Daily Voice | High inflation likely to persist for another two quarters, says Rahul Bhuskute of Bharti AXA Life

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In the Indian context, the much hoped for capex cycle is dependent significantly on government spend. Further, India being an oil importer, the increased oil bill paid in dollars impacts our external position significantly – the current account deficit has already gone from 1.5 percent levels to over 3 percent.

If the currency comes under pressure, the central bank might also have to raise interest rates more/faster. Not just an actual rise, but an anticipation of one is also detrimental to GDP growth rates. Now for India, with its higher growth rates, this might not mean an actual ‘recession’ –going strictly by the technical definition – but it will definitely feel like it.

Will the Reserve Bank of India take the repo rate beyond 6 percent by the end of this calendar year, especially due to inflation concerns?

The RBI is definitely likely to increase rates further – the pre-Covid repo level of 5.15 percent will be possibly breached by the next policy in August. After that, the next few inflation prints – which I feel are likely to be elevated in the foreseeable future – will dictate the RBI reaction.

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Much will depend on crude prices then, which are difficult to forecast now. But there could be other drivers of inflation too. Even core inflation has been in the 5.5-plus percent range for a long time now and the last print was 6.8 percent.

Given that the pre-Covid level of 5.15 percent was on a much lower inflation number and the likelihood of the next few inflation prints being at an elevated level, 6 percent does look like a distinct possibility, whether it’s by the end of the calendar year or financial year, only time will tell.

Do you think inflation has peaked out now?

The CPI is likely to have peaked. However, given the elevated commodity prices, in particular crude oil prices, and the geopolitical concerns, the inflation level could continue to remain high, with a very gradual decline possible in the monthly prints. The recent CPI print, for instance, of 7.04 percent, was a decline from 7.79 percent in the previous month, led by a favourable base effect and a moderation in food inflation. The level, however, remains elevated, and well above the RBI tolerance level of 6 percent.

A move towards a sub-6 percent print will be very gradual. The high inflation print is likely to persist for another two quarters, after which favourable base effects and probable easing of non-crude commodity prices and softening of vegetable prices could begin to take effect.

The geopolitical situation seems to be unending. Do you think the market will remain volatile and end 2022 with losses?

The year 2022 is likely to be a challenging one for the equity markets. The Nifty is down by 4.4 percent this year, till end May 2022, and continues to exhibit signs of weakness, driven by consistently high inflation, scope for large interest rate hikes, stubbornly high commodity prices, relentless FII selling and zero visibility on the outcome of the Ukraine-Russia war.

There are some factors that give hope to investors, including a normal monsoon and robust private sector capex (albeit in specific pockets), and this may provide a fillip to the markets in the second half of 2022.

Much also depends on the Indian domestic investor. It has been providing some sort of support in the fact of significant and continued FII selling. If the Indian domestic investor also gives in, then the market is likely to see more downward pressure.

Have you spotted any sector ideas that can be a part of a portfolio?

Typically, higher interest rates benefit the banking sector through better margins, while higher inflation also results in higher credit growth. These factors should help banks perform well over the medium term.

Having said that, there are many quality stocks and sectors available at reasonable valuations given the 15 percent drop in index from its peak (20 percent in USD terms).

How can investors save their portfolio from recession as well as inflation concerns?

It is important for investors to be well diversified across asset classes to manage their risks. Allocation to asset classes like debt, equity, gold, etc., can be done based on the individual’s risk appetite. One of the best asset classes to combat inflation is equity.

The long-term return on equity typically outpaces inflation and provides strong real returns. It is, however, crucial to remain invested for the long term, investing across market cycles, even during periods of slow growth, to reap the rewards of strong equity returns.

Equally, in the next year to 18 months, we are also likely to see a big fixed income buying opportunity. Investors should use that to look into higher yields, preferably for the longer term. The guaranteed products provided by life insurance companies would prove to be a very attractive proposition then.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.