The ogre of inflation is rearing its head yet again. Prices at the retail as well as the wholesale level have been rising at a rate much faster than what they did in the month before. After hitting a nine-month low in the month of February, wholesale price based inflation was up 5.7% in the month of March. On the other hand, retail inflation as measured by the Consumer Price Index shot up to 8.31% against 8.03% in February. In both the cases it is the rise in food prices which has pushed up the overall inflationary pressures.

Hopes of a rate cut in the ensuing RBI meet (to be held of the 3^rd of June) have been dashed because inflationary pressures are once again creating a strain. The market reacted instantaneously to this. It had opened positive, said that Infosys had declared results in line with its expectations and kept up with the positive spirit only to give away all gains and turn down following the declaration of the inflation numbers.

One thing baffles us. If the market had priced in a weak performance from Infosys (the company had maintained towards the end of the quarter that growth could possibly come in the lower end of its guidance) then why on earth would it not have priced in the fact that inflation would once again be moving up the curve. There were enough signs of this. The untimely rains and hailstorms in states like Maharashtra and the overall clumsy weather had indicated of a bad crop and hence supply side constraints on the food side. This rise in inflation is in fact just the beginning. It could get even worse from here on.

Dr Rajan should have brought down rates when the RBI met for its policy review at the beginning of April. The governor has been thoroughly worried about inflation raising its ugly head once again for quite some time now. The RBI governor should have ceased the opportunity to cut interest rates at its last meeting and wait for inflation to go up to hike them again later.

This could have served two purposes. The cry about growth being subdued due to higher interest rates could have died down considerably. Whether growth really could have picked up or would it only be an illusion would be something to think of in the future. It could atleast have had a placebo effect on the industrial sentiment, and thereby helped the markets psychologically. But now that inflation is rising, there is no scope for the Governor to cut rates. It would rather be the other way round. There is every possibility that rates may go up in order to control inflation from going completely out of hand.

The second trigger of the day, the corporate results too did not turn out to be as good as one would hav expected them to be. To say that the Infosys numbers are on expected lines is just reassuring oneself that all is well as of now. As more and more companies come out with their performance for the March quarter the market is likely to turn further weak.

As for global happenings, US markets turned higher for the second straight session as the Ukrainian crisis ebbed. The S&P 500 was up 0.7%, ending at 1842.98, while the Dow Jones Industrial Average gained 89.32, almost 0.6%, to close at 16262.56. Earlier in the day, European markets were in a dicey mood following the Ukrainian crisis. Stocks have turned decisively weaker in that region following the re-eruption of geopolitical tensions. Asia has opened well this morning. Except for China and Malaysia all other markets are trading positive as of now. The Japanese Nikkei is up more than two percent while all others are trading an average quarter percent above their yesterday’s closing levels.

The sentiment has changed and though global cues aren’t looking as bad today, the Indian markets are likely to open on a subdued note. This should be read as a sequel to what has happened yesterday. Over optimism will give way to caution following the inflation numbers. Corporate results will now be the focal point until the next big phase of elections begins in a couple of days. Tomorrow is the last working day of the week for the markets. It would be better to sit out and wait for a fresh week to begin than gamble in a highly volatile market today and tomorrow.