Vijay Kumar Gaba

In this context, I consider it pertinent to note what the industry and markets are saying about the current state of affairs of the Indian economy, particularly the inflation and demand outlook.

The rating agency CRISIL notes that “Inflation based on the Consumer Price Index (CPI), or retail inflation, rose to 6.1% on-year in February compared with 6.0% in January and 5.0% a year ago. This marks the fifth consecutive month of rising inflation, and the second month of it staying above the Reserve Bank of India’s (RBI) upper target of 6%. Food has been driving the rise, as the benefit from a favourable base is wearing off. Core retail inflation remains sticky around the 6% mark, while fuel inflation softened as domestic fuel prices did not change.”

(Note: Beginning 21 March 2022, the oil marketing companies have started to raise the fuel and cooking gas prices, after a gap of almost five months.)

The brokerage firm Motilal Oswal Financial Services (MOFSL), highlighted a business update released by the FMCG major Hindustan Unilever (HUVR). Speaking about the demand environment, the management reportedly emphasized that “Sharp inflation is affecting consumption. Cumulative growth, for categories in which HUVR is present, was flat with a high single-digit volume decline in Jan-Feb '21. High inflation is affecting volume growth. Down trading is being witnessed towards lower unit packs (LUPs), but not yet towards lower-end brands. The mix is deteriorating both YoY and QoQ in a quarter where relatively higher mobility should have brought back demand for high margin beauty products. Instead, the customer is tightening their purse strings on premium purchases.” The management had warned about persisting pressure on margins due to raw material inflation. It now believes that “The Ukraine crisis has further exacerbated cost inflation, particularly in palm oil and crude-related RMs like LAB, soda ash, and packaging costs, all of which have seen a sharp sequential inflation. A greater impact of the Ukraine crisis will result in higher inflation in coming months.”

Kotak Securities, highlighted the challenges being faced by the steel industry. In a recent note, it noted that “Prices of coking coal, iron ore and steel have surged sharply amid the ongoing war, as Russia and Ukraine are large exporters of these commodities. Domestic steel price hikes, so far, are insufficient to cover cost inflation, however, the consumption lag suggests higher margins in 4QFY22E. We expect steel prices to rise further, leading to demand destruction partly offset by higher export opportunities.” In the meantime, the European Union has increased duties on stainless steel imported from India.

JM Financial note also warned about likely demand destruction for steel. In a recent note the brokerage emphasized that “Rising raw material cost pressures driven by geopolitical factors – NMDC iron ore price hike (INR900/t CYTD for fines) and US$303/ton CYTD increase in coking coal price to US$660/ton spot, has driven a sharp steel price increase in Indian domestic markets. Dealer price for HRC and Rebar recorded a jump of INR10.2k/19.3k per ton respectively CYTD – some of it driven in anticipation of impending mill price hike. Gross margins for flat products are likely to witness a drop of INR8.1k/t QoQ despite the steep steel price hike. While, on the one hand Ukraine-Russia (~10% of global steel exports) situation has thrown open the European steel market to India, the record high domestic steel price may dampen domestic demand in rural/construction sectors in our view.”

In a separate note, Kotak Securities highlighted the downside risks to the growth forecasts. It said, “With the ongoing Russia-Ukraine conflict’s impact on commodity prices, especially crude prices, we see downside risks to our growth estimates of 8.1% (with crude at US$80/bbl). Under various scenarios of average crude prices (US$120-80/bbl), we estimate FY2023E real GDP growth between 7.0-8.1%. Given the volatility in commodity prices and probable outcomes of the geopolitical tensions, the adverse risks to India’s inflation and growth outturns remain high.”

In a sector note, Edelweiss Securities highlighted the sluggishness creeping in the road construction sector. The note reads, “Overall road award from NHAI and the Ministry of Road Transport and Highways (MoRTH) remained sluggish in Feb-22, with only ~735km of road projects awarded during the month. YTD project award stands at ~7,618km (with NHAI’s share at 2,988 km), down 10% YoY. Road construction in Feb-22 stood at ~1,361km. YTD road construction stands at ~8,045km, down 28% YoY. The 2022 Union Budget (refer to, Union Budget – A mixed bag) witnessed a mere 1% YoY increase in outlay for roads space. This has raised concerns about the trajectory of road capex going ahead.”

Edelweiss also noted, in a separate note, that “The paint industry has never seen such sharp cost inflation in at least the past four decades. Price hikes for the end-consumer has been at record levels too. Hence, we do not have a precedent to see how demand behaves with such sharp price hikes. But, we do expect some adverse impact on demand in the near-term (especially at the lower-end)”

The higher oil prices shall also reflect on current account deficit and INR exchange rates. As MOFSL notes, “Due to higher commodity prices (including fuel), we have almost doubled our FY23 CAD forecasts to 1.5% of GDP, with slight downward revision in FY22E. Further, while India’s inflation is likely to remain broadly intact, higher US inflation could lead to some appreciation bias in INR against USD, which is reflected in our INR forecasts. We have revised our USD:INR expectations to average 75.6/76.8 in FY23/FY24 vis-à-vis earlier forecasts of 76.4/78.3, respectively.”

Notwithstanding the assurance of Governor Das to maintain adequate liquidity in the system to support growth, the banking system liquidity surplus has been narrowing. For the week ended 17 March 2022, the average banking system liquidity surplus at Rs 5.78 lakh crore was Rs 1.46 lakh crore less than that in the previous week (Rs 7.24 lakh crore). Some of this liquidity outflow could be attributed to advance tax payments. But the present net surplus liquidity is more than 40% lower than the peak surplus in 2021.