The medium-term implications of commodity prices for inflation are worrying: Rahul Bajoria, Barclays


I would be more worried about the medium term implications of this particular increase in commodity prices and what it means for consumer price inflation, as there is a risk that inflationary pressures will spread a bit more, a declared Rahul bajoria, Chief Economist for India, Barclays to ET Now’s India Development Debate. Edited excerpts:

What is your opinion on the inflation figures? Do you think this is a matter of concern?
This should be concerning because I think what happened compared to last year, we had high inflation, but the drivers of inflation are changing compared to 2020. This year we had more than inflation induced by commodity prices. So, the growing gap between WPI inflation and CPI is a reflection of the squeeze in on-the-ground margins that has occurred and we also see this in several survey data.

If you look at the PMI entry and exit cost surveys, they clearly show that last year widening margins gave way to significant squeeze in company margins. As activity levels accelerate, the ability to pass higher commodity prices on to consumers will increase. I would be more worried about the medium term implications of this particular increase in commodity prices and what it means for consumer price inflation, as there is a risk that inflationary pressures will spread a bit more.

There are already signs of this, at least in the food basket; core inflation also remains very high. Now, of course, the problem is that monetary policy can’t answer it, but the RBI certainly won’t be happy with the numbers that have come out.

What can the government do to ease the burden of inflation? What are the political measures they have?
Much of this could be about trying to moderate food prices at the margin through some supply side initiatives or trying to import more food grains. But the difference between inflation this year and last year is that supply chains aren’t really disrupted. So it’s not exactly a temporary shock. To give you an example, this year, food inflation is increasing mainly in areas that require refrigeration, more defined logistics such as fruits, meat; which require cold chains, etc.

This is because of higher operating costs and even if we lower taxes on fuel and this comes at the expense of a higher budget deficit, it could just mean that inflation is coming and hitting us with it. a slight lag because in India the relationship between government deficits and inflation is also reasonably well defined. If this comes at the expense of a higher cost of borrowing, a higher borrowing requirement, we may not necessarily be spared from the inflationary shock because, at the end of the day, someone must foot the bill.

From this point of view, imported inflation is something that really cannot be fought. We just have to digest it. This will have implications for the revival of demand. This is something that has more implications for companies in the short term, because what we have seen is that the margins have been reduced. Unlike last year when margins were expanding, this year the margins have been drastically squeezed, which can hurt underlying profitability, even in an environment where top line revenue growth appears. reasonably correct.


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