• CPI Inflation fell sharply lower to 6.93% in November 2020 compared to 7.61% in October. The reading in November was lowest in the last three months indicating the headline print has peaked in October and is now trending down
• The decline in inflation was largely driven by food inflation. Food inflation was down to 8.76% in November against 10.09% in October. Almost all components except oil & fats and non-alcoholic beverages saw a decline in growth in inflation
• Food inflation seems to have peaked out and is likely to trend lower due to a decline in retail prices of vegetables and a favourable base effect. Vegetable prices inflation declined to 15.63% in November compared to 22.08% in October
• Core inflation was largely flat at 5.80% in November compared to 5.75% in October. Core inflation remained flat with divergent trends seen across different components. Going forward, rise in crude prices, elevated input cost pressures, reflecting in wholesale prices could eventually impact output prices and would need to be monitored
• Overall, the reading was better than market expectations. However, sticky core inflation would remain a point of concern. Minutes to be released later this week will be looked at closely to understand MPC members’ views on broad based inflationary concerns, excess liquidity and supporting growth
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Indian markets witnessed a spectacular run recently, with markets surpassing pre-Covid peaks primarily tracking near normal economic activity domestically, robust FII flows (~US$4 billion in MTD November 2020), incrementally positive news flow on Covid vaccine development. Part of market optimism was also fuelled by a better-than-expected Q2FY21 wherein maximum companies benefitted from low raw material cost and realised operating leverage benefits with management commentary positive on demand prospects and retaining some part of operating leverage gains in the post Covid world. On the macroeconomic front, GST collection for October 2020 was in excess of | 1 lakh core (up ~10% MoM) while present E-way bill generation, fuel consumption and power demand surpassed pre-Covid levels. Given the sharp up move in the present month (up ~10% MTD), we expect broader market participation to follow. Stock specific action is expected to continue wherein we continue to like IT, pharma, private banks and rural economy linked business models.
Going forward, post blip over FY19-21E, earnings recovery in FY20-23E period will be led by automobile sector, oil & gas space and index heavy BFSI space (~38% weight) that now also includes the insurance sector.
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