Indian corporate inflation concerns to test RBI’s easy policy

A handful of Indian companies have increasingly voiced concerns about inflation, paving the way for a price hike that could test the central bank’s resolve to keep borrowing costs lower for longer to sustain the economy.

From the companies of Hindustan Unilever Ltd., the Indian branch of Unilever Plc, to Nestlé India Ltd. petroleum, and Britannia Industries Ltd. have already passed on some of the increased costs to consumers.

This could see India’s headline inflation start a four-month slowdown trend in October, data due later on Friday should show the impression as high as 4.4%, median estimate from survey shows Bloomberg to economists. Consumer prices are expected to accelerate further as the higher basis of comparison from a year ago weakens.

“There is no substitute for price increases in an environment like this,” Varun Berry, managing director of Britannia, told analysts in a post-earnings call this month. “So we took steps to increase prices.”

While several central banks have responded to price pressures by raising interest rates, the Reserve Bank of India has stuck to its rhetoric on transient inflation as it sees the overall figure drop due to ‘higher food production after a heavy monsoon.

The expected moderation of food price-induced inflation in India was cited by Governor Shaktikanta Das as reason enough to continue accommodating monetary policy to support what he called a “delicately balanced” economic recovery. The RBI rates committee is due to meet early next month to review the policy parameters.

Although the central bank sees inflation ending at 5.3% for the year ending March 2022, well within its target range of 2% to 6%, economists see the headline figure obscuring continued pressures on price.

“The annual estimates of retail price inflation mask the real inflationary undercurrent that prevails in the economy due to the statistical base effect,” said Jay Shankar, chief economist at Incred Capital in Mumbai. “Corporate results continue to underline the impact of commodity inflation on margins, and are expected to persist for a few more quarters due to the slowing economy.”

What Bloomberg Economics Says …

“Given the prospect of further rising inflation and the accelerating recovery, we see a risk that the RBI will raise rates a little earlier than our current expectations for a rate hike to take. reverse repo in April 2022 followed by an increase in the reverse repo rate in February 2023. ”

– Abhishek Gupta, senior economist in India

Prime Minister Narendra Modi’s administration last week cut an excise tax on diesel and gasoline, in a bid to control inflationary pressures and give the central bank more room to keep costs down. low loan. This decision, according to economists, including those of IDFC First Bank Ltd. and Yes Bank Ltd., would help reduce consumer price inflation by 10 to 14 basis points.

Yet an increase in pent-up demand from Indians emerging from lockdowns could see companies regain pricing power that could accelerate inflation.

“A substantial increase in the prices charged for the provision of services in India has had no negative impact on demand,” said Pollyanna De Lima, associate director of economics at IHS Markit. “That said, service providers were concerned that persistent inflationary pressures could dampen growth in the coming year.”

These are among the risks that Incred’s Shankar believes could make the RBI hawkish sooner than what is currently being considered by the markets.

“Regardless of short-term inflation numbers, the market is focused on the impact of rising global commodity prices and the potential for quantitative easing of the Fed on India’s monetary policy,” he said. said Anubhuti Sahay, economist at Standard Chartered Plc.

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