Rising Inflation Takes Toll on Economic Fundamentals

According to 4th Advance Estimates, foodgrain production is expected to have risen to a record 308.6 million tonnes in the crop year 2020-21 – higher by 3.75 per cent over the last year. Both rice and wheat productions are expected to be up by 2.9 per cent and 1.5 per cent, respectively on a year-on-year basis. Notably, output of pulses (11.7 per cent), and oilseeds (8.7 per cent) is also estimated to increase. However, production of cotton is expected to fall by 1.9 per cent. Kharif sowing is now down 1 per cent from last year.

The US consumer price index (CPI) rose by 5.4 per cent year-on-year in July, unchanged from June, and core inflation was down to 4.3 per cent from 4.5 per cent in June. On a month-on-month basis, inflation eased significantly to 0.5 per cent in July from 0.9 per cent in June. Core inflation moderated to 0.3 per cent from 0.9 per cent. Within core, prices of vehicles (new and used), apparel and transport service cooled significantly. Prices of medical care commodities and services inched up. The latest data print gives backing to Fed’s stance that inflation pressures are transitory.

CPI inflation in Germany rose to its highest since December to 3.8 per cent in July year-on-year compared with 2.3 per cent in June due to the base effect. In July, inflation had fallen by 0.1 per cent due to the impact of a reduction in VAT. Apart from this, introduction of carbon di-oxide charge and higher energy prices (11.6 per cent in July, YoY) also contributed to the sharp jump in inflation. Food prices also rose by 4.3 per cent in July from 1.2 per cent in June. On a monthly basis, inflation rose by 0.9 per cent in July.

Markets

Bonds: Global yields closed mixed. The 10-year yield for the US and the UK fell by 2bps each to 1.33 per cent and 0.57 per cent, respectively. Lower-than-expected core US CPI validated Fed claims that inflation pressures are transitory. Crude prices rose by 1.1 per cent ($71/barrel) on the hopes of improved demand. India’s 10-year yield ended flat at 6.24 per cent.

Currency: Except the INR (flat), other global currencies closed higher against the dollar. The DXY fell by 0.1 per cent from a 4-month high as US inflation eased in July, quashing hopes of policy normalisation by the Fed. The AUD rose the most by 0.3 per cent followed by the GBP and the EUR rising by 0.2 per cent each. The INR is trading higher today while other Asian currencies are trading mixed.

Equity: Barring the Sensex, other global indices ended higher as investors monitored lower-than-expected inflation print from the US, signalling higher inflation might remain transitory. Among other indices, FTSE (0.8 per cent) gained the most followed by the Nikkei (0.7 per cent). The Sensex (0.1 per cent) ended in the red and was dragged by banking and consumer durable stocks. However, it is trading higher today in line with other Asian stocks.

[Based on inputs from Bank of Baroda]