While India Inc’s sales performance in the fourth quarter of the last fiscal has generated hope and pointed to green-shoots in the economy, rising inflation threatens to spoil the party.

Not only will it stall chances of an interest rate cut, a further rise in inflation may even push the Reserve Bank to hike lending rates, which have so far been benign to corporates.

While consumer price index-based inflation rose sharply in April to 5.4 per cent year-on-year — from average inflation of 4.9 per cent in FY16 — wholesale price index (WPI)-based inflation rose 0.34 per cent and ended its 17 months negative streak led by higher food prices.

Monsoon vital

Increase in inflation has put aside chances of a rate cut in the near term and this year’s monsoon has become critical for the overall prospects of the economy, said a head of research at a domestic brokerage firm.

Dhananjay Sinha, Head-Institutional Research, Economist & Strategist, Emkay Global Financial Services added: The government is likely to hike minimum support prices by 8-10 per cent as it has promised to double farm income in next five years.

The Reserve Bank’s projection of inflation for March remaining in and around 5 per cent has higher upside risks. This is likely to refrain RBI from reducing the rates further in the near term scenario.

Trying times

Thus, profitability is also at risk. While a possible rate hike by the US Federal Reserve can impact currencies and commodity prices, the progress of South-West monsoon is a bigger event for India Inc. Both Skymet and India Meteorological Department have predicted above-normal monsoon this season.

The outlook has turned challenging for corporates and it might take some more time for India to see a real revival. Benefits of lower input costs — the mainstay for propping up volume growth and revenues till now — are slowly eroding.

In the March quarter, raw material as percentage to sales saw slowest decline of 367 basis points in the last five quarters.

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