Impact of June CPI Inflation on Indian Stock Market: Experts Weigh In

The Consumer Price Index (CPI) inflation in India, which measures the retail inflation, is expected to rise in June, but experts believe it will not have a significant negative impact on the Indian stock market, which is currently at a record high. The CPI inflation has been below 6% since September last year, and the Reserve Bank of India’s (RBI) medium-term target is to keep it within a band of +/- 2% around 4%.

According to Nirmal Bang Institutional Equities, the CPI inflation is likely to edge up to 5% in June from 4.75% in May due to high vegetable prices. Core CPI inflation, which excludes food and fuel prices, is expected to remain muted at 3.2% in June. The brokerage firm believes that fewer than 5% of service companies opted to pass on additional cost burdens to their clients by increasing selling prices, resulting in a moderate rate of charge inflation.

The experts at Nirmal Bang expect food inflation to see a material moderation only from September, when fresh kharif crop arrivals are expected to bring down prices. They also expect CPI inflation to average nearly 4.8% in FY25, mainly due to food price volatility.

Market experts believe that the mild spike in June retail inflation is discounted, and therefore, it will not impact market sentiment. The major triggers for the market are the upcoming Union Budget 2024 and the June quarter earnings of India Inc. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that the June CPI inflation is likely to come around 4.87%, which is on expected lines and will not impact the market. The market will respond to Q1 results and expectations surrounding the Budget will move the market in the near term.

G. Chokkalingam, founder and head of research at Equinomics Research Private Ltd, also believes that June 2024 retail inflation may inch up to around 4.81% due to a flare-up in some vegetable prices. He said that markets are unlikely to be impacted as the monsoon performance has turned surprisingly normal, and the inflow of new investors into the capital markets continues at a robust rate of 10-12 lakh per week.

Aamar Deo Singh, Senior Vice President- Research at AngelOne, pointed out that the CPI data for June is likely to be impacted by expectations of increased inflation due to growing costs for food items, veggies, and telecom tariffs. He said that the markets may be impacted by any notable departure from the 4.8-5% overall consensus projection, but in the medium run, both domestic and international macroeconomic conditions remain favourable and supportive of the markets.

Chintan Bhatt, director of listed investments at Waterfield Advisors, observed that inflation tends to hurt equity markets, resulting in a rise in interest rates and then the cost of equity. He said that value stocks belonging to sectors like commodities may do well with the rise in prices of their goods, whereas growth stocks, which are consumer-facing businesses, may not do well, as the rise in inflation can hit consumer demand and impact their profit and loss statements.

In conclusion, while the June CPI inflation may rise, experts believe it will not have a significant negative impact on the Indian stock market, which is expected to continue its positive momentum in the short term. The market will focus on the upcoming Union Budget 2024 and Q1 earnings of India Inc, and any notable departure from the expected inflation projection may impact the market in the medium run.

Historical Context:

The Indian economy has been experiencing a period of growth, with the country’s GDP growing at a rate of 7.3% in the fourth quarter of 2022-23. The Reserve Bank of India (RBI) has been maintaining a accommodative monetary policy stance, with the repo rate remaining unchanged at 4.0% since May 2022. The RBI has also been focusing on containing inflation, which has been above the target range of 4% for several months.

The Indian stock market has been on a tear, with the Sensex and Nifty indices reaching record highs. The market has been driven by a combination of factors, including the government’s efforts to boost economic growth, the RBI’s accommodative monetary policy, and the country’s strong macroeconomic fundamentals.

The Consumer Price Index (CPI) inflation has been a concern for the RBI, which has been above the target range of 4% for several months. The RBI has been taking steps to contain inflation, including increasing interest rates and implementing measures to curb speculation in the commodity markets.

Summary in Bullet Points:

• The CPI inflation in India is expected to rise to 5% in June, driven by high vegetable prices.
• The RBI’s medium-term target is to keep inflation within a band of +/- 2% around 4%.
• Experts believe that the mild spike in June retail inflation will not impact market sentiment.
• The market will focus on the upcoming Union Budget 2024 and Q1 earnings of India Inc.
• Any notable departure from the expected inflation projection may impact the market in the medium run.
• Value stocks belonging to sectors like commodities may do well with the rise in prices of their goods, while growth stocks may not do well due to the impact of inflation on consumer demand.
• The Indian stock market is expected to continue its positive momentum in the short term, driven by the government’s efforts to boost economic growth and the RBI’s accommodative monetary policy.