India’s economic landscape presented a mixed bag this week. While the January retail inflation numbers brought cheer, certain segments of the financial markets painted a less rosy picture. The Consumer Price Index (CPI) eased to a five-month low of 4.3 percent in January, down from 5.4 percent the previous month. This moderation, primarily driven by cooling food prices, has raised hopes of sustained inflation control and potential policy easing. But the stock markets, specifically shares of Non-Banking Financial Companies (NBFCs), seemed to shrug off this positive news, instead reacting to quarterly performance and regulatory concerns.

Inflation Breather

The dip in inflation is indeed welcome. Easing food prices, especially vegetables and pulses, offer genuine relief to consumers. Economists appear optimistic that this trend will continue, with projections for the fourth quarter of FY2025 aligning with the Reserve Bank of India’s (RBI) target of 4.1 percent. Reports suggest that February food prices are also trending downwards, reinforcing this positive trajectory. This, coupled with a robust winter crop and government vigilance on price hikes, provides a solid foundation for continued moderation in food inflation. The convergence of food and core inflation is another encouraging sign, suggesting a broad-based cooling of price pressures.

Market Jitters in NBFC Space

However, the stock market reaction, particularly within the NBFC sector, tells a different story. Shares of Manappuram Finance, IIFL Finance, Repco Home Finance, and Fusion Finance all experienced significant declines after announcing their December quarter results, as reported by Business Today. Weakened profit after tax (PAT), contracting Net Interest Margins (NIMs), and increased credit costs were cited as reasons for the underperformance. IIFL Finance, in particular, faced additional headwinds due to Income Tax raids, adding to investor unease. While some analysts suggest targets reflecting potential upsides for these stocks, the immediate market sentiment remains cautious.

Rate Cut Conundrum

The broader question is whether the easing inflation will prompt the RBI to accelerate interest rate cuts. Slowing economic growth, attributed to weaker consumer demand and rising household debt, certainly strengthens the case for monetary easing. Some economists now anticipate a more aggressive rate cut cycle in 2025. However, the strength of the US dollar and the weakening Rupee introduce a layer of complexity. A depreciating Rupee can fuel imported inflation, potentially dampening the enthusiasm for rate cuts. As UBS strategists point out, a five percent Rupee depreciation could add 25-30 basis points to inflation, offsetting some of the gains from domestic price moderation.

Despite the inflation respite, market anxieties persist, especially within the NBFC sector. For the bulls to regain control, a sustained period of positive earnings performance, coupled with a stable Rupee and supportive global economic conditions, will be crucial. Until then, the market mood might remain subdued, reflecting a cautious outlook despite the welcome news on inflation.