So, the doomsday sayers are prophesying that recession is coming and markets will deeply correct themselves in the coming months and quarters that follow. Is this true? Well, the indications of this are evident across the world with inflation skyrocketing, rising energy and food prices, and shortages, combined with a decline or stagnating economic activity globally. All these trends are running in parallel across the globe. Not quite! There are exceptions to this and India is one of the largest economies that is ducking this trend with the exception of energy costs. Whilst energy costs have spiraled in India since the beginning of the Russia-Ukraine conflict, her granaries are overflowing and she’s well cushioned when compared to the rest of the world as far as food reserves are concerned. Further, the Indian economy is growing at the fastest tick and we are seeing a truly V-shaped recovery and it is expected to continue with good monsoons prediction for the current year. So, why are the Indian markets tanking? Two reasons: one, the FIIs are pulling out their investments because of the increase in rates by the respective federal banks across the globe which makes the treasury bills a safer bet, and two, the fear of rising inflation in India which is nearly at 8%, highest in many years! With the RBI tightening money supply by raising rates, local money too has dried up from the markets. So, under the double whammy of FIIs pulling out and RBI tightening money supply because of rising inflation, markets had only one way to head - southwards!
But is this going to be the trend through 2022?
I don’t think so. Let me explain: since the Russia-Ukraine conflict India has upped its purchases of Russian oil from less than 1% to almost 20% today and its expected to touch 30% by end of July. What this means is that cost of petroleum in India would drop by nearly 10% vis-a-vis say a few months back by end of July and it will continue the downward trend either because India will keep increasing purchases of Russian oil or the Russia-Ukraine conflict will get over or the sanctions against Russia will fizzle away as it's biting the west and the U.S. badly. So, either way, energy costs in India are slated to come down in the coming months. Further, recently the Modi government has reduced taxes on fuel (with this, diesel cost in June 2022 is now at par with what it was in June 2021! And my guess is that the government cut the taxes on fuel to the extent to bring the prices to last year's levels to tackle inflationary pressure) which will have an impact on prices and also the government has acted to reduce the prices of cooking oil in a bid to tackle food inflation that’s mainly driven by cooking oil and fresh produce. With good monsoons predicted, we’d see food inflation too dropping in the coming months. This along with overflowing granaries, we will see food inflation too tapering in the coming months. Mainly, with the further easing out of energy prices in the coming months, we’d see inflation dropping as energy has a cascading effect on inflation across the economy. With inflation easing in the coming months, we’d see RBI give up on its hawkish monetary policy in the next quarter or so. Come September, we will see RBI dropping interest rates - something none of the other major central banks doing for some time to come. In addition, when compared, India’s Sensex has fallen around 16% from its all-time peak and on the other hand, Nasdaq has fallen over 30%! What explains this? One of the reasons for this is that the Indian DIIs and retail investors are filling in the place vacated by FIIs and with valuations looking attractive again, we’d see buying interest gaining momentum in a month or so when the next inflation data comes in - already, the last tick of inflation in India (about a week back) was downwards and I expect it to continue its downward trend with fuel already at par with prices of 2021.
So, my outlook for the Indian economy and for the Indian markets is extremely bullish as I believe India will be the outlier performer on all economic metrics in 2022 and beyond!
