How long can Indian companies not pass on inflated cost to customers - An analysis

The inflation monster is now beginning to affect markets, corporates and RBI's thinking of the future policy direction too.

 How long can Indian companies not pass on inflated cost to customers - An analysis

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• The story: It's the inflation bugbear again. Indian companies are facing rising raw material costs, and so far have generally avoided passing on the load to their customers. The RBI may be forced, hence, to unwind its stimulus faster-than-expected. That may hit the stock market rally.
• Passing through the inflation: Companies across a range of sectors - from Unilever Plc to Tata Motors Ltd. - are now complaining about costlier inputs and inability to fully pass on costs to consumers, who are themselves hit by the pandemic-induced economic shock. But the pass-through will happen soon enough.

1. So far, weak demand has forced firms to not pass on the increase in underlying input costs.
2. Since RBI feels a recovery in consumer optimism may be around the corner, and households are hopeful about the year ahead prospects, firms may raise prices.

• What then: Any across-the-board increase in prices could end up pushing inflation even higher, complicating the central bank’s efforts to support the economy. While RBI Governor Shaktikanta Das has maintained that the inflation rise is “transitory,” the RBI Monetary Policy Review committee for the first time in August 2021 saw a break in consensus on the issue of keeping rates steady.

1. Inflation has been generally above the RBI’s upper tolerance limit of 6%, leading to a MPC member Jayanth Rama Varma expressing “reservations” about continuing with the accommodative policy stance.
2. The RBI had raised its inflation forecast for the fiscal year ending March to 5.7% from 5.1% previously, even as Das underlined the effect of higher global commodity prices, broken supply chains and steep local fuel taxes on price-growth.

• Present stance: For now, the RBI has kept funding conditions easy, driving a big rally in the stock markets. Individual investors by the millions were drawn to stock trading as they chased yields amid inflation and low rates denting returns from traditional sources such as bank deposits. About 14 million first-time electronic trading accounts were opened in the fiscal year ended March 2021.
• Rising commodity prices: Companies struggle to protect margins, to protect high share prices. Firms across the manufacturing and services spectrum are trying to strike a balance between sluggish consumer demand and the need for higher sales and profits. It is a fight that is persisting, especially for manufacturing firms who have had to deal with higher prices of commodities and fuel costs for months on end. For the bulk of the previous financial year, most Indian companies resorted to cost cutting to boost profits, according to a study on corporate performance by the RBI.
• Fearful: Some firms are not sure if steep price increases are the right way forward. Dabur’s Chief Executive Officer said that instead of a large rise in one shot, it may opt for calibrated increases. That is due to demand, which is not very resilient. So the firm could get priced out of the market.
• Temporary or permanent: No one knows if inflation here and abroad is “transitory” or not, but many Indian economists are certain that inflation is here to stay. So bond and swap investors are 'pricing in' chances of a faster-than-expected normalization of monetary policy by the RBI. Developed economies had not seen inflation at more than 2% even after incessant quantitative easing. In India, inflation is now running close to 6% for the last one year and almost all inflation prints, headline, core, rural and urban are converging at 6% or upwards implying inflation numbers may not be transitory.
• Summary: Going forward, it is inflation that will decide a whole bunch of decisions at multiple levels.

 

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