Moneycontrol Pro Weekender | Artificial intelligence, real inflation

IMF Managing Director Kristalina Georgieva summed up the current state of the global economy well in a speech this week. She said, “To put it simply, the global economy is being pulled in two opposite directions: a negative energy supply shock and a positive demand shock from AI.” That explains why, as Martin Wolf writes in his FT column: “The disruption to oil supply, oil prices and the world economy more broadly has, in truth, been quite surprisingly manageable”.

Will the resilience last? Georgieva said that “will depend on our success in navigating three major crosscurrents: the rapid arrival of AI, persistently high energy prices, and record levels of public debt”. What’s common among these three factors is that they all stoke inflation. Georgieva pointed out: “The AI building boom is inflationary. The energy and food shocks are inflationary. Tariffs, defence spending, and high public debt can be inflationary.” Her policy prescription is to rein in fiscal deficits while she also adds that “now may be a good time for a prudently hawkish bias in many countries’ monetary policy”.

Is the RBI’s 25 basis point rate hike and shift in stance to ‘calibrated tightening’ evidence of a prudently hawkish bias? Well, if we take the RBI’s survey of professional forecasters’ estimates, they see retail inflation at 4.7 percent by Q2 FY2028, or about a year ahead. The current repo rate of 5.5 percent, therefore, gives a real rate of around 0.8 percent. That’s not very tight, which is why analysts are saying there could be multiple hikes ahead and the RBI has also said it will do what it takes to reduce liquidity so that the rate increase is passed on. The trouble with a “calibrated” tightening cycle is that inflation may not agree to move in calibrated increments.

Indeed, two technical studies in the RBI’s Monetary Policy Report made the point that the forces that kept inflation low have dissipated while inflation is getting broad-based and household inflationary expectations have risen for the sixth straight survey round. This column argues that the RBI’s stance signals caution, not aggressive tightening, and that investors could buy bonds as the market has already priced in the adjustment. We considered whether the RBI’s change of stance would dent the fragile sentiment in Indian equity markets.

Incidentally, RBI’s latest consumer surveys show declining optimism about the future, but also higher spending, very likely on the back of increased borrowing. That is true also of markets, which too show high levels of leverage, with hedge funds on a borrowing spree on Wall Street -- They could well be a systemic risk. In the Indian markets, stockbrokers’ profits may increasingly come from loans and this column warns that Indian regulators need to learn from the LTCM crisis. Those who forget history are condemned to receive margin calls.

We said the AI rally masks broader weakness, and India gets the downside without the upside, which could explain the current fragility in the Indian market. As sci-fi writer William Gibson said “the future is already here – it's just not evenly distributed”.

Of course, there are always pockets of opportunity, if you know how to look for them. For example, we analysed who wins and who loses amid commodity volatility. Top-end consumption is still strong, as seen by jewellery demand staying resilient. Since the banking sector still trades below its long-term historical multiples, positive earnings growth is expected to trigger a valuation re-rating. For autos, while September volumes have picked up, underlying demand is mixed. For the FMCG sector, much depends on the El Nino risks and the inflation trajectory. For the IT sector, we analysed the TCS and Accenture results.

The power and infrastructure cycle remains, if you will pardon the pun, rather electrifying. KIMS Hospitals could be entering a multi-year growth cycle while Sedemac Mechatronics illustrates the opportunity created by smarter vehicles and the transition in automotive technology. Defence manufacturing, too, has a structural story, with Bharat Dynamics positioned to benefit from the missile programmes.

To conclude on a happy note, our Diwali 2025 portfolio has significantly outperformed the benchmark indices in a difficult market. As against a double-digit decline in the benchmark Nifty 50 and a mid-single digit decline in the broader Nifty 500, our portfolio delivered a double-digit return, outperforming the Nifty 50 and Nifty 500 by 20 percent and 15 percent, respectively. It is a reminder that even in a market buffeted by strong headwinds, careful stock selection can pay off.

In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

GM Breweries, Weekly tactical pick, Dabur, Value fashion retailers: Festive shift clouds underlying demand, HDFC Bank: can the new CEO turn the tide? Augmont Enterprises

As valuations, certainty take centre stage, large caps wait in the wings

The historic derating of India’s blue-chip stocks

SEBI's pause could bring back expiry day sanity

US 10-year Treasury yields risk hitting 6% for first time since 2000, Pimco says

AI agents could cost banks $500bn — by winning savers better rates

What is the real price of oil anymore?

How AI could scupper the dollar

Ruchir Sharma: Why a booming economy is not helping Trump

Batteries are the missing link in India's renewable rally, but risks remain

Prolonged summer to drive a rebound in AC sales in FY2027

Data Story | Quick commerce is becoming a force of habit

Accenture Q4 beat boosts AI demand hopes; pricing pressure remains a worry for Indian IT

Will El Nino take the fluff off cotton yarn mills?

GST Council sets the stage for a trust-based regime

The rupee is now India Inc’s problem to hedge

Climate change will test RBI’s price stability goal this year and beyond

Electricity deficit surges in September

Money market rates don’t follow the RBI repo rate always

The Eastern Window: Xi Jinping nowhere near reaching his goal of trimming China’s overcapacity problem

China’s Export Surge Creates New Similarity Risk—A lesson for Indian companies

G20 trade ministers’ meeting: Outcome mixed, outlook dim

Startup Street | Smart money increases bets on India’s new manufacturing revolution

Premji Invest to take platform approach, seek greater ownership in portfolio companies

The IndiaAI mission needs a rethink

Can the SIR protest affect the coming elections?

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