US Consumer Price Index Inflation data which is also known as headline inflation was the sharpest since
Sep 2008 The rising inflation is due to huge surge in energy and metal prices in the last one year.
The Wholesale price Index Data in India hit record high of 12.94% in due to energy, crude and
manufactured goods. It is a record straight month of uptick in WPI with double digit growth which can
be negative for stock market
What can be the Impact on Stock Market?
Rising inflation would lead to decrease in consumer purchasing power capacity and spending which will
have a negative impact on Indian Economy. Further Central Bank have boosted surplus liquidity by
increasing money supply and reducing interest rate from last 2 years. However, if inflation rises
consistently than RBI has to increase interest rate and decrease money supply to contain rising inflation
which will have a negative impact on Indian stock market.
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What would be the Impact on Sectors?
Negative Impact:
Rising inflation would lead to increase in raw material and input cost for industries engaged in
Manufacturing, Paints, Chemical, FMCG and Automobiles. Further due to economic slowdown consumer
spending is already less. Rising inflation is due to supply side constraint amid fresh lockdown and curbs
in India. When inflation is on a rise due to demand driven than industry can transfer the rising cost to
consumer however this is not the case which means companies need to absorb the rising cost and it will
lead to decrease in profitability which will have a negative impact in near term.
Banks will have some impact on their balance sheet due to surge in NPA amid fresh lockdown. Further
banks existing bonds would have negative yield if RBI increase interest rate.
Positive Impact:
Rising inflation would be positive for Metal and Mining and they produce raw material used in
manufacturing. It will also be positive for Energy stocks due to rising crude oil prices.
What should be the approach of Investors and Traders in Stock Market?
Investors should take cautious approach and can-do selective buying in some sectors. Further stock
market has made record high and economic data is showing some negative news. Further valuations are
a record expensive levels. Nifty PE last two quarter is around 27 which is above historical average.
Investors can do some profit booking at these levels with tactical shift and should for some corrections
before making fresh investments.
Traders should be cautious before making fresh long positions and should book profit at record levels.
Further, they would wait for fresh sell signals and open interest data in Index. Stock Market may give
knee jerk reaction as economic data is negative, technical charts are showing negative divergence on
weekly charts and Nifty open interest is consistently rising which can give opportunity to traders to
make decent gains once sell signal comes in Nifty on daily charts.
Disclaimer: This article is for pure educational purpose and investors and traders should take the advice
of financial advisor before making decision.
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