Inflation and Rupee appreciation effect on India Inc

More than half of Indian corporate companies surveyed by industry body FICCI, have said the overall economic conditions have deteriorated in the last six months with high interest, appreciating rupee and rising cost of raw materials playing the spoilsport.
The overall Business Confidence Index has recorded a decline from 61.2 in the last survey to 55.3 in the present series.
India Inc is deeply concerned over the evolving economic situation with growth slowing on one hand and inflation rising on the other hand. Companies from across the sectors have reported rising prices of industrial raw material as a serious concern with regard to their business performance.
Companies covered in the assessment had a wide range with turnover between Rs one crore and Rs 50,000 crore. The industries included cement, pharmaceuticals, textiles, FMCG, apparel, leather, heavy equipment and machinery, financial services, paper, metal and metal products, chemicals, IT, automobile auto ancillary and steel.
Industry expectations for the coming six months are also not optimistic. The ‘Expectations Index’ has moved down from 62.2 in the last round to 55.7 in the current series.

However, the silver lining lies in the fact that nearly 54 per cent of the participating firms reported that their investments are likely to increase in the coming six months. This figure is much higher when compared to the corresponding figure of 33 per cent obtained in the previous survey. Further, this improvement in the investments index is largely due to higher reported investments by members from the heavy industry.

Many firms are faced with no choice but to increase their prices. Stabilization of the rupee to around Rs 40 to a US dollar has helped some companies in their export business but currency appreciation has dented majority 56 per cent companies of their competitiveness.

On the efficacy of fiscal stimulus that was provided in Budget 2008-09 in the form of an across the board excise duty cut of two per cent, the industry is divided with a majority saying that this would only help them maintain prices for some more time in an otherwise rising costs environment.

Companies have reported that the rising interest rates have done considerable damage to growth and that RBI should take steps to reverse the upward movement in the interest costs.

Rising inflation too has been a cause of concern. Steel prices alone have increased by about 49 per cent in the last one year.

Considering the above inflationary trends, if many had feared a slowdown in the domestic economy, the recent results should take away some of the concerns. The first round of the performance show by domestic companies has been fairly satisfactory. While tech companies, particularly the large ones, have been a mixed bag on their volume growth, there was some good news from the mid-sized and small companies. The much-feared banking sector too gave a mixed signal with private banks maintaining their growth.
If there was a common thread across sectors, it was possibly the margin pressure which dipped in the case of most companies. For instance, based on the recent results announcements, the turnover growth story was still intact with companies recording a jump of 32 percent for the quarter ended March 2008.
Higher input costs besides higher interest rates seem to have put pressure on the profitability of most companies, barring refineries.
At the macro level, the volume growth for the previous quarter should be heartening as domestic companies have managed to hold on to their growth rates on a much larger base. However, the effects of a slowdown would be more visible in the coming two quarters and hence one could see a dip in revenues.
Two sectors which would probably hog the limelight in the coming days would be IT and banking as both have been under pressure due to currency fluctuations. While tech companies have had to struggle with a strong rupee, the banking sector has been caught off-guard by the derivatives on the currency front.
Besides currency pressures, banks have also been hit by the inflationary pressures which have pushed up the cost of borrowing both for banks and their customers. In fact, short-term papers are quoting a yield of over nine percent and 30 banks have also hiked their deposit rates when the tenure is short.
On the other hand, commercial and retail borrowing have been on the lower side and according to bankers, there has been a significant slowdown on the retail credit front and any further hike in the bank rate could put more pressure on the demand side. While interest rates are expected to stabilize in the medium term, a status-quo at current levels could also put pressure on the off-take of credit.
Interestingly, in the current scenario, a handful of sectors such as pharma and metals have managed to maintain their good run both on revenue and bottom lines. Investors have also begun to believe in the steady performance of tech companies if the recent run-up in the prices of many stocks is any indication.
Though the growth rate has slowed down when compared with earlier years, it is possible larger companies can maintain at least a 15-18 percent growth. There is a scenario where the rupee, at least in the near-term, looks like settling around these levels. So, the concern of the currency continuously appreciating and thereby impacting the IT companies seems to be behind. —