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.
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 timesThus, 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.