As we expected in our base case status quo was maintained on repo rate and stance of the policy.
Inflation estimates have been lowered from 3.8%-4.5% to 2.7% -3.2% in H2FY19.
Below is the brief history of RBI estimates of 3 months forecast vs actual inflation.Which gives an impression that the estimates are way different from actual data specially when inflation estimates are lowered.
TARGET INVESTING VIEW:
Below are the reasons which we believe that this estimates will not stand even this time :
There are two major items impacting CPI that are Fuel cost & Food. October 2018 has been low for both the items but if removed from CPI then the inflation is 6.1% and 5.9% adjusted for House Rent Allowance (HRA) increase.
Food prices have been low recent months but looking at Kharif crop has seen low output and Rabi crop as on (29th Nov) 8.3% lower than previous year. Due to lower output there is big risk of sudden reversal that could come due to MSP being actual provided given higher procurement policy coming into place.
Fuel price considered for estimates is the previous day close price of the future contract and currency is also taken into same way. This is biggest risk to the inflation estimates of H2FY 19 and FY 2020. With Crude volatility at the highest on record the outcome can create an extreme on either side specially if OPEC+ meeting results in a cut.
OUR BASE CASE IS THAT FUEL AND FOOD PRICES REVERSE BY NEXT FEB MEETING AND THIS WOULD RESULT IN HIGHER INFLATION WHICH WAS EVEN MENTIONED BY DEPUTY GOVERNOR DURING PRESS CONFERENCE.
NIFTY WILL TAKE THE POLICY NEGATIVE AND PSU BANKS & NBFC (EXCEPT FEW) FOR SHORT TERM.