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.

India’s inflation target band up for review: FM Nirmala Sitharaman

Source: Business Standard, Feb 19, 2021

New Delhi: India’s inflation target band of 2-6 per cent is up for review as the five-year term for the Monetary Policy Committee’s (MPC’s) inflation-targeting framework draws to a close, Finance Minister Nirmala Sitharaman said on Thursday. “The MPC’s term is coming to an end. Inflation targeting will also have to be reviewed. We shall do that,” Sitharaman was quoted as saying by Reuters.

The government has asked the Reserve Bank of India (RBI) for its views on the targeting framework, said a senior government official. The government has also sought the central bank’s suggestion on tweaks to the CPI basket and if the old weightings need to be changed or recalibrated, said the official. The new framework would be announced by March 31, he added.

The framework, notified in 2016, mandates it to target 4 per cent consumer price index (CPI) inflation until March 31, 2021, with the upper and lower tolerance limits of 6 per cent and 2 per cent, respectively.

The RBI Act was amended to provide for the inflation target to be set by the central government, in consultation with the RBI, once every five years.

The current range of 2-6 per cent is valid till the end of this fiscal year. The CPI-based inflation rate did not come down below 6 per cent till November in the last calendar year, barring March.

According to the RBI Act, amended through the Finance Act, 2016, the central bank has to send a report to the government in the case of a breach in the mandate cited above, stating reasons for failure to achieve the target, remedial actions proposed to be taken by it, and an estimate of the period within which the inflation target will be achieved.

However, the MPC has not taken the April and May inflation numbers into consideration because these were imputed, escaping government scrutiny.

CPI inflation was back within the MPC’s range of 4 (+/-2) per cent since December 2020, and fell to a 16-month low of 4.06 per cent in January, after hovering above the upper limit of 6 per cent of the target since March 2020.

However, the government and the RBI are of the view that the current targeting framework has worked out well and the status quo must be maintained. After the recent monetary policy announcement, RBI Governor Shaktikanta Das said that inflation targeting had worked well.

“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the inflation targeting framework, barring the Covid-19 period, need to be reinforced in the coming years even as we exit the pandemic and seek to exploit the opportunities of the post-Covid world,” he had said.

Recently, Das had also said a wider band for targeting inflation would be meaningless because it would dilute its effectiveness in setting monetary policy.

In a working paper released by the RBI in December, authors Deputy Governor Michael Patra and Harendra Kumar Behera had also defended maintaining inflation target at 4 per cent in the medium term.

“If it ain’t broke, don’t fix it,” it had said.

The government has echoed this view, and has favoured maintaining the status quo for targeting inflation. In a recent interview with Business Standard, Prin­cipal Economic Adviser Sanjeev Sanyal had said the current system had worked reasonably well to bring down inflation.

“I don’t think there is any need to tinker with it too much. Also, it’s a reasonable range of 2-6 per cent and we have very rarely gone outside it,” he had said. The CPI basket can be updated, and the exercise is periodically done by the government and the RBI, Sanyal had said.

However, Madan Sabnavis, chief economist at CARE Ratings, said India conventionally had had high inflation, and the MPC’s inflation target should be increased to 5 (+/-2) per cent.

“Ever since the MPC was constituted, we have seen low CPI inflation, but historically, it has been above 5 per cent. Targeting 4 (+/-2) per cent is not reasonable,” Sabnavis said.

The MPC has deviated from the inflation target last year due to the pandemic, and the government should address the question whether growth should be targeted along with inflation, Sabnavis said. Another important argument, Sabnavis said, is whether CPI inflation was the better index to be targeted, given the fact that food prices were volatile.

The government must explore if WPI inflation can be made an anchor, he said. “If the WPI is chosen to be the right index, then the target cannot be 5 per cent,” he said. To exclude the impact of high, volatile food prices, the MPC can also be mandated to target core inflation, he said. Core inflation is calculated after taking out food and fuel items.

Wholesale inflation at 2%, no rate cuts seen

Source:, Feb 16, 2021

NEW DELHI: Inflation, measured by the wholesale price index (WPI), rose to 2% in January from the previous month’s 1.2% on the back of rising manufactured product prices. Economists said they do not see any interest rate cuts from the Reserve Bank of India for now, despite retail inflation showing signs of cooling.

Data released on Friday had shown retail inflation cooling to a 16-month low of 4.1% in January as some food and vegetable prices eased. Retail and the WPI inflation have shown signs of diverging.

The WPI numbers released by the commerce and industry ministry on Monday showed prices in the manufactured products category rose to an eightmonth high, which economists said was an encouraging sign as it displayed the return of pricing power for companies.

The food segment displayed sharp deflation and inflation in food articles contracted to a 26-month low of 2.8% in January. Prices of vegetables fell 20.8% for the second consecutive month. Inflation in onions fell for the third month by 32.6%, the data showed.

Inflation in primary articles, which accounts for 22.62% of WPI, registered the sharpest decline in 43 months, according to a note by Care Ratings.

Wholesale prices is likely to register an up-tick in the coming months, with sustained surge in manufacturing. Core inflation (minus food and fuel) rose to a 27-month high of 5.1% in January and experts said the strengthening of pricing power could push it to 7-7.5% range in the first quarter of fiscal year 2022.

Retail inflation at 16-month low in Jan

Source: The Hindu Business Line, Feb 12, 2021

New Delhi: With a dip in vegetable and sugar prices, retail inflation skid to 16-month-low of nearly 4 per cent in January. Though this seems to be a comfortable zone for the Reserve Bank of India, it might not prompt immediate downward revision of policy interest rate.

Meanwhile, industrial growth is back in black in December.


Retail inflation, based on Consumer Price Index (CPI), continued to slide in January and has now touched 4.06 per cent. This is the lowest after 4.62 per cent in October 2019. The headline rate for January is near median rate of targeted inflation range of 4 per cent with 2 per cent in both directions.

However, this is unlikely to prompt the RBI Governor-led Monetary Policy Committee to lower the policy rate, better knows as Repo Rate (the rate at which the RBI lends money to Scheduled Commercial Banks for a short period). One key factor could be continuous increase in fuel prices and that will also have a multiplier. Also, the RBI would like to wait for some more time to see the trend not just in headline but also in core inflation (excluding price movement in volatile products such as food and fuel). The next meeting of the MPC is likely to take place in April.

Food inflation, based on Consumer Food Price Index (CFPI), declined to 1.89 per cent in January against 3.41 per cent in December. Retail inflation for vegetables in January was negative 15.84 per cent while for sugar and confectionary it was negative at 0.26 per cent. Bird flu also appears to have affected the rate of inflation for eggs as it is now around 13 per cent against 20 per cent or more in the previous months.

However, the bad news is that inflation for non-foods has recorded a rise, which is why Aditi Nayar, Principal Economist with ICRA, expects inflation to resume an uptrend in February-March 2021. “We do not think that today’s softer-than-anticipated print creates the room for an imminent rate cut,” she said. Further, she mentioned that food prices have displayed a mixed trend so far in February. The rise in onion prices, as well as higher crude oil prices and their transmission into retail fuel prices, are areas of concern that need to be monitored.

“If the pace of growth in Q4 FY21 exceeds the prevailing tepid expectations, the stance may be revised to neutral in June 2021 MPC review. However, we anticipate that the MPC will err on the side of caution, and change the stance of monetary policy to neutral in the August 2021 review or later, only after there is greater confidence related to the economic revival,” she said.


Improved manufacturing and continuous rise in electricity production helped industrial growth, based on Index of Industrial Production (IIP), and will be back in positive territory as December saw a growth of 1 per cent against over 2 per cent contraction in November. Manufacturing, with weight of over 77 per cent in IIP, recorded growth of 1.6 per cent in December, while electricity saw a growth of 5.1 per cent.

Inflation staying above 6% seen as risk to RBI’s interest rates path

Source: Business Standard, Feb 11, 2021

India’s central bank may have to propose raising interest rates if inflation holds above its target for a third straight quarter, prompting monetary and fiscal policy makers to double down on efforts to keep prices in check, according to a person familiar with the matter.

Headline inflation has stayed above 6% for the past two quarters, and breaching that level during the January-March period would require the Reserve Bank of India to inform the government in writing why its Monetary Policy Committee failed to meet its goal of keeping price-growth within the 2%-6% band mandated by law.

The central bank would also be required to suggest remedial action, which in this case would be to raise interest rates to douse price pressures, the person said, asking not to be identified as the deliberations are private. Any rate hike proposed as a remedy risks snuffing out a nascent recovery in Asia’s third-largest economy, the person said.

India’s law also requires the RBI to give an “estimate of the time period within which the inflation target shall be achieved” after remedial actions have been put in place.

A spokesperson for the RBI wasn’t immediately available for a comment. The Ministry of Finance declined to comment.

The RBI kept rates steady last week for a fourth straight meeting to support growth, while separately announcing a plan to sap excess liquidity it had allowed as part of measures to counter the impact of the pandemic. The government of Prime Minister Narendra Modi, for its part, has cut custom duties on items like pulses, edible oil and oilseeds to help ease some of the price pressures.

Consumer prices for January are expected to have risen 4.4%, according to the median estimate in a Bloomberg survey before data to be published Friday. That would be the second month within the RBI’s range after December’s 4.59% increase.

What the amended RBI Act, 1934, says:

  • Where the RBI fails to meet the inflation target, it shall set out in a report to the federal government:
  • the reasons for failure to achieve the inflation target
  • remedial actions proposed to be taken by the Bank; and
  • an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions

The central bank’s inflation expectations survey of households shows price pressures are entrenched. While a sharp drop in vegetable prices during December helped lower inflation expectations of households for the current period and three-month horizon, the one-year ahead inflation expectations were sticky at 10.1%.

“This signals that households feel uncertain about the medium-term inflation outlook and prefer to build in a certain amount of risk perception in their assessment of inflation risks,” said Kaushik Das, chief India economist at Deutsche Bank AG in Mumbai. “This is not surprising, as global oil prices are now trading above $60 per barrel and any sustained increase could result in prices of transportation and consequently food prices going up with a lag.” Against this backdrop, a change to the mid-point of the CPI inflation target from 4% to 5%, could lead to inflation expectations going awry, he said.

Retail inflation for farm, rural workers eases in December on lower food prices

Source: The Economic Times, Jan 20, 2021

Retail inflation for farm and rural workers eased to 3.25 per cent and 3.34 per cent, respectively, in December, mainly due to lower prices of certain food items. “Point to point rate of inflation based on the CPI-AL (Consumer Price Index-Agricultural Labourers and CPI-RL (rural labourers) decreased to 3.25 per cent and 3.34 per cent in December 2020 from 6 per cent and 5.86 per cent respectively in November 2020,” a labour ministry statement said.

According to the statement, inflation based on the food index of CPI-AL and CPI-RL is at (+) 2.97 per cent and (+) 2.96 per cent, respectively, in December 2020.

Among states, the maximum decrease in the consumer price index numbers for agricultural labourers and rural workers was experienced by Gujarat and West Bengal (-20 points each) mainly due to the fall in prices of gur, onion, green chillies, vegetables and fruits etc.

On the contrary, the maximum increase in the consumer price index numbers for agricultural labourers and rural workers was experienced by Meghalaya (+2 points and +3 points, respectively) following the rise in prices of pulses, mustard oil, fish dry, vegetables and fruits, firewood, plastic shoes and bus fare etc.

The fall or rise in the index varied from state to state. In the case of agricultural labourers, it recorded a decrease of 1 to 20 points in 18 states and an increase of 1 to 2 points in two states.

Tamil Nadu with 1,253 points topped the index table whereas Himachal Pradesh with 823 points stood at the bottom.
In the case of rural workers, it recorded a decrease of 1 to 20 points in 18 states and an increase of 1 to 3 points in two states.

Tamil Nadu with 1,236 points topped the index table, while Bihar with 870 points stood at the bottom.

The all-India consumer price index numbers for agricultural labourers and rural workers for December 2020 decreased by 13 and 12 points, respectively, to stand at 1,047.

The major contribution towards the fall in the general index of agricultural labourers and rural workers came from food with (-) 14.40 points and (-) 13.73 points, respectively, as prices of pulses, onion, potato, cauliflower, brinjal etc declined.

“The inflation based on CPI-AL and RL has dipped to 3.25 per cent and 3.34 per cent which is driven by lower food inflation mainly on account of decline in prices of pulses, onion, potato, cauliflower, brinjal etc,” Labour Minister Santosh Gangwar said in the statement.

India’s December wholesale inflation slows to 1.22% as food prices ease

Source: Business Standard, Jan 14, 2021

New Delhi: The wholesale price-based inflation slowed to 1.22 per cent in December on easing food prices, as per government data released on Thursday.

The inflation based on Wholesale Price Index (WPI) was 1.55 per cent in November 2020, and 2.76 per cent in December 2019.

The rate of inflation based on WPI Food Index decreased from 4.27 per cent in November 2020, to 0.92 per cent in December 2020, as per the data released by the Department for Promotion of Industry and Internal Trade. It is to be noted here that retail inflation had also dropped sharply to 4.59 per cent in December, mainly due to declining food prices.

RBI eyes cooling inflation as it defends targeting framework

Source:, Jan 11, 2021

Inflation in India may finally be slowing, opening the door for the central bank to resume monetary easing and helping it push back against calls for a shake up of its policy framework.

Consumer price index figures due Tuesday are expected to show a 5% increase in December from a year earlier, returning to the Reserve Bank of India’s target range of 2% to 6%. Prices rose quicker than 6% in 11 of the 12 prior readings, hampering the RBI’s ability to counter the pandemic-driven downturn.

The price moderation couldn’t come at a better time for central bank Governor Shaktikanta Das, with the inflation targeting mechanism that’s been in place since 2016 coming up for review this year. The RBI will give its official recommendations in an annual report due in the next few weeks.

Critics, including some in Prime Minister Narendra Modi’s government, are seeking a widening of the inflation targeting band so the bank can focus on doing more to stimulate growth. Others are calling for policy to target core inflation, which strips out volatile food and energy prices, as well as the current benchmark headline inflation.

The RBI has been gently pushing bank on any changes, through working papers and statements by senior officials. It has argued the elevated headline inflation is a supply-side impact of the pandemic, not a policy flaw.

“I don’t think this is the result of any significant policy errors,” said Hugo Erken, head of international economics at Rabobank in Utrecht. “But the RBI needs ways to restore faith of agents in the economy that 2%-6% is an inflation rate that will eventually be achieved.”

Flaw or not, India’s above target CPI has kept the RBI from adding to the 115 basis points of easing it delivered in the first half of 2020, although some of its peers across the Asia-Pacific were able to use the rate tool to support their economies, thanks to price-growth that was within or in line with target.

Price pressures in India have for the most part been driven by factors beyond the central bank’s control: costlier food items, broken supply chains due to a strict lockdown, and hefty levies on already rising retail fuel prices.

Crude oil, India’s top import, has surged more than 40% since the end of October thanks to a series of vaccine breakthroughs, and the increase is an added threat to inflation, as also trade balance — making the economy heavily reliant on foreign inflows in stocks and bonds to help finance import needs. Indian bonds saw outflows of more than $13 billion last year amid concerns a wider fiscal deficit and economic contraction will lead to the nation’s credit score being cut to junk.

That’s part of the reason some economists have called for abandoning the current framework of tracking retail inflation to decide monetary policy, and instead target core prices, which strip out volatile food and fuel costs. And then there are those that advocate adopting dual targets of inflation and growth.

On his part, Governor Das is clear that anchoring inflation expectations is the RBI’s primary task so that policy credibility is not undermined. To that effect, he cautioned the government against loosening the current inflation target band, saying doing so would dilute its effectiveness toward setting monetary policy.

His comments came after the government was said to consider allowing the central bank to focus more on growth despite stubbornly high consumer prices.

The thorn in the inflation flesh has been food prices, which appears to have divided economists in the middle. It accounts for nearly half of India’s CPI basket, making it the highest among inflation-targeting countries.

Sengupta’s views are echoed within the central bank. GV Nadhanael, an assistant adviser in RBI’s department of economic and policy research, recently wrote that while food can prove to be sticky, targeting core prices instead of the retail consumer prices carried the risk of under-predicting inflation and lead to policy missteps.

Dual Targets?

So can the RBI adopt dual targets wherein it keeps an eye on both underlying as well as headline inflation? That’s tough, is the assessment of Amol Agrawal, an assistant professor in the department of economics and public policy at Ahmedabad University.

“It is best to stick to one,” he said. And his reasoning: “If we move to core it is just 45% of the basket which will hardly be a target.”

Governor Das himself hinted that the headline CPI is likely to form the central target.

In the end, the Flexible Inflation Targeting regime, which has been successful in anchoring expectations, is likely to stay. A recent working paper from the International Monetary Fund on “India’s Inflation Process Before and After Flexible Inflation Targeting” found there is evidence that expectations have become more anchored since 2015. “Central banks using FIT as a framework have a clear goal by adopting a nominal anchor rather than targeting intermediate variables, such as money supply, credit growth, which have an indirect relationship with price stability at best,” said Rabobank’s Erken. “Policy transparency enhances central bank credibility to such an extent that it leads to lower inflation expectations.”

Retail inflation eases marginally to 6.93% in November

Source: The Economic Times, Dec 14, 2020

Retail Inflation has eased marginally to 6.93% in November due to considerable easing in vegetable prices. Retail inflation had remained above 7 per cent for two month in a row. It had surged to six-and-half year high of 7.61 per cent in October, 2020.

RBI Governor on central bank and inflation
In an interview, RBI Governor Shaktikanta Das told ET that at least for now, inflationary pressures are not going to weigh on the central bank’s policy formulation as they are more due to supply-side factors and not because of low interest rates or surplus liquidity. Read the rest of this entry »

India’s retail inflation expected to stay above 7% in November, economists say

Source: The Economic Times, Dec 10, 2020

India’s retail inflation probably fell in November from October but remained above the Reserve Bank of India’s target, amid high food and petrol prices, a Reuters poll of economists showed.

Retail inflation has stayed above the central bank’s comfort zone of 2% to 6% for seven consecutive months, a streak not seen since August 2014.

The Dec. 4-9 poll of 48 economists forecast a drop in inflation in November to 7.10% from 7.61% in October, which was the highest since May 2014.

If realised, November’s rate would be above 7.0% for the third consecutive month. Read the rest of this entry »