Inflation figures of 7.07% for the week ended march 22 triggered major sell off in the Indian markets. The latest surge is partly on account of a jump in metallic mineral prices. The primary articles sub-index, which has a weight of 22.02 per cent in the WPI, rose 1.8 per cent over the previous week on account of a steep 38.2 per cent rise in metallic minerals, a 4.9 per cent surge in vegetable prices and a 1 per cent increase in oilseeds. Metallic minerals refer to commodities like iron ore, manganese ore, bauxite and chromite. The manufactured products sub-index, with a weight of 63.75 per cent in the WPI, rose 0.2 per cent over the previous week due to higher prices of food products, non-metallic mineral products (up 0.9 per cent).
Now apart from the global factors, host of domestic factors such as Inflation, price control, GDP growth, recent guidelines from ICAI on forex derivatives have started affecting Indian markets.
But clearly Inflation remains the biggest concern of the market and government since we are in the pre-election year and Indian public is unforgiving on Inflation - increasing prices front. Although inflation is not just the biggest worry for India but most of the countries across the world. Government has started acting at various levels to control Inflation. In its desperation to control inflation government has taken some inspector raj measures such as price control on steel, cement. A host of other measures such as reduction of basic customs duty on crude edible oils to zero, and on refined oils and vanaspati to 7.5%, Maize imports under tariff rate quota of 5 lakh tonnes at zero duty, non basmati exports has been banned. Government is even ready to sacrifice growth for controlling inflation. Global commodity prices might come down in weeks ahead. Historically equity and commodity prices move in tandem. Equity prices have already come down substantially in the last 2 months and commodity prices have gone up. With US economy also going into recession sooner or later this divergence will correct.
Even RBI Governor Dr. Y V Reddy has said recently 'Inflation is unacceptably high and RBI is ready to take appropriate action if required'. Inflation is now ruling above the RBI comfort level of 5% for the fifth straight week. It is clearly evident that RBI will hike CRR (the amount of cash the government requires banks to deposit with the central bank) by 50 bps to shore up some liquidity from the market at or before its annual monetary policy review on April 29. CRR hike impacts the bottom line of the banks since they have to park more money with RBI on which they will not earn any interest. But monetary intervention would not produce immediate results as the current spike in inflation is driven by supply constraint and not demand-pull inflation.
Now apart from the global factors, host of domestic factors such as Inflation, price control, GDP growth, recent guidelines from ICAI on forex derivatives have started affecting Indian markets.
But clearly Inflation remains the biggest concern of the market and government since we are in the pre-election year and Indian public is unforgiving on Inflation - increasing prices front. Although inflation is not just the biggest worry for India but most of the countries across the world. Government has started acting at various levels to control Inflation. In its desperation to control inflation government has taken some inspector raj measures such as price control on steel, cement. A host of other measures such as reduction of basic customs duty on crude edible oils to zero, and on refined oils and vanaspati to 7.5%, Maize imports under tariff rate quota of 5 lakh tonnes at zero duty, non basmati exports has been banned. Government is even ready to sacrifice growth for controlling inflation. Global commodity prices might come down in weeks ahead. Historically equity and commodity prices move in tandem. Equity prices have already come down substantially in the last 2 months and commodity prices have gone up. With US economy also going into recession sooner or later this divergence will correct.
Even RBI Governor Dr. Y V Reddy has said recently 'Inflation is unacceptably high and RBI is ready to take appropriate action if required'. Inflation is now ruling above the RBI comfort level of 5% for the fifth straight week. It is clearly evident that RBI will hike CRR (the amount of cash the government requires banks to deposit with the central bank) by 50 bps to shore up some liquidity from the market at or before its annual monetary policy review on April 29. CRR hike impacts the bottom line of the banks since they have to park more money with RBI on which they will not earn any interest. But monetary intervention would not produce immediate results as the current spike in inflation is driven by supply constraint and not demand-pull inflation.
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