India Simmers, US Sizzles: Decoding November’s Inflation Numbers

November 2024 brought contrasting inflation trends from India and the US, giving investors a mixed bag of optimism and caution. With India’s cooling prices signalling potential rate cuts and the US grappling with sticky inflation, the stage is set for diverging monetary paths, if at all! 

Let’s break it down for you.

In Numbers: India Eases, US Squeezes

India’s inflation numbers were a significant relief this time. Retail inflation for last month (November) cooled to 5.48%, a significant drop from October’s 6.21%, according to the Ministry of Statistics and Programme Implementation (MoSPI). The reason behind this? Food and beverage prices, especially vegetables, which finally cooled on the “price tag wars”. 

India’s vegetable inflation dropped to 29.33% month on month. Seems high? Well, it’s significantly lower than October’s fiery 57-month high of 42.18%. Meanwhile, food inflation, which accounts for nearly half of the consumption basket, slowed to 9.04% from 10.87% in October. 

On the other hand, the US paints a different picture. At 2.7%, consumer prices increased in November by the most in seven months. The core inflation rate, which removes the volatile food and energy industries from the data, held steady at 3.3%. However, the labour market showed no improvement. The US unemployment rate ticked up to 4.2% after holding at 4.1% for two consecutive months. A rising unemployment rate signals economic weakness, prompting consumers to cut back on spending due to job security concerns, which can further slow the economy.

Now, how is the US inflation rate of 2.7% a cause of such a big concern? Well, a seemingly small monthly rise in US inflation translates to an annualised rate of approximately 3.6%, far above the Fed’s 2% target. This persistent increase pressures policymakers to maintain high interest rates, which can weigh on economic growth and investor sentiment globally.

To add to the woes, looming tariffs from President-elect Donald Trump’s incoming administration also pose a threat to price increases.

How Markets Took the News

Following the inflation data, stock markets in India and the US exhibited varied reactions, reflecting investor sentiment towards differing economic indicators.

India Markets (December 13, 2024): Despite the relief of easing inflation and falling vegetable prices, Indian shares fell more than 1% intra-day, dragged down by a slide in metal stocks on a strong US dollar and likely due to a continuation of foreign investors selling. However, the bourses closed in green in a major volatile session.

Nifty 50 had slid 1.21% to 24,251 points mid-day, with 40 stocks trading lower. However, the index settled at a little over 24,700 to end the Friday volatility. The 30-member BSE Sensex shed 1.21% during the day but closed over 1% or 843 points higher at 82,133.12. As per market data, the metals index recovered to close at 9,439.30 points after declining over 2% intra-day.

US Markets (December 12, 2024): The US markets had a tough day digesting sticky inflation numbers and higher-than-expected wholesale prices. Investors hit the sell button as concerns about prolonged higher rates loomed large.

Dow Jones lost 234 points, down 0.5% at 43,914.12. S&P 500, too, dropped by 0.5% to 6,051.25. The tech stocks in the Nasdaq Composite had a worse day, down 0.7% to close at 19,902.84. 

What are the Central Banks Doing?

To summarise, the Reserve Bank of India and the Federal Reserve have taken diverging paths in response to inflation’s curveball as and when required. What remains constant is the rule to either hike or cut interest rates to regularise the inflationary growth. 

When inflation rises, central banks increase interest rates to make borrowing more expensive and saving more attractive. This reduces spending and demand, helping to cool down price rises across the economy. It’s like hitting the brakes to slow down an overheated system.

On 8 December, the RBI pressed the pause button on interest rates again, keeping the repo rate steady at 6.5%. But here’s the kicker—the inflation-cooling trend has economists buzzing about a potential rate cut in February 2025. The decline in inflation and a sharp fall in growth (GDP) in the July to September quarter to seven-quarter low support expectations of a rate cut early next year. The meeting would be the first after the appointment of new central bank governor Sanjay Malhotra, who took over from Shaktikanta Das.

For the US, the Fed is likely to take a cautious approach at its December 18 meeting, with many economists expecting a 25-basis-point rate cut to bring rates down to 4.25% from 4.5%. This would acknowledge progress in reducing inflation, which has steadily declined from a 40-year high of 9.1% in June 2022, while addressing concerns about slowing economic growth. However, if core inflation remains sticky or labour market data shows unexpected strength, the Fed may hold rates steady to maintain inflation pressure. 

What Does this Mean for Investors?

For investors, this is a pivotal moment. A cooling inflation environment in India is generally positive as it signals easing price pressures and offers several benefits for the economy and financial markets:

Domestic Consumption: Lower inflation leaves more disposable income in consumers’ hands, which means good news for consumption-themed sectors such as FMCG, auto, and real estate.

Potential Rate Cuts: Easing inflation may prompt RBI to reduce interest rates, lowering borrowing costs for businesses and individuals. Rate-sensitive sectors like banking, NBFCs, real estate, and auto often see increased activity in such scenarios.

The Big Beneficiaries: Banking and NBFC-focussed sectors could be the real winners if a rate cut materialises early next year. Lower interest rates reduce borrowing costs for businesses and consumers, boosting credit demand and increasing loan growth for banks and NBFCs. Additionally, these entities often hold government bonds as part of their portfolios, which appreciate when interest rates fall, leading to higher treasury income.

However, global macro trends can’t be ignored. US inflation’s stubbornness means a strong Dollar might continue dominating, putting pressure on emerging market currencies, including the Rupee. Export-heavy sectors might face challenges, so consider tilting portfolios towards domestic-focused themes.

To Wrap it Up…

Inflation data is the “drama queen” of macroeconomics—when it’s high, everyone panics; when it cools, everyone celebrates. For Indian investors, the November numbers bring a reason to cheer and strategise. Keep an eye on rate-sensitive stocks and sectors that benefit from a robust domestic economy.

As always, stay diversified and curious, and let your portfolio do the talk!