Premium| Listen to this article |
NEW DELHI: With inflation at 6%, nominal gross domestic product, real GDP + inflation, looks optically strong at 7%, but points to an economy overheating, Axis Mutual Fund has said in a report. The fund house has warned that if Indian continues on this path, there could be serious repercussions, even stagflation.
According to the fund house, higher the inflation, longer the impact on future growth, with the effects likely to play out in 2022 and 2023.
Amid this, Axis MF has suggested that investors looking to allocate to debt strategies could consider fund segments with lower duration profiles and use target maturity strategies to gradually lock in incrementally higher rates over the next six to 12 months.
“To reiterate, bond yields are likely to see increased volatility and hence investors should remain vigilant in their allocations," said Axis Mutual Fund.
The report said inflation for the last 2.5 years, up till February 2022, has averaged close to 6%. This was even before the pandemic hit.
“A belligerently high inflation number points to significant bottlenecks hampering growth. While the government continues to strive for ease of business and pave the way for growth, the current framework has been strangling real growth at closer to 5% levels before covid struck. The past two years real GDP growth has cratered to 1% CAGR," the fund house said.
Axis MF has said that one aspect of this heightened inflation could be linked to the lag effect of the Reserve Bank of India (RBI) policy.
In the aftermath of the covid outbreak, RBI flooded the markets with low-cost liquidity aimed at supporting the economy as it crashed into recession. Even as the economy has recovered, system liquidity is yet to be normalised adding to latent inflationary pressures.
“Given that monetary policy especially liquidity works with a lag, normalising liquidity quickly and fixing inflation is the need of the hour," the report said.
According to Axis MF, RBI is now behind the policy curve.
“Dr. Michael Patra (deputy governor of the RBI), commented that the target of the monetary policy committee (MPC) will be to maintain positive real rates. That implies that overnight rates now have to move 100 bps+ given the current state of inflation," Axis MF said.