Both India and the US have released red hot inflation numbers. That at a time when the Federal Reserve has already announced tapering of its massive, pandemic-era stimulus from this month, and the Reserve Bank of India hinted at normalisation of the liquidity surplus. Besides, a series of downgrades for Indian equities, puts the financial markets and the Indian economy as well as economic policy at a turning point.

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CNBC-TV18 caught up with Samiran Chakraborty, Chief Economist-India at Citi, and Badrinivas NC, Managing Director, Country Treasurer and Head-Trading and Local Markets Treasury at Citi South Asia.

Asked about the downgrades on Indian equities, Badrinivas said valuations are much higher than historical premiums and the Nifty is likely to consolidate around the current levels.

“We have a 12-month, December 2022 target of around 17,500 on the Nifty - a 2-3 percent downside from here, primarily coming from two reasons. One is quite rich valuations and the second the fact that there is a lot of private issuance coming in, and that is taking a lot of capital or drawing a lot of capital as well,” he said.

"The combination of these factors makes us believe that there is some bit of consolidation likely, given the extremely rich valuations that we are already at," Badrinivas added.

Speaking on high inflation numbers, Chakraborty said October was bound to see a month-on-month increase given that it was the peak of the second wave of commodity price increases. "Also this was the festive season when prices typically go up. We also saw that because of unseasonal rains in September and early October, vegetable prices were significantly higher in the month and continued even in November. So all these things would have put pressure on the October numbers," he explained.

“The only thing which is a bit worrisome for me is that the certain line items within CPI that you can construe as demand side are also starting to see some upward pressure. Now, to what extent this will get counterbalanced by the excise duty cut on fuel and to what extent they will moderate going forward is what we have to observe. So watch for the next couple of prints. But as of now, we have put an upside risk to our 5.3 percent CPI forecast for the full year,” he said.

Come December and January, the headline number is going to be close to the six percent mark, he said. "So it is time to be somewhat cautious on this trend," said Chakraborty, adding that he is not worried that about the runaway inflation situation.

Asked whether he thought that global inflation is abating, Badrinivas said that if one were to look at it from the energy price point of view, Citi's view is that "we are probably at the peak as we get to the northern hemisphere winter and prices post-winter should moderate from these levels, whether it's on natural gas or oil itself and so on".

Broadly, when you look at inflation, there are supply-side factors that continue to be at play. If you look at the US, there are certain labour market dynamics that are probably the new normal. One needs to figure out how much the participation rate improves and how much of the labour comes back, he said.

"Some of the price hikes are coming because of labour shortage and could that become a little bit more permanent and so on. Also, the whole supply-side coming from the China-slowdown effect is something that could play out a little bit longer," he added.

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"The last factor when it comes to energy prices is the shift from conventional to non-conventional, or clean energy, which the world wants to go to. It creates a certain mismatch in the short to medium term between the availability of clean energy to support the demand at this point in time and that can create certain pricing pressures on the more conventional sources up till the time the non-conventional the clean energy steps up to the demand-side," he added.

Badrinivas believes that some part of the supply side and some of this conventional-non-conventional gap could be a little bit longer in terms of its effects. "But in terms of the near term energy outlook, our view is that after the European winter, we should see some alteration in fuel prices,” he said.

Watch the accompanying video for the full interview

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