Moody's Warning May Trouble Markets

It is indeed a tough task for the common man to survive in this high inflationary environment. In the past, we have seen that the Wholesale Price Index (WPI) inflation has witnessed a declining trend while the Consumer Price Index (CPI) inflation has remained high in double digits. While the RBI is looking at the WPI numbers to take a final call on the interest rate movement, it is actually the CPI which is pinching the common man.

Food inflation has been a major overhang for the economy and individuals. One should broadly recollect that the CPI number for February 2013 increased by 12 basis points to 10.91% on a MoM basis. Further, food inflation grew by 13.73% on a YoY basis. According to the latest media reports, high food inflation has prompted Moody's Investors Service (global credit rating agency) to say that sustained food inflation is negative for the country's sovereign rating as it widens the macroeconomic imbalances. “High food prices can accelerate broader inflation by pushing up wages, while negatively impacting the government finances and reducing monetary policy flexibility,” said the media report. 

In the last week itself, S&P had warned India that it may downgrade India's rating if the economic environment doesn't improve in the year ahead. We had made a short note on the same in our Mindshare column titled ‘Rating Downgrade Threat Still Looms Large’.

Hence, a repeated warning coming in from the global rating agency could create more trouble for the markets. The markets today are also trading lower by around 0.7 per cent on account of the rating agency threatening downgrade and also because of weak Asian markets. At present, it is only Moody's who has a stable outlook on India’s economy while S&P and Fitch have a negative outlook on India.

We believe that continuous reformist action by the government would result into better infrastructure for the country and lead to lesser supply side bottlenecks thus helping soften inflation. We also hope that the monsoons are normal this year for adequate crop cultivation activity.

It would be interesting to watch out RBI Governor Subbarao in action tomorrow (March 19) in the Monetary Policy Meet. His views on the macroeconomic situation, particularly in the context of inflation, Interest rates and Twin deficit (fiscal and current account) are anticipated. Nevertheless, we would keep updating the readers on the same.