One can argue that the Reserve Bank of India works like a game of dominoes. The bank makes one move, and it sets off a whole series of cascading events.
There is a Tom & Jerry cartoon that shows RBI's dilemma (my mother used to claim that cartoons were useless, but I have now proven that this is not true). In the cartoon, Jerry tries to take a piece of cheese. A string tied to the cheese pulls an alarm clock, setting off a series of events which ends up with a very heavy box hitting Tom.
In its role as the central bank, RBI is constantly trying to avoid moves that will result in a heavy hit on the Indian economy. But right now, the economy is in a difficult mood. It's dealing with high inflation, a weakening rupee, and capital outflows.
What can the RBI do? On the one hand, prices are rising and the consumer price index (CPI) has crossed the 6% mark – the upper limit of the target inflation range. On the other hand, a slowing economy is hurting businesses.
Should RBI hold interest rates at the current level to bring inflation down, or should it cut rates to boost economic growth? The government is on the side of lower interest rates. Finance Minister Nirmala Sitharaman has pushed for lower rates to drive GDP growth, and Commerce Minister Piyush Goyal has made similar remarks. This has got many hoping that the RBI may cut rates at its next meet.
The central bank however, makes up its own mind. And it sees inflation as a dangerous creature, which if let loose with low interest rates, can create havoc. So it will probably hold rates steady in its December monetary policy meeting, despite the government's displeasure.
Inflation: No immediate relief in sight
RBI is a cautious central bank, unlikely to cut rates without clear signals. And the big picture is unfriendly right now, because of persistent inflation coming from rising food prices. These increases are partly due to unseasonal rains, which destroyed crops like onions and tomatoes, and strained already fragile supply chains. In October, vegetable prices surged by 42% year-on-year (YoY), driving up the CPI to a 14-month high of 6.2% YoY.
Commerce Minister Piyush Goyal, has suggested that the RBI can ignore food inflation when setting rates. However, food makes up nearly half of household expenditure for many Indians. The central bank cannot just ignore the effect of rising food prices on overall demand.
Despite hopes that food inflation will ease over the next few months as supply conditions improve – thanks to higher mandi arrivals, adequate reservoir levels, and better rabi sowing, the outlook right now is unclear. The State Bank of India (SBI) estimates that consumer inflation will stay higher than the RBI's projection (4.8-4.9% vs. 4.5%) till the end of FY25. This dampens hopes for a rate cut even by February, according to SBI.
Near-term risks: A stronger dollar, and the China factor
Another complicating factor is the stronger US dollar. While a strong dollar has made Indian exports more competitive, India is now importing inflation, particularly in crude oil and other commodities. Being a net importer of goods, imported inflation is hitting India hard. Analysts at Goldman Sachs and UBS expect the dollar to stay strong under a Trump administration, which could keep pushing up the cost of imports.
Then there is China. China is for now, still grappling with deflation, low demand and falling fiscal revenues despite several rounds of stimulus. Lower demand has kept commodity and crude oil prices low.
The CME Group points out that if China can reverse its economic slowdown, we could see higher commodity prices worldwide, so the central bank is keeping an eye on the Chinese recovery.
Growth vs. Inflation: Walking a tightrope
Remember last month’s newsletter on India’s slowdown? We discussed how lower government spending dragged the economy down. However, post-elections, it has picked up compared to the previous year. The jump in government spending is expected to help the economy recover.
Motilal Oswal expects a better second half for businesses, driven by higher government expenditure, a robust kharif crop, and strong rural demand. A rate cut may not be needed urgently if these factors kickstart the recovery.
But there are still factors that can drive prices up, from unseasonal rainfall and supply chain issues to global upheaval that hits oil and commodity prices. Governor Das has warned that a rate cut right now would be "very premature" and "risky".
RBI is unlikely to budge on rate cuts, for now
With high inflation and upward price pressures expected to persist for at least a month, the RBI monetary policy committee is likely to hold rates. Government officials and ministers might not be thrilled with this decision, but it's a common scenario worldwide. Governments often push central banks to cut rates, and rarely call for hikes.
If the economic conditions improve — possibly by February or April 2025, when the MPC meets again —we believe the RBI will be ready to cut rates. Till then, the central bank is likely to keep both the government and investors in a sulk.
Screener: Rising stocks recovering towards year highs, and outperforming their sectors
General Industrials & IT stocks rise the most in the past month
In the current bearish market environment where the Nifty 50 is trading at a discount of 7.9% from its 52-week high of 26,277.6, we look at stocks that have risen the most over the past month, outperforming their sectors and trading near their year highs. This screener shows rising stocks over the past month trading near their year highs which are also outperforming their sectors.
The screener contains stocks from the banking & finance, pharmaceuticals & biotechnology, software & services, general industrials, and diversified consumer services sectors. Notable stocks in the screener are Kirloskar Brothers, Vijaya Diagnostic Centre, Jyoti CNC Automation, KFIN Technologies, Gillette India, Mastek, eClerx Services, and CCL Products India.
Kirloskar Brothers has risen the most, by 36.9% over the past month, helping it to outperform the general industrials sector by 33.4 percentage points. This has helped the stock to recover towards its 52-week high of Rs 2,684 per share and it is currently trading at a discount of 17%. The industrial machinery company (which manufactures engineered, industrial, agriculture and domestic pumps, valves, and hydro turbines) has been on the rise since reporting its Q2FY25 results on October 29 where its revenue and net profit grew by 14.7% YoY to Rs 1,050.1 crore and 89.9% YoY to Rs 95.1 crore, respectively. Its revenue increased on the back of Rs 1,162 crore worth of new orders during the quarter, while its net profit surged, led by higher volumes, cost control initiatives undertaken by the company, and a reduction in raw material prices.
Vijaya Diagnostic Centre comes in next after rising by 27.9% over the past month, outperforming the diversified consumer services sector by 28.6 percentage points. This has helped the stock to recover towards its 52-week high of Rs 1,250 per share and is currently trading at a discount of 7.4% from its year-high. This healthcare services company’s price rose on the back of its revenue and net profit growing by 28.7% YoY to Rs 187.5 crore and 25.9% YoY to Rs 41.9 crore, respectively, in Q2FY25. Its revenue increased on the back of an improvement in patient footfall and higher test samples.
You can find some popular screeners here.
