the global economy.

On a positive note, domestic markets are touching higher highs for the last few sessions on the back of better-than-expected quarterly results and on expectations that rural consumption would outpace the urban pattern.

Also, the RBI looked optimistic on the GDP front and has retained growth of 7.4 per cent this fiscal on robust corporate earnings and buoyant rural demand. However, on the inflation front, there is an expectation that inflation would speed up in the absence of adequate rains.

Factors such as rising crude oil, weakening currencies and more than average increase in MSPs will continue to push inflation higher. So, the RBI in its recent meeting has hiked the repo rate by 25 basis points (bps). Actually, it has kept an inflation target of 4 per cent, plus or minus 2 per cent.

But the tone of policy statement is broadly neutral. Actually, due to rising prices, inflation has inched up close to its mid-range target and has been hovering in the 5 per cent range.

Recently, Skymet, a private weather forecasting agency, has updated forecast for monsoon 2018 to 92 per cent of the LPA (long period average) compared with a prediction of 100 per cent made in April. To note, rainfall of 96-104 per cent of the LPA is considered normal.

Moreover, its outlook for August and September is not encouraging as there is a 70 per cent chance of August rainfall being below normal while September faces a 60 per cent risk of below normal rainfall.

The India Meteorological Department (IMD) has a different story though, which says India would receive normal monsoon this season.

Macro environment concerns are dominating the market narrative, which include rising inflation and interest rates. Higher crude prices and the weaker currency, which are playing a role of a catalyst in inflation, may see one more factor — weak monsoon — adding to price worries. This could have its bearing not only on the monetary policy, but on the consumption demand.

If rains appear to be below normal, then we may see market adjusting towards the same. Which will mean some correction in stocks cannot be ruled out as they (as of now) are running on expectations of good rural and urban demand.

Besides, the action and tone of the global central banks will give direction to the markets. It is expected that the market would move in tandem with these variables. However, any correction in stocks would provide investors the opportunity to enter into stock markets.

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