Eye on inflation

The markets had a fairly good last week, starting with a positive session, and thereafter, gradually moved up and closed for the week above 5300 in case of Nifty. Major economic events backed last week's trade with domestic economic data and RBI decisions helping the markets to retain weekly gains. The major economic data was inflation for the month of March. The annual rate of inflation, based on monthly WPI, stood at 6.89 per cent in March, compared to previous month's 6.95 per cent and 9.68 per cent during the corresponding month of the previous year. Price of pulses which had softened earlier, rose an annual 10.05 per cent in March compared to previous month's 7.91 per cent. Vegetable prices rose an annual 30.57 in March, while milk prices shot up 15.29 per cent year-on-year during the month. Egg and meat prices remained stubborn rising 17.71 per cent year-on-year.

Policy
Another major event during last week was the RBI policy review, which was scheduled on Tuesday. It was widely expected that the RBI would reduce interest rates this time by around 25 bps given the slowing inflation and weak IIP numbers. The RBI, at its meet, reduced the Repo rate by 50 bps, for the first time in three years, to 8 per cent in order to boost the slowing economic growth. The RBI warned that there is limited scope for further rate cuts. The RBI left unchanged the cash reserve ratio at 4.75 per cent, in line with expectations, after cutting it by 125 basis points since January 2012 to ease tight market liquidity. It expects headline inflation to remain stubbornly above 6.5-7 per cent and also warned about rising fiscal deficit. RBI directed the government to take necessary action to reduce the subsidy burden by freeing diesel, LPG and kerosene prices.

Norms
The RBI, at its meet, also put forward strict norms to be followed by banks who lend to NBFCs having gold loans. First, banks should reduce their regulatory exposure ceiling to a single NBFC, having gold loans to the extent of 50 per cent or more of its total financial assets, from the existing 10 to 7.5 per cent of the bank's capital funds. Second, banks should have an internal sub-limit on their aggregate exposure to all such NBFCs, having gold loans to the extent of 50 per cent or more of their total financial assets, taken together. Finally, the Reserve Bank has constituted a Working Group to undertake a detailed study of gold demand, trends in gold prices and lending by NBFCs against gold. This shows that RBI is trailing the activities of gold loan companies and we may see more pain in Manappuram and Muthoot Finance.

Trend
Even though the WPI showed a slowing down trend, the Consumer Price Index was showing an up trend, if one could call it that. Retail inflation spurted to 9.47 per cent in March because of higher prices of milk, vegetables, protein-based items and edible oil products. Consumer Price Index (CPI), was 8.83 per cent in February. Among other items, prices of cereal saw a rise of 2.78 per cent over the March 2011 level. The prices of milk and products rose by 15.22 per cent, while oils and fats turned costlier by 14.20 per cent during the month, year-on-year basis. Prices of egg, fish and meat shot up 10.06 per cent, while non-alcoholic beverages and vegetables became costlier by 10.20 per cent and 9.55 per cent respectively.

Exports
India's exports grew by 21 per cent to $303.7 billion in 2011-12 against the previous fiscal, while imports grew by 32.1 per cent. Imports reached $488.6 billion, leaving a trade deficit of $184.9 billion. Exports were good in engineering, petroleum, pharma, gems and jewellery, leather, electronics etc., while imports mainly happened in crude, gold and silver, coal, electronic goods, vegetable oil, fertilizers etc. The trade deficit has widened above expectation and is posing serious concerns, according to Commerce Secretary Rahul Khullar.

Outlook
The outlook for Rupee is weak and no major RBI intervention is expected. The Rupee is likely to test 52.40 and 52.80 in the near term. It has resistance at 51.60 and 51.38. The outlook for crude oil is mixed in nature. It has resistance at $102.98 and $103.70. Movements above these two levels can lift the price towards $107.20. Support for crude is at $100.19.u00a0