20210804-未知机构-Macro_Keys-Economics_Five_key_questions_on_inflation_and_rates_26页_1mb

Summary of UBS Report "India: Five key questions on inflation and rates"

1. Inflation in India
India's inflation is not considered structural, largely driven by temporary supply-side factors like COVID-19 disruptions, and not fiscal deficits or food price trends alone.

• CPI inflation expected at 5.5% YoY in FY22 (vs. RBI's 5.1%) and 4.5% in FY23.
• Ultra-easy policy stance due to persistently negative output gaps; policy normalization starts late FY22.
• 10Y yield forecast to rise to 7% by end-FY23 due to slowing growth expectations and policy rate hikes.

2. Policy Normalization and Monetary Policy
The Monetary Policy Committee (MPC) is keeping the repo rate unchanged to support the economic recovery, even amid inflation overshooting 4%.

• Repo rate is likely to rise in 2HFY23 after vaccination targets are met.
• Liquidity adjustments and yield curve flattening are expected sooner.

3. Impact on Markets: Bonds and Equities

• Bonds: 10Y yield to rise gradually (target 6.5% end-FY22, 7% end-FY23). QE risks are limited due to subdued credit growth and excess capacity.
• Equities: Upside for Nifty is limited due to high inflation sensitivity; an 80bp yield rise compresses Nifty PE by ~12%.

4. Core Economic Queries:
Q1: H2 FY22 is not expected as high as FY09-13, driven by weaker global commodity prices vs. past cycles.
Q2: Fiscal imbalance risks are minimal due to ample capacity and no historical correlation between monetization and inflation.
Q3: Negative real interest rates aid economic recovery but require reversal for financial stability by 2HFY23.
Q4: Global commodity shocks are temporary; food inflation will moderate post-pandemic supply chain issues.
Q5: Food price disruption is transitory due to intervention, though structural reforms for agriculture are needed.

5. Global Context:

• Global inflation normalizing in 2023 due to supply chain resolution; India may lag if output gaps persist.
• Special focus on global vegetable and pulse market inefficiencies.

Ab i.e., the analysis highlights that while inflation is elevated, it is manageable through policy adjustments and supply-side reforms.