Its implications for policymaking are not far to seek. They help explain why the central bank in Mumbai and its counterparts in the West have different takes on the threat emanating from inflation.
Equities worldwide have surged in December amid expectations that the price cycle in the US is very much on the mend, increasing the likelihood of an early start to rate easing by the Federal Reserve. US bond yields have declined more than 70 basis points in three months, translating into a slide in excess of 14%.
The majority of the shrinkage in US borrowing costs is of much more recent vintage: In the past one month, US ten-year bond yields have declined more than 12%, with the latest Fed commentary shortening the odds on an early end to the rate hardening cycle that was the steepest since the 1970s’ oil crisis.
By contrast, the minutes of the latest meeting of the Monetary Policy Committee (MPC) are far more circumspect. Members of the key Reserve Bank of India (RBI) panel have indicated that the rate-setting committee will not cease its steadfast and unwavering vigil on price stability.
Seen in the prudential light of the November spike, the MPC stands amply vindicated on prioritising price stability over every other objective. Profits & Price Stability But, does the central bank have any major cause for concern beyond farmgate prices? Probably not. Inflation in manufactured and processed products will unlikely surge, evidenced in the trend in recent corporate performance.
Indian companies have lately boosted margins from the 2020 trough, but volumes have consistently trailed the exponential growth in operating profitability.
India’s corporate profits to gross domestic product (GDP) ratio, which had fallen to below 2.5% toward the end of the last decade on deteriorating bank assets and higher input costs, has since recovered to near 4%. That’s still about a quarter below the levels seen before the 2008 global financial crisis.
This corporate profit-GDP ratio trendline is expected to head north, with some experts pencilling in this ratio at about a twelfth of the GDP before the end of this decade.
That would mean the current corporate profit trend is only reaching the midpoint of the expected range, pointing to continued buoyancy in operating profits, anchored in reasonably stable input costs.
“Currently, falling costs and healthy sales have raised profits, despite factors that are restraining demand in India. Some firms have reversed earlier price increases that passed on higher costs. Higher sales help spread costs…,” MPC member, Ashima Goyal, said at the latest review of the panel.
Sell More, Make More
“Lower price and higher volumes is a strategy that delivers profits in India,” Goyal added.
She has, in one sentence, captured the broad directional trend in corporate performance. An extensive ET analysis of 3,573 companies showed that at the end of the September quarter, profit growth surged to a two-year high in excess of 40%, while revenue growth stayed decidedly circumspect – just north of 6%.
The trend wasn’t drastically different in the June quarter either, suggesting that unless weighed down by input costs, which seem headed lower in time-value terms in a slowing global economy, Indian manufacturers and product makers will unlikely raise prices and risk volume loss in the bargain.
That would take a major variable out of the equation for the RBI as it seeks to ensure price stability, especially in a year in which the world’s biggest democracy will choose a government that would have the task of taking India to the top three in the global economic order before its mandate runs its course.
