Frontloading of policy action needed to tame inflation expectations: RBI bulletin

Source: Financial Express, 18 July 2022

The Reserve Bank of India (RBI) has stressed the need for frontloading of monetary policy actions to keep inflation expectations firmly anchored and re-align inflation with the target while reducing the impact such actions will have on medium-term growth, the central bank said in its bulletin for July. To that effect, the RBI has already initiated coordinated monetary and fiscal policy responses.

While the role of monetary policy to control inflation caused due to global supply shocks leaves limited space for the RBI to maneuver, there is risk of unhooking of inflation expectations due to the increasing intensity and frequency of such supply shocks, the RBI said, citing the ongoing supply side issues stoked by the Ukraine war and rebound of pandemic.

If crude prices increase by 10%, inflation could increase by around 30 basis points (bps) at its peak and gross domestic product (GDP) will weaken by 20 bps, the RBI observed, which requires monetary policy tightening to push inflation back to target. In such a scenario, the government will have to opt for reduction in its capital expenditure to maintain the trade deficit target or maintain the spending target and go for a higher trade deficit. Although the required interest rate tightening is lower in either scenario, there will be spillover effects on the growth of the economy, the RBI said.

In a separate article of the bulletin, the RBI had said that India can overcome the worst surge of inflation if the commodity prices soften and supply chain issues are resolved.

India’s current account deficit (CAD) was 1.2% of the gross domestic product (GDP) in FY22, slightly lower compared to 1.3% in the previous year. Although the deficit moderated to 1.5% in the fourth quarter of FY22 from 2.6% in Q3FY22, the surging oil prices are likely to have widened the current account deficit to 2.7% of GDP in Q1FY23, ICICI Securities said in a report.

The widening trade deficit leads to the depreciation of the Indian rupee due to depletion in foreign exchange reserves, which has resulted in a massive $8.1 billion decline in the country’s foreign exchange reserves as of July first week, the latest RBI data shows. The rupee is expected to depreciate further and may test psychological levels of 80.00 in coming sessions, the brokerage had said in another report earlier this month.

India’s inflation could dip to 5 per cent by March: SBI Research Report

Source: Economic Times, 14 July 2022

There is only 20-30 per cent likelihood of a global recession and chances of prolonged stagflation in the economy seem more, according to State Bank of India NSE 0.04 % research report Ecowrap’s latest edition, which has projected that India’s inflation rate is expected to come closer to 5 per cent by March 2023.

“The fear arises that spiralling inflation and an aggressive monetary policy tightening cycle may lead to the recession, particularly in the US economy. However, the fear is unfounded,” it said.

In India, retail inflation has been over the Reserve Bank of India’s upper tolerance band of 6 per cent for the sixth consecutive month in a row in June. Retail inflation came in at 7.01 per cent in June.

“CPI inflation moderated slightly to 7.01 per cent in Jun 2022 as compared to 7.04 per cent in May 2022 due to moderation in food inflation. The June data now confirms the fact that peak had passed,” the report said.

The moderation in inflation in the past two months has been possible because of the various steps taken by the government, including the cut in taxes on petrol, and diesel, restrictions imposed on food exports, and cut in cement prices amid a global meltdown in commodity prices.

Globally too, high inflation has been a worrying factor due to both demand and supply side concerns.

“Categories that experience frequent supply-driven price changes include food and household products such as dishes, linens. Categories that experience frequent demand-driven price changes include motor vehicle-related products, mobile phones and electricity.”

With several goods and services costing more from July 18 with the Goods and Services Tax (GST) Council approving an increase in rates and withdrawing tax exemptions on some, the additional impact of GST rates increase on retail inflation will be in the range of 15-20 basis points only, it said.

The Government has maintained that any increase in GST rates is intended to make up for “inefficiencies” in the value chain.

Steps taken by RBI and govt to cut duration of high inflation: FinMin report

Source: Financial Express, 12 May 2022

The finance ministry on Thursday said measures taken by the RBI and government will squeeze the duration of high inflation fuelled by global factors.
Retail inflation has been trending above Reserve Bank’s upper tolerance level of 6 per cent for the past three months.

“While inflation is expected to be elevated in 2022-23, mitigating action taken by the government and RBI may reduce its duration. Evidence on consumption patterns further suggests that inflation in India has a lesser impact on low-income strata than on high-income groups,” the finance ministry’s monthly economic review said.

RBI in an off-cycle announcement earlier this month hiked the key repo rate — at which it lends short term money to banks — by 0.40 per cent to 4.40 per cent to tame inflation. This was the first rate hike since August 2018 and the sharpest in 11 years.

Further, it said, since aggregate demand is recovering only gradually, the risk of sustained high inflation is low.
Seen over a longer time horizon, it said, inflation in India’s economy has not been as much a challenge as is sensed from month-to-month changes.
CPI (Consumer Price Index)-based inflation during FY22 averaged 5.5 per cent, 50 basis points below the upper limit of the RBI monetary policy committee’s inflation band, and lower than 6.2 per cent for FY21.

RBI had sharply raised its inflation projection for the current fiscal year to 5.7 per cent from the earlier forecast of 4.5 per cent due to geopolitical tensions.

Beginning May, most of the major central banks, including US Federal Reserve and Bank of England, also increased their benchmark rate to rein in soaring inflation.

Markets, as the rising bond yields show, have already priced in the increase in policy rates, including the ones expected later in the year, besides absorption of excess liquidity, it said.

Global growth watchers, as their slowing growth projections reflect, have also factored in monetary tightening the world over to calm down global inflation, it said.

The cost of restraining inflation– the slowing down of the global growth– is manifested in the April update of the World Economic Outlook (WEO) of the IMF that projects growth of global output to decline from 6.1 per cent in 2021 to 3.6 per cent in 2022 as well as 2023.

“Among major countries, the WEO projects India to be the fastest growing economy at 8.2 per cent in 2022-23. Lending credence to this projection, the fiscal year 2022-23 has begun with a strong growth in economic activity in April as seen in the robust performance of e-way bill generation, ETC toll collection, electricity consumption, PMI manufacturing and PMI services,” it said.

Notwithstanding the presence of inflationary headwinds, the capex-driven fiscal path of the government, as laid down in budget 2022-23, will help the economy post a near 8 per cent growth in real GDP for the current year, it said.

With regard to forex reserve, it said, the reserve was at a comfortable level of USD 597.7 billion, providing an import cover of about 11 months for financing investment and consumption in the country.

The reserves have been steadily declining under pressure from outflow of foreign portfolio investments responding to monetary tightening by central banks in advanced economies, it said.

Notwithstanding the turbulence associated with monetary tightening in advanced economies, the ongoing geopolitical conflict, lockdowns in parts of China and the supply-side disruptions, India is relatively better-placed than most other nations to weather the storm and achieve steady growth during the current financial year, the report said.

Rising food and energy prices are a global phenomenon and even several advanced nations have higher inflation rates than India, it said, adding that the Reserve Bank of India has signalled its determination to combat inflation and that too will sustain macroeconomic stability and growth.

Inflation outlook: Status quo from RBI on Omicron uncertainty

Source: Financial Express, 03 December 2021

As base effect wanes, inflation to harden to an uncomfortable 5.5-6% in December-March FY22, close to upper end of MPC’s medium-term target range. With elevated input prices, either margins will be further squeezed or higher prices will contain the consumption recovery in H2FY22.

The Monetary Policy Committee (MPC) meets next week amidst renewed uncertainty generated by the Omicron variant of Covid-19. When it had last met, in October 2021, it had remarked that with output trailing the pre-pandemic level, recovery remains uneven and dependent upon continued policy support. With the Q2FY22 GDP marginally exceeding the pre-Covid-19 level, will the MPC conclude that economic recovery is broad-based and durable enough, and policy support can be weaned off? Unlikely, in our view.

To recap, the October policy review had contained no major surprises. The MPC had voted unanimously to maintain the policy repo rate at 4%. In a split vote, it had indicated a continuation of the accommodative stance for as long as necessary to revive and sustain growth and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward. The MPC had retained its FY22 growth forecast at 9.5%, pegging the Q2FY22 expansion at 7.9%, while reducing its inflation forecast for this fiscal by 40 bps to 5.3%. As expected, RBI had simultaneously refrained from hiking the reverse repo rate, while continuing the move towards liquidity normalisation.

The recent macroeconomic developments are decidedly mixed, both on the inflation and growth front. Encouragingly, the CPI inflation dropped from 5.3% in August 2021 to 4.3% in September 2021, before rising mildly to 4.5% in October 2021. The Centre announced a welcome excise cut on petrol and diesel, which was followed by VAT reduction on these by several states. The softening impact of this is expected to be visible in the non-core CPI inflation for November 2021.

Additionally, the outlook for the rabi crops is bright, softening the expected food inflation trajectory. Benefiting from healthy moisture levels, the area sown under rabi crops recorded a healthy year-on-year (y-o-y) increase of 7.3% as on November 26, 2021. This was led by higher acreage under some high inflation items such as oilseeds as well as pulses and wheat, partially offset by lower area sown under rice and coarse cereals.

However, vegetable prices have surged. Moreover, producers grappling with cost pressures emanating from surging global commodity prices and logistics costs have announced price increases in a number of sectors, which is likely to keep core inflation elevated.

On balance, we expect the CPI inflation to print at around 4.7% in November 2021. As the base effect wanes, we anticipate that it will harden to an uncomfortable 5.5-6% in December-March FY22, edging close to the upper end of the MPC’s medium term target range of 2-6%. Overall, the CPI inflation is now expected to average 5.5% in FY22, 20 bps higher than the forecast of 5.3% made by the MPC in its October 2021 review.

Signals regarding the momentum of economic growth are also mixed. India’s real GDP expanded by 8.4% in y-o-y terms in Q2FY22, surpassing the MPC’s and our own forecast of 7.9%. With this, the absolute level of GDP reverted mildly above the pre-pandemic level of Q2FY20, one of the metrics being watched by the MPC. However, we contend that broad-based signs of a durable recovery were missing in the disaggregated GDP data.

Encouragingly, gross fixed capital formation displayed a rise of 1.5% in Q2FY22 relative to Q2FY20, echoing the trend in capital goods output and government capital spending. However, private and government consumption expenditure in Q2FY22 lagged their pre-Covid-19 level by 4% and 17%, respectively. The impact of this was offset by a surge in valuables relative to the pre-Covid-19 level of Q2FY20, led by the near tripling in imports of gold and silver.

At constant 2011-12 prices, the valuables in Q2FY22 exceeded the Q2FY20 level by Rs 0.8 trillion, much higher than the mild absolute rise of Rs 0.1 trillion in GDP during this time period. This is the chief reason why we are circumspect, despite the Q2FY22 GDP exceeding our forecast.

Moreover, some key sub-sectors such as manufacturing, mining and construction displayed a lower GVA growth in Q2FY22 than the volume expansion indicated by the IIP, suggesting that rising input costs bit into corporate margins. Looking ahead, rising domestic vaccine coverage and fuel tax cuts will boost confidence and reinvigorate demand, pushing up volumes. However, with elevated input prices, either margins will be further squeezed, or higher prices will contain the consumption recovery in H2FY22.

After a broadly healthy festive season, some indicators have displayed a flagging momentum in November 2021. For instance, the daily average generation of GST e-way bills declined considerably to 2 million in November 1-28, 2021, from the record-high 2.4 million seen in October 2021. Electricity growth dipped in November 2021 to a feeble 2%. Moreover, vehicle registrations contracted on a y-o-y basis. On the other hand, the November PMI rose further, mirroring the improved mobility data.

Following improved tax revenue visibility, we anticipate a brisk pace of central and state government spending in H2FY22, even as the base effect is particularly unfavourable in Q4FY22. Moreover, the recent releases of the remaining tranches of the back-to-back GST compensation loan as well as an extra instalment of central tax devolution would boost the cash flows of the state governments, nudging them to step up their spending. This is growth-positive, as state expenditure is an important component of brightening business sentiment and economic activity.

Disappointingly, the discovery of the Omicron variant has reignited uncertainty regarding the strength of global demand and cross-border flows, as well as the insurance provided by the current Covid-19 vaccines, while at the same time triggering some correction in commodity prices.

In light of the renewed uncertainty, we expect a status quo from the MPC and RBI in the December 2021 policy review on the stance and rates. However, the tone may shift to signal an impending change in the monetary policy stance to neutral in the February 2022 policy review, as long as Omicron doesn’t necessitate fresh lockdowns in the coming weeks. We expect the stance change to be accompanied by a 15 bps hike in the reverse repo rate by RBI in February 2022, narrowing the policy corridor to 50 bps from the current 65 bps.

Thereafter, our base case continues to pencil in hikes of 25 bps each in the repo and reverse repo rates each in the April 2022 and June 2022 reviews, followed by a reassessment of the durability of the growth revival as policy support is withdrawn.

RBI remains laser-focused to bring back inflation to 4 pc: Guv Das

Source: Financial Express, 22 October 2021

“A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma, who voted against the accommodative stance.

The Reserve Bank remains laser-focused to bring back retail inflation to 4 per cent over a period of time in a non-disruptive manner, Governor Shaktikanta Das stressed while voting for status quo in interest rates, as per minutes of the October policy meeting released on Friday.

The central bank has been mandated by the government to ensure the Consumer Price Index (CPI) based inflation is at 4 per cent, with a band of 2 per cent on either side. The retail inflation, which was above 6 per cent during May and June, has started moving down and stood at 4.35 per cent in September.

As per the minutes of the Monetary Policy Committee (MPC) meeting held during October 6 to 8, Das said in its August 2021 meeting, the panel was faced with the challenges posed by headline inflation exceeding the upper tolerance threshold for the second successive month.

The actual inflation outcomes for July-August, with inflation registering a substantial moderation to move within the tolerance band, have vindicated the MPC’s outlook and monetary policy stance, he noted.

The more-than-expected softening of inflation in July and August this year was underpinned by the significant lowering in food price momentum, especially in August.

Going forward, the governor said if there are no spells of unseasonal rains, food inflation is likely to register significant moderation in the immediate term, aided by record kharif production, more than adequate food stocks, supply-side measures and favourable base effects.

“Volatile crude oil prices, particularly the resurgence since mid-September, is pushing pump prices to new highs, raising risk of further spillover of high transportation cost into retail prices of goods and services,” he said.

He opined that continued monetary support is necessary as the economic recovery process even now is delicately poised and growth is yet to take firmer roots.
At this critical juncture, “our actions have to be gradual, calibrated, well timed and well-telegraphed to avoid any undue surprises”, he asserted.

While voting to keep the policy rate unchanged and continue with the accommodative stance, Das said, “In parallel, we remain laser-focused to bring back the CPI inflation to 4 per cent over a period of time in a non-disruptive manner.” All members of the MPC — Shashanka Bhide, Ashima Goyal, Jayanth R Varma, Mridul K Saggar, Michael Debabrata Patra and Shaktikanta Das — unanimously voted to keep the policy repo rate unchanged at 4 per cent. Also, all members, except Varma, voted to continue with the accommodative stance.

Deputy Governor Patra said while the trajectory of inflation may undershoot the projections made in August, it is likely to be uneven, sluggish and prone to interruptions.

He also opined that even as domestic macroeconomic configurations are improving, the risks from global developments are rising and warrant a close watch as they could stifle the recovery that is underway in India.

Exports are directly at risk from logistics bottlenecks, shortages of containers and personnel in international shipping, and elevated freight rates. Policy interventions, including coordinated multilateral efforts, are needed urgently to prevent global trade from choking, he opined.

“In my view, the biggest risks to India’s macroeconomic prospects are global and they could materialise suddenly,” he added.

RBI Executive Director Saggar stressed that “an Arjuna’s eye” needs to be kept on commodity prices and “we need to consider different scenarios according to which we can calibrate our policies.” He said that in his assessment, the probability that oil prices may touch or cross USD 85 per barrel before the year ends and could average USD 80 or more in second half is not insignificant.

“It can have significant impacts that are hard to precisely quantify due to non-linearities and uncertainties but, on a ballpark from the baseline, can be expected to raise inflation by 15-20 bps, lower growth by 13-15 bps, have negligible effects on fiscal subsidies and widen CAD by about 0.25 per cent of GDP,” he added.

Varma, the external member on the panel, said several arguments he made in his August MPC meeting continue to be valid.

“Since August, I have become increasingly concerned about two other risks that have become salient globally in recent weeks,” he said.

The first is that the ongoing transition to green energy worldwide poses a significant risk of creating a series of energy price shocks similar to that in the 1970s. The second recent concern is about the tail risk to global growth posed by emerging financial sector fragility in China, he said.

“Both of these risks — one to inflation and the other to growth — are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility.

“A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma, who voted against the accommodative stance.

External member on the MPC Ashima Goyal said global price shocks have turned out to be more persistent, contributing to sticky core inflation and tax cuts on petroleum products are “essential” to break the upward movement that could impart persistence to domestic inflation.

She also said there is large uncertainty built into current prices because of the speculative element that seeks to profit from aggravated shortages.
“Large sudden falls are therefore possible,” she said, and added oil prices have shown high volatility.

She further said the “climate change activism” that is partly responsible for current spikes will also reduce oil demand in the future.

The third external member on the MPC, Shashanka Bhide said investment activity has picked up over the levels seen 2020-21 but is yet to reach the 2019-20 levels.
Accelerated progress in vaccinations and a number of economic policy initiatives to open up opportunities for investment are among the factors constituting positive stimulus to fresh investments.

Three members on the MPC are RBI officials and the government appoints three eminent economists as external members on the panel.

RBI cuts FY22 inflation forecast to 5.3%

Source: Economic Times, 08 October 2021

The Reserve Bank of India on Friday cut the FY22 inflation forecast to 5.3% from its earlier estimate of 5.7%. Edible oils, fuel, LPG, and medicine prices are driving inflation rate, Governor Shaktikanta Das said while announcing the monetary policy. Though Das cautioned that unseasonable rains and adverse weather events could pose risks to vegetable prices.

As per the central bank’s estimates, CPI inflation is seen at 5.1% in Q2, 4.5% in Q3 and 5.8% in Q4 of FY22 with risks broadly balanced. CPI inflation for forst quarter of fiscal 2023 is projected at 5.2%. Das added that CPI inflation during July-August had turned out to be lower than anticipated. CPI inflation print in August came in at 5.3%, the second consecutive month of moderation. Though, core inflation, i.e. inflation excluding food and fuel, remained elevated and sticky at 5.8% in July-August 2021.

“The CPI headline momentum is moderating with the easing of food prices which, combined with favourable base effects, could bring about a substantial softening in inflation in the near-term,” Das said.

Though Das cautioned that the resurgence of edible oils prices and high global crude oil prices in the recent period, is a cause of concern.
“Pressures persist from crude oil prices which remain volatile over uncertainties on the global supply and demand conditions,” Das said. “Domestic pump prices remain at very high levels. Rising metals and energy prices, acute shortage of key industrial components and high logistics costs are adding to input cost pressures.”

The RBI Governor also noted that the decline in vegetable and cereal prices with sharp deceleration in gold prices, had helped softening of inflation. Going forward as per RBIs estimates, cereal prices are expected to remain soft though unseasonable rains and adverse weather events pose upside risks to vegetable prices.

“Going forward, the inflation trajectory is set to edge down during Q3:2021-22, drawing comfort from the recent catch-up in kharif sowing and likely record production,” Governor Das said. “Along with adequate buffer stock of food grains, these factors should help to keep cereal prices range bound. Vegetable prices, a major source of inflation volatility, have remained contained in the year so far and are likely to remain soft, assuming no disruption due to unseasonal rains.”

India’s inflation “uncomfortably high”: Moody’s Analytics

Source: ETRetail.com, Mar 30, 2021

India’s inflation is at an “uncomfortably high” level, which is an exception among Asian economies, Moody’s Analytics said on Tuesday.

Higher fuel prices will keep upward pressure on retail inflation and keep the RBI from offering further rate cuts, said Moody’s Analytics, a financial intelligence company.

Retail inflation rose to 5 per cent in February, from 4.1 per cent in January. The Reserve Bank mainly takes into account retail inflation while deciding on the monetary policy.

Core inflation (which excludes food, fuel and light) was up 5.6 per cent in February, from 5.3 per cent in January, Moody’s Analytics said, adding India’s inflation is “uncomfortably high”.

In its macro roundup, Moody’s Analytics said inflation is subdued in most of Asia, and expected to only gradually pick up over 2021 because of rising oil prices and economies starting to reopen. Brent crude has climbed 26 per cent this year at around USD 64 per barrel. It was around USD 30 per barrel in March 2020, when the COVID-19 crisis was near its peak.

“India and the Philippines are exceptions. In these economies, inflation is above comfort levels, adding to the list of challenges for policymakers,” it said.

Stating that India’s inflation is “worrisome”, it said volatile food prices and rising oil prices led retail inflation to exceed the upper band of 6 per cent several times in 2020, inhibiting the RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic.

Under the monetary policy framework, RBI has a target for maintaining retail inflation at 4 per cent (+/- 2 per cent).

” RBI is expected to retain its current inflation-targeting band beyond its current expiry date of March 31,” Moody’s Analytics added.

WPI inflation rises to 4.17% in February on costlier food, fuel, power

Source: Business Standard, Mar 15, 2021

New Delhi: The wholesale price-based inflation rose for the second consecutive month in February to 4.17 per cent, as food, fuel and power prices spiked.

The WPI inflation was 2.03 per cent in January and 2.26 per cent in February last year.

After witnessing months of softening of prices, the food articles in February saw 1.36 per cent inflation. In January it was (-) 2.80 per cent.

In vegetables the rate of price rise was (-) 2.90 per cent in February, against (-) 20.82 per cent in January.

Inflation in pulses was 10.25 per cent in February, while it fruits it was 9.48 per cent, and in fuel and power basket it was 0.58 per cent.

The RBI in its monetary policy last month kept interest rates unchanged for the fourth consecutive meeting and said that the near-term inflation outlook has turned favourable. Retail inflation, based on the consumer price index, was at 5.03 per cent in February, data released last week showed.

Retail inflation jumps to 3-month high of 5.03% amid rise in fuel prices

Source: Business Standard, Mar 13, 2021

New Delhi: India’s retail inflation surged to a three-month high of 5.03 per cent in February, as against 4.06 per cent in the previous month, as petrol and diesel prices rose sharply.

This may lead to the demand for fuel tax cuts growing louder in the coming days. Food inflation rose to 3.87 per cent from 3.11 per cent over this period.

While the consumer price index-based fuel and light inflation rate stood at 3.53 per cent in the month compared to 3.82 per cent in January, the devil lies in detail. Within the category, petrol saw the inflation rate surging to 20.57 per cent in February compared to 12.53 per cent in January. Diesel, on the other hand, saw the rate of price rise climbing to 22.50 per cent from 12.79 per cent. Diesel inflation had an impact on other segments as well.

The overall fuel and light inflation rate came down due to other segments such as electricity, which saw its inflation rate coming down to 3.29 per cent in February from 3.60 per cent in January.

Sunil Kumar Sinha, principal economist at India Ratings, said the higher retail prices of fuel due to a combination of higher crude prices and elevated excise duties pushed transport and communication inflation to a four-month high of 11.4 per cent in February from 9.4 per cent in January.

There are chances of food items, which have about 47 per cent weighting in the consumer price index, facing the indirect impact of high diesel prices.

Govinda Rao, former director at the National Institute of Public Finance and Policy (NIPFP) and now chief economic adviser at Brickwork Ratings, said, “Going forward, the excess liquidity in the system, combined with the volatility in fuel prices, can pose an upward risk to inflation.”

If one takes out food and fuel, what is left is core inflation, which is often taken as a key part of the overall rate of price rise. This inflation rate was up at a three-month high of 5.86 per cent.

Rao said, “In this situation, the MPC (monetary policy committee) is expected to continue the pause, though the RBI might take some measures to drain excess liquidity.”

The MPC is scheduled to meet in the first week of next month.

In its February review, the MPC had suggested that the Union and state governments reduce taxes on petroleum products to provide some relief to customers, who are paying record high prices for petrol and diesel.

“Pump prices of petrol and diesel have reached historic highs. An unwinding of taxes on petroleum products by both the Centre and states could ease the cost-push pressures,” the MPC had said.

Finance Minister Nirmala Sitharaman had said the issue of tax burden on petroleum products was something that the Centre and states had to discuss as both drew revenue from these items.

The Centre imposes both flat and ad valorem rates on fuel. For instance, there is a 2.5 per cent Customs duty on unbranded petrol. Along with this, on every litre, there is a Rs 14.90 countervailing duty, Rs 18 additional Customs duty, Rs 1.40 basic excise duty, Rs 11 special additional excise duty, and Rs 2.5 of newly imposed cess. However, there is no uniformity of taxes among states. Inflation in the services sector too saw a rising pressure. For instance, the health inflation rate in February stood at a 17-month high of 6.3 per cent. “This is turning structural,” Sinha said.

Input inflation, muted demand drags on earnings growth

Source: Financial Express, Feb 23, 2021

The reasonably good results for the December 2020 earnings season and the recovery in the coming quarters notwithstanding, profit estimates for FY22 remain below pre-Covid levels. Indeed, while the economy is recovering fast, large pockets remain fragile.

While earnings for FY22 will benefit from the low base of FY21, just as the FY21 numbers have benefited from the low base of FY20, there are a couple of headwinds.

The first is the rising prices of commodities—especially crude oil—and it is not certain all businesses will be able to pass on the higher input costs. The muted sales of two-wheelers are evidence they have become unaffordable for many after the price increases.

The second concern is that the demand for a host of consumer goods could peter out once the demand from the more affluent households has been satiated; analysts point out the lockdowns necessitated purchases of homes and also a range of goods.

While the sales of affordable homes could well retain momentum, whether this holds for more expensive residential properties remains to be seen.


Large numbers of urban households—and thousands of small enterprises—have been badly impacted by the pandemic and this would affect consumption, at least in the near term. Again, profitability has been boosted by hefty cost cuts and not all of it would be a permanent saving. For instance, salaries would be restored and increments re-started as the business picks up. However, apart from IT and BFSI companies, wage bills are flat or shrinking.

The corporate results suggest the larger companies, especially market leaders and bigger brands have made strong comeback, partly on the back of market share gains from the unorganised sector. This is reflected in the robust GST collections over the past few months.

But the anaemic credit growth—with loan growth slipping to sub-6% in the fortnight to January 29 and CP issuances in January down 26% lower y-o-y —is a sign that a large swathe of companies is not stepping up production. Kotak Institutional expects net profits of the Nifty-50 Index to grow 20% in FY2021 and 25% in FY2022. The increase would be led by volume recoveries in the auto and oil& gas sectors, lower provisions in banks and higher ARPUs in telecom. Given the elevated valuations, strategists expect the markets confidence about the country’s medium term growth prospects would be crucial. “We note that India’s GDP growth had started to decelerate meaningfully even before the Covid-19 pandemic outbreak on decline in the investment component of GDP,” they observed.