No upside left in inflation in near future

by Manasi Swamy

Retail price inflation in India remained stubbornly high at 6.23 per cent in June 2021, after its May 2021 surge of 6.30 per cent. This is the second consecutive month when inflation has remained above the Reserve Bank of India’s (RBI) comfort zone of 2 to 6 per cent.

The food group, which is the largest component of the Consumer Price Index (CPI), reported a price inflation of 5.2 per cent in June 2021. A few items in the food basket witnessed very high inflation. Vegetable oil prices rose year-on-year by 34.8 per cent, fruit prices were up by 11.8 per cent and pulses 10 per cent. Inflation in eggs, fish & meat, and prepared meals, snacks, sweets, etc ranged between 6 and 7 per cent, while inflation in sugar and milk remained muted at 0.8 per cent and 1.9 per cent, respectively. Cereals turned cheaper in June 2021. Their prices ruled two per cent below their year-ago level.

The June 2021 inflation was largely imported. Prices of commodities, particularly crude oil, steel and cotton have been rising globally for some time, putting an upward pressure on the domestic prices. Unwilling to absorb this additional cost pressure, producers of consumer goods and service providers in India have hiked prices of their offerings.

Firm petroleum fuel prices translated into a high inflation of 11.6 per cent in transportation in June 2021. Inflation in prices of petroleum-based cooking fuel kerosene was also high at 69.4 per cent. LPG prices were up y-o-y by 27.8 per cent in June 2021. A consequent switch by households to traditional alternate cooking fuels resulted in a rise in demand for these. Cow dung reported double-digit inflation of 10.8 per cent in June 2021, while fire wood prices rose by 5.8 per cent.

Prices of goods like clothes, footwear, cars, motor cycles & scooters, washing machine, stoves, pressure cooker and utensils recorded inflation exceeding six per cent in June 2021. These goods use steel and cotton as their key inputs, prices of which have been rising sharply in the international market. Manufacturers of these goods have passed on a large part of the input cost pressure to the end-users by hiking prices of finished goods.

There are fears that inflation may remain above six per cent or even rise further going forward due to further pass through of rise in commodity prices. We do not rule out a further pass through of input cost pressure in consumer durable prices and also acknowledge their sticky nature. Yet, we believe that inflation will not rise any further. In fact, it may moderate to 5.8 per cent, a little below the upper limit of the RBI’s comfort zone in the second quarter of 2020-21. There are five main reasons to believe so. We discuss these below.

First, food inflation is likely to inch down in the September 2021 quarter as output of pulses and oilseeds, which are currently driving the food inflation, is expected to increase in double-digits during the ongoing kharif season. Edible oil prices softened in the international market by 9.8 per cent in June 2021 compared to May 2021, according to the data released by the Food and Agricultural Organization of the United Nations (FAO). International edible oil prices have a strong bearing on the domestic price movement as India meets half its edible oil demand through imports. In addition, the government has cut effective duty on crude palm oil imports by five per cent to 30.75 per cent with effect from June 30, 2021 up to September 30, 2021. This is expected to cap any upside in vegetable oil prices. Data collected from mandis already shows a mild downward movement in edible oil prices in July 2021.

It needs to be noted that food prices are quite susceptible to the vagaries of nature. Our forecast assumes a normal south-west monsoon as projected by the IMD. Any deficiencies in the southwest monsoon or disruptions caused by it can lead to a spike in food prices and change the direction of headline inflation entirely.

Second, the northward marching international crude oil prices have begun to soften following the OPEC and its allies’ decision to pump 40,000 barrel per day more each month starting in August till December 2021. This arrests the upside in international crude oil prices, thereby reducing the chances of any sharp rise in transportation and fuel & light inflation in India.

Third, there is not much upside left in gold prices with global economy recovering from the Covid-19 shock. If prices hover around their current level, they will report a y-o-y contraction in the September 2021 quarter, thus contributing to the downward pressure in headline inflation.

Fourth, the demand-pull pressure in the global commodity market, caused by excess liquidity, may shift to services as western countries open up further. This is likely to ease the upward pressure from imported inflation in India. International commodity prices have a fairly large influence on domestic inflation, whereas services have only a mild impact.

Fifth and the most important reason is that inflation is unlikely to witness any demand-pull pressure domestically in the near future considering the current fall in employment, erosion of household income and weak consumer sentiments.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.1 -0.7
Consumer Sentiments Index
Base September-December 2015
58.2 0.0
Consumer Expectations Index
Base September-December 2015
60.1 0.0
Current Economic Conditions Index
Base September-December 2015
55.2 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Sep 20 Dec 20 Mar 21 Jun 21
New projects 2.53 1.42 2.13 2.74
Completed projects 0.77 0.86 1.15 0.71
Stalled projects 0.08 0.31 0.26 0.32
Revived projects 0.27 0.15 0.22 0.12
Implementation stalled projects 0.09 0.20 0.32 0.25
Updated on: 26 Sep 2021 3:28PM
Quarterly Financials of Listed Companies
(% change) Sep 20 Dec 20 Mar 21 Jun 21
All listed Companies
 Income -6.3 1.6 14.8 42.0
 Expenses -10.3 0.1 7.3 42.2
 Net profit 47.9 58.3 325.4 124.7
 PAT margin (%) 8.4 8.4 8.9 9.0
 Count of Cos. 4,430 4,450 4,355 4,324
Non-financial Companies
 Income -10.5 0.2 17.5 60.8
 Expenses -14.2 -0.8 10.4 62.9
 Net profit 31.8 54.7 232.8 178.2
 PAT margin (%) 8.1 8.8 9.0 8.4
 Net fixed assets 5.9 2.3
 Current assets 0.8 4.6
 Current liabilities -1.8 0.8
 Borrowings 8.5 -4.2
 Reserves & surplus 3.7 12.0
 Count of Cos. 3,282 3,304 3,251 3,239
Numbers are net of P&E
Updated on: 26 Sep 2021 3:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.3 0.2 -1.4
 Expenses 13.6 0.2 -3.7
 Net profit 15.2 -10.4 39.8
 PAT margin (%) 2.1 2.1 7.7
 Assets 9.8 8.5 13.4
 Net worth 8.5 4.4 15.1
 RONW (%) 3.8 3.5 9.5
 Count of Cos. 31,749 30,612 4,154
Non-financial Companies
 Income 14.0 -1.7 -3.9
 Expenses 14.2 -1.4 -5.6
 Net profit 21.4 -21.1 25.5
 PAT margin (%) 2.9 2.4 7.3
 Net fixed assets 5.6 10.0 3.6
 Net worth 7.9 2.1 13.3
 RONW (%) 6.4 4.9 10.7
 Debt / Equity (times) 1.0 1.1 0.6
 Interest cover (times) 2.3 2.0 4.3
 Net working capital cycle (days) 74 81 64
 Count of Cos. 25,424 24,480 3,033
Numbers are net of P&E
Updated on: 20 Sep 2021 8:43AM