The Indian economy (
) was treated to a rare piece of good news this week with headline
inflation falling much more sharply than anticipated. Does this
mean time to jump into stocks with broad exposure to the Indian
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Wholesale prices in the Indian economy grew only
, down substantially from the 7.25% increase
reported the previous month
Although on the surface these numbers look like the inflationary
situation in India is improving, economists seem to be a bit
puzzled. The fundamentals would otherwise indicate that inflation
should have risen for July.
The Indian economy and its rate of inflation is particularly
susceptible to a rise in crude prices; the country is a net
importer of fuel. However for the month of July, power and fuel
inflation decreased even though the price of energy rose during
this period of time.
This anomaly has confounded economists, leading many to conclude
that this drop in inflation is probably a one-off event.
As a result, few observers of the Indian economy are under the
impression that the Reserve Bank of India will take the opportunity
to lower interest rates in an attempt to stimulate the economy.
In other words, the Indian economy is not yet necessarily ready
to emerge from its stagflationary quagmire. The
structural concerns that caused the country's
economic situation to devolve
remain intact. Until further corroborating evidence materializes
that the decrease in inflation is more than a singular outlier, the
central bank is unlikely to lower interest rates.
In turn, these decent inflationary numbers are not sufficient
reason to jump back into the Indian economy. In fact, for traders
who are long India,
the recent move higher in Indian equities
plus positive momentum from these numbers could be an opportunity
to sell some long positions before the next leg lower.