Moneycontrol Pro Panorama | No quick fix for inflation

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Inflation is the topic of the moment, not just for central bankers, but also for households, markets, governments and corporates. In fact, companies have been taking innovative steps to tackle it.

For India, inflation traditionally has a lot to do with energy prices, though food prices have also played their part. This time around too, fuel-led inflation has impacted the country, but at the same time high fuel prices and commodity prices along with logistic issues on account of the Russia-Ukraine war have resulted in fertiliser prices shooting up.

The government has tried to absorb the impact of higher fertiliser costs by extending subsidies. Fertiliser subsidy during the year is expected to touch Rs 2.5 lakh crore, the highest ever. But supply side issues and high transportation costs have caused food inflation to raise its head.

Vivek Kelkar in his article points out the complex nature of the crisis in food inflation. He talks about how the closure of fertiliser units on account of high energy prices is causing food inflation. Global food and commodity supply chains today are extraordinarily complex systems, where direct and indirect links are so intertwined that the butterfly effect comes into play, he says.

As for energy prices, Indian refiners have increased the usage of Russian crude. Media reports say India’s bill for imports from Russia has jumped 3.5 times in a year in April to $2.3 billion. Russia is now the fourth-largest crude petroleum supplier to India, after Iraq, Saudi Arabia, and the United Arab Emirates (UAE). Reliance and Rosneft-owned Nayara Energy accounted for 69 percent of the discounted imports from Russia.

Indian companies are taking advantage of the discount offered by Russia, though they are not passing on the entire benefit to the consumers. However, indirectly, lower import costs benefit the country.

The fact is that unless international prices of energy come down, the benefit will not be available to the common man and thus to the economy and markets. Manas Chakravarty in his article argues that investors would do well to keep a close watch on energy and commodity costs and the easing of supply chain disruptions.

The main weapon that central banks have traditionally been using to control inflation is interest rates. This time around too, controlling rates is the foremost weapon in their arsenal. Manish Banthia believes that in terms of interest rate outlook, the RBI will take interest rates to a neutral zone and stop there. There is a limit to which interest rates can be raised without harming the economic recovery.

The battle against inflation is being fought on various fronts. While the retail consumer curtails her purchases to shelter herself from inflationary pressures, corporates use their ability to control cost, squeeze suppliers and use alternative resources.

In the long run, overall inflation needs to come down and that can be possible with either increased supply by debottlenecking and higher production, or lower demand. There is no quick-fix and painless solution to higher inflation.

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Technical Picks: Nifty, Mahindra & Mahindra, Castor seed, GNFC and Adani Enterprises (These are published every trading day before markets open and can be read on the app)Shishir Asthana
Moneycontrol Pro