Inflation went down to just 4.17% in July 2018. This might look good, but hold on.
The biggest helper: Food. The biggest culprit? Everything else.
As you can see, the other items are at the top of their one year ranges, while food is only +1.7%. If we consider that food is volatile, as is fuel, what is the real core inflation in the economy? That would be everything except food and fuel. And if we use those numbers, we get to see that core inflation is actually close to the highest in four years (since August 2014).
This doesn’t augur well just as the rupee crosses 70 (today). We wrote earlier in the day that the rupee was looking dangerously poised to fall, and indeed, in a single day today, it’s down more than 1 rupee to nearly Rs. 70 to the dollar. (Read post)
The rupee falling creates inflation because we are a net importer. Even if we removed gold (which isn’t something you care about in terms of inflation) we imported stuff (or services) worth over 15 billion dollars last year, and gold was $33 billion, so we have a deficit on the current account, of $48 billion. This is $4 billion a month.
Much of this is financed by capital inflows. The fear now is: Capital inflows will slow. Rupee depreciates more. Our imports become more expensive, especially crude oil. The cost of fuel goes up (and thus, downstream stuff like plastics and pipes and ATF and airline tickets and what not) . This makes other things more expensive locally.
This should make the central bank want to raise rates further. Inflation is already in there, and as we can see, core inflation continues to be at elevated levels. The rupee depreciation just adds to the damage. Inflation impacts currencies, and currencies impact inflation. And both impact the bond market – which sees a rise in rates as a conclusion. You either raise rates to bring in more money from abroad, or you raise rates to control inflation. The rest of the financial bazaar usually takes a while to understand the gravity of the issue, if there is any. And then there’s gravity.
(This is how much the knickers have to be in a twist to just be able to say that it’s possible, in some alternate universe, that the stocks markets could go down. Meanwhile, party on. )