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Inflation remains higher, tightening cycle may last longer than expected; check investment strategy

In the last two months, the Nifty has rallied 17% and that seems to have alleviated almost all the concerns that the markets had.

Inflation remains higher, tightening cycle may last longer than expected; check investment strategy
At a time when most central banks have been in a reaction mode, RBI has been proactive in tightening and which has helped in containing the inflation situation. Image: Bloomberg

By Manish Jain

In the last two months, the Nifty has rallied around 17% and that seems to have alleviated almost all the concerns that the markets had. Inflation, Rural demand, rate hike, slowing earnings growth and commodity prices have all been put behind. From being all blue, we have very quickly gone to all roses. However, the hard truth is that in reality the Nifty is nearly 1.5% up on a CYTD22 basis. This essentially means that all that we have done in the last couple of months is to regain the losses for January – June ’22. A large part of this rally, albeit with improved fundamentals, has been driven by liquidity. The FPIs have come back and they have come back like never before and this, we believe, has been one of the major reasons for the resurgence.

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The second reason has been the strong foreign policy stand taken by our government. The swapping of Middle-eastern crude with more inexpensive Russian crude has been instrumental in keeping inflation in control and also saving precious US Dollars. The third thing that stands out is how India has been completely decoupled in the whole global recession scenario. The US & EU slowing down has actually had a bit of silver lining. This has pushed the global crude and commodity prices and also helped bring the FII flow back into the country. Last, but not least, The Indian central bank – RBI, has played a key role in managing the economy. At a time when most central banks have been in a reaction mode, RBI has been proactive in tightening and which has helped in containing the inflation situation.

So, the question is – have we all missed the bus? Is the rally over? What should be the strategy now? The simple answer to the above-mentioned questions is – No. The markets will likely give us more chances to build positions. There are some concerns that continue to linger on. The first one is food inflation, particularly rice, which has been a cause of concern. This could mean that inflation continues to remain higher and that in effect means that the tightening cycle can last longer than expected.

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The second concern is the Balance of Payment which has been caused by stagnant exports and rising imports. Dare I say that the danger of getting into a 2012-14 kind of situation now seems very real? This could also be a major cause of worry for the markets. So, the moot point is that markets will give us opportunities to build positions, so rather than lamenting, be watchful and don’t miss the bus a second time coming. However, when you do buy, always remember – Buy quality, buy long term. Stay invested and create wealth. Invest in good & clean companies.

(Manish Jain is a Fund Manager at Coffee Can PMS, Ambit Asset Management. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)

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