India'sCPIandgrowthvsinflationdebate

Stock markets around the world are mostly flat in trade today. The Dow Jones closed down by 0.29% last night. This morning, the Hang Seng is down by 0.2% however the Nikkei is slightly in green. The relative outperformance of the Nikkei in the last 5 days can be mildly attributed to the fall in the Japanese Yen against the dollar over the same period. The fall in Yen gives the Japanese exporters a fillip.

On the data front, the Chinese retail sales data for the month of July dropped by 1.1% YOY against the forecast of a small rise. Industrial output grew 4.8% YOY for the month of July narrowly missing the analyst forecast of 5.1% rise. Though not earth shattering, the data shows the fragility of the economies in the wake of the pandemic. Considering the swift control which the Chinese authorities were able to have on the spread of the virus, the anaemic retail sales indicates that the consumer pack is still lacking in confidence. Now juxtapose this with the economies where the virus is still raging, and they can clearly expect consumer confidence to be shaken for a long time with a quick V shaped recovery being more hope than reality. The Australian dollar, which moves in step with Chinese data, showed weakness once the Chinese data was out.

In other news, there is still no agreement on the second pandemic relief package in the US. However there was some good news on the job front, where the weekly jobless data showed that initial claims fell below the one million mark for the first time since March. The number conveys that the pace of retrenchments in the economy is coming down. The continuing claims number came in at 15.5 million, for the week ending August 8. It is interesting to note that the provision which provided an extra USD 600 of benefit over and above the normal unemployment claim amount ended on July 31^st. Hence the argument by the Republican side, that the generous pay out was hindering people going back to the job market, will be tested now.

On the domestic front, the important news was the release of CPI data for July. Against the expectation of 6.3% the final figure came at 6.9%. The 10 year benchmark bond is trading at 5.95% currently against the previous close of 5.90%. What the high figure essentially does is it takes the rate cut further into the future. There was consensus already that the October policy might see a pause but with elevated CPI now the market will reassess whether the next one will make the cut. Pun intended!

Former RBI Chief Raghuram Rajan, delivering a speech in 2016 on the occasion of Statistics Day, spoke on the never ending debate between growth and inflation. He says that inflation, until the time it stays in higher single digits, generates little public anxiety. This is because the impact of inflation which erodes the real income is little understood and a gradually manifesting phenomenon. Hence it gets little press coverage unless and until the prices of a household staple has skyrocketed. On the other hand, the twin constituencies of Keynesian economics and the financial markets will keep demanding the rate cuts as it suits their interests. Rajan concludes that delivering a stable inflation rate is the key to mid and long term sustainable growth. Hence Central Banks will do well to stick to their guns on controlling inflation.