Globally, GST implementation had led to higher inflation and weaker growth in short term. Against this backdrop, GST council has either reduced or kept unchanged effective tax on list of goods and services, which directly impacts retail inflation. Arvind Subramanian, Chief Economic Advisor, has argued time and again that lower taxes will lead to lower inflation and possibly increase the demand in volume terms. Theoretically, there is little flaw in the argument. In an organized and competitive setup the reduced taxes will let companies to reduce prices and attract higher sales.
Unfortunately, a significant part of Indian economy is contributed by informal sector, which has been evading taxes for ages. Though, this informal sector has little contribution to tax collection but it is highly competitive i.e. traders have to pass on the gain of tax evasion to remain competitive. Hence, theoretically, tax evasion is acting like tax credit by government, which was fuelling the economy. It is note-worthy that first Demonetization and now GST has forced a lot of traders to start routing their business through proper channel. Once, these traders, who works at paper thin margins, start paying taxes, there would be a significant jump in prices. Formal sector is also likely to witness in increase in semi-furnished raw material. It remains to be seen how much its cost would be passed on to end consumer.
Retail Inflation:The latest RBI monetary policy categorically mentions that retail inflation is expected to pick up on account of unfavorable base effect. CPI inflation in month of June has fell to its life time low levels of 1.54% y-o-y basis, interestingly month-o-month inflation rose sharply by 0.53% (6.5% on annualized basis). It is also note-worthy that retail inflation has been on upswing after demonetization as it rose from -0.6% in December to 0.53% in June.
Though, it remains to be seen how inflation in informal sector will push overall retail inflation higher, but there is little hope that month-on-month inflation will ease in current environment. Hence, it is safer to presume that we will see more hawkish tone from RBI in next few months.
How to Trade this hypothesis?
India’s 10 year bond is trading at nearly 40 bps tenor and credit premium from repo rate. We can buy yield at current levels, 6.44% with stop loss below 6.34%, previous low on June 2016, with a target of 6.65%.
Reference: Reuters
CPI Data
First Published on 7th Aug 2017
No comments:
Post a Comment