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The latest economic data from India shows retail inflation inching up to a 3-month high of 5.6% in November, while industrial production rebounded strongly, growing at 11.7% in October, the fastest pace in 16 months.
Analysis for Layman
Retail inflation refers to the rate of increase in prices of goods and services paid by consumers. A higher inflation rate indicates faster increase in prices. Industrial production growth rate indicates how fast manufacturing and industrial output in the country is rising or falling. Faster industrial growth rate implies stronger economic activity.
The rise in retail inflation, led by higher food prices, signals persisting pricing pressures that may limit the central bank RBI’s ability to cut interest rates to boost growth. However, strong industrial production growth indicates robust economic activity during the festive season. This is a positive sign for corporate earnings and equity markets in the near term.
Impact on Retail Investors
For retail investors, moderately higher inflation eats into disposable incomes and returns from fixed income investments like bank FDs. However, factors supporting industrial recovery like higher infra spending and resilient domestic demand are positives for equity returns over 12-18 month horizon. Retail investors should avoid fixed return instruments and remain invested in quality stocks across consumption and manufacturing sectors.
Impact on Industries
Higher inflation will impact pricing power and profitability for consumer sectors like automobiles, FMCG, consumer durables etc. However, double digit growth in capital goods and manufacturing output signals strong corporate capex cycle ahead. Sectors like capital goods, infrastructure, engineering, cement and construction materials would benefit from higher public and private sector investments.
Long Term Benefits & Negatives
In the long run, current levels of inflation may sustain and limit RBI’s ability to cut rates meaningfully to boost demand. However, government’s continued infrastructure push and China+1 driven manufacturing investments augur well for sustained industrial recovery over 3-5 year horizon. This along with pickup in private capex will support earnings and offset inflation impact to an extent.
Short Term Benefits & Negatives
In the near term, higher inflation remains a concern due to uncertain food prices as kharif crop harvest was lower. However, strong festive demand and higher production signal robust growth in H2FY24 as well which will benefit corporate earnings. Equity investors may see higher volatility but can expect double digit returns from stocks in 12 months.
Companies to Gain
Larsen & Toubro, Ultratech Cement, Tata Motors, Axis Bank, ICICI Bank, HDFC Bank, SBI, Tata Steel etc.
Negatively Impacted Companies
Maruti, Hindustan Unilever, Dabur, Britannia, Asian Paints etc.
Persisting inflation and possibility of global slowdown in 2024 remains key risks to monitor. However, domestic structural growth drivers seem intact to drive a moderate multi-year capex cycle. Equity investors should take advantage of volatility.
The latest data offers mixed signals. Inflation remains a near term bother but strong industrial activity signals resilient growth prospects ahead, offering opportunities for equity investors with appropriate risk management.
Source: ET Bureau. “Retail Inflation at 3-Mth High; Factory Activity Rebounds.” The Economic Times,