What does the relief for bond markets as well as the fact that inflation has come in much lower than estimated mean for the equity markets?
The market would be definitely relieved. Plus the market would also think that the Retail Direct Gilt account will give a lot of headroom to RBI in their August policy to continue that bias on supporting the growth and that is where we will see some relief rally today, especially on the short end of the five-year bonds. In the case of 10-year bonds we might see a little bit of retracement from the current situation. but you know at the end of the day, 10-year is where RBI decides it should be.
You have a different view than the market on inflation. What is that?
The governor has said twice that they do not want to hurry up and undo the good work they have done to support the growth. Therefore, they will look at this more as a transient inflation spike than supply side shock and I personally think unless the US does something dramatic, we would not be changing the stance and would support growth.
We can live with 6.20-6.50% inflation for some time. But as the market wants to react to every good news and bad news, there would be some relief rally among 10-year also but five year bonds would also be in a good situation today.
How would you compare the inflation easing post the first Covid wave vis-à-vis what we are witnessing this time around? Are you retaining the overall forecast for FY22 headline inflation around the 5.9- 6% mark?
Yes, because one has to see whether we get a Third Covid Wave or not. If we do not and if we open up, there would be a spike not only in India but globally also. All the spike right now — whether in India or global — is on the supply side. I think the central bank globally and locally has been very clear this is a supply side shock and we are seeing it right like ship shortage, shipping freights and various other supply side shocks which are there in the system. So once the opening up happens, inflation will spike up a little bit. But as the supply side gets regularised, we will see supply being overdone than demand growth. So there will be some pent up demand growth right now. We have seen it in consumer stocks. We will also see it in travel and other sectors once the opening up happens.
What about industrial output?
It is also not only about the factory opening up or remaining open. It is also about their components, their raw materials, their supply chains and the cost thereof. All that has been disturbed. Large companies are doing well. They have been able to manage that but then the raw materials and components come from MSMEs and a lot of them were disturbed during this lockdown. For the whole supply chain to get normalised, it will take some time but once that happens, we will see inflation overall coming. In the medium term or one year down the line, inflation looks very much under control but in the next six months, when opening up happens, we might see some more spike than what we have currently.
