Indian companies are running out of room to absorb rising raw material costs, which could force the Central bank to unwind stimulus. faster-than-expected and threaten a stock market rally. that has earned billions for investors.
Companies from the Indian unit of Unilever to Tata Motors are increasingly complaining about pricier inputs. and are frustrated at not being able to fully pass on costs to consumers reeling from the pandemic-induced economic shock. But it is only a matter of time before the pass-through happens, warn economists.
Consumer optimism "Firms are yet to pass on the increase in underlying input costs due to weak demand," said Sameer Narang, Chief Economist at Bank of Baroda in Mumbai. "This will change as growth and consumer confidence revives."
That recovery in consumer optimism may be just around the corner, according to a survey by the Reserve Bank of India (RBI). While households were downbeat about the current economic conditions, they are hopeful about the year ahead prospects, the RBI said.
Any increase in prices could end up fanning inflation further, complicating the Central bank's efforts to support the economy. While Governor Shaktikanta Das has so far maintained that the inflation hump is 'transitory', the RBI this month for the first time since October last year saw consensus elude it on the need to keep interest rates lower for longer to ensure a durable economic recovery.
With inflation already hovering above the RBI's upper tolerance limit of 6 per cent for the past two months, one of the rate-setters, Jayanth Rama Varma, expressed reservations about continuing with the accommodative policy stance, Das told reporters on Friday.
The RBI separately raised its inflation forecast for the fiscal year ending March to 5.7 per cent from 5.1 per cent previously, even as Das underlined the effect of higher global commodity prices, broken supply chains and steep local fuel taxes on price growth.