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Inflationary expectations to remain elevated in H2FY23 on rising global energy, food prices

Coming out of two years of the pandemic the consumer confidence and business optimism led to improvement in economic activity

Inflationary expectations to remain elevated in H2FY23 on rising global energy, food prices
Global interest rates impact capital flows, putting pressure on domestic currency and thus leading to imported inflation.

By Sharad Chandra Shukla

Services, and Manufacturing Purchasing Managers Index are economic indicators. These Indices show the trends in both the manufacturing and services sector. Index gives the direction of market conditions as seen by decision makers. Direction may be improving or deteriorating or may stay the same. PMI is one of the closely watched indicators of business activity and in turn helps in estimating the state economic activity. A PMI number greater than 50 indicates expansion in business activity. A number less than 50 shows contraction. The rate of improvement or deterioration can also be observed by previous month’s data. 

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Domestic economic activity was buoyant in the first half FY 2022-23. Coming out of two years of the pandemic the consumer confidence and business optimism led to improvement in economic activity. Going into the second half of FY 2022-23 there is good progress in the agriculture sector with adequate rainfall and Government’s continued thrust on capital expenditure. Geopolitical situation and uncertainty in global financial markets are the major risks that the domestic sector faces in the second half. Global economic slowdown due to higher interest rates and energy cost is also another risk. S&P Global India Services PMI declined to 54.3 in September 2022 from August’s 57.2. This was a low number in the last six months. This may be due to inflationary pressures. Earlier the S&P Global India Services PMI increased to 57.2 in August 2022 from July’s number of 55.5. 

India depends on imported oil for most of its domestic consumption. Oil prices have shown big swings in the first half. This is driven by supply concerns due to sanctions on Russia. But global demand is weakening and so the Organization of Petroleum Exporting Countries (OPEC) has also proposed to cut down on production. Gas-to-oil switching due to high natural gas prices have supported crude oil prices while the geopolitical conflict will lead to energy related issues. INR depreciated bias vis-à-vis the US dollar during H1 on the back strengthening of US dollar against all currencies, high crude oil prices and portfolio outflows. With high expectations of recessions in major economies, leading to slow down in global trade will impact our economy partly. 

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Global composite Purchasing Managers Index fell into contraction zone in August 2022 for the first time since June 2020. Global growth is expected to slow down to about 3% in 2022 and the outlook is “gloomy and uncertain”. Global price inflation is estimated at about 7.5% in 2022. Global factors do impact domestic growth and inflation. lower external demand drags down export demand. At the same time, weak global demand can soften global commodity prices. Global interest rates impact capital flows, putting pressure on domestic currency and thus leading to imported inflation. In the second half Indian economy will progressively lose momentum as inflationary expectations remain elevated due to rising global energy and food prices. Inflation remains a challenge with the RBI having to balance growth and inflation.

(Sharad Chandra Shukla, Director at Mehta Equities. Views expressed are the author’s own.)

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First published on: 08-10-2022 at 11:13:53 am