Global markets have seen a resounding rally since ECB’s first liquidity injection of EUR489bn during Dec 2011, somewhat similar to QE1 driven emerging markets rally in late 2010. However, market performance during QE2 phase was subdued. It remains to be seen how the second phase of ECB’s Long-Term Refinancing Option (LTRO) program involving 530 billion euros (higher than expectations) announced during end of February impacts the global risk assets going forward this year besides the real economy of EU in the mid-term. The Greek package – Voluntary Private Sector Initiative (PSI), second bailout package and extended fiscal austerity – that has been agreed recently has cut down the risks of immediate default and disorderly exit from European Union. However, the upcoming elections in Greece and France besides a range of important countries like USA, China, Russia and Egypt could magnify policy uncertainties in respective regions with corresponding global effects. In the Indian context, FII inflows would be a key derivative of global risk appetite and liquidity funnel. Meanwhile, Oil prices have been creeping up, partly on recovery hopes but also reflecting political tensions in Iran and Middle East. The Brent prices have so far not broken out of the USD 95- USD 125 per barrel range seen since early 2011. But, if Iran nuclear issue escalates and triggers a spike up to USD 150 per barrel then economies worldwide may again shift back to a mood of caution.
Q3FY12 Domestic GDP growth – Bottoming out
Fig 2- Industrial activity to see improvement ahead
Inflation and IIP review
January inflation came in at 6.55% as against 7.5% a month ago, marginally surprising on the down side. The decline was mainly on account of base effect in the primary articles side rather than any meaningful drop in prices. Core inflation (non-food manufactured products) dropped sharply to 6.68% from 7.7% in December. Considering the seasonality in the food prices segment (mainly vegetables) that is currently pulling down the inflation and hardening of crude oil prices, RBI may not cut rates in its review meeting on March 15. The central bank has also signaled that it will be difficult to contain inflation without a proper support from fiscal side. Hence, we expect that it would wait and review the fiscal proposals in the union budget to be presented on March 16 before starting to ease policy interest rates.
Pausing for Breath