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Inflation adds to corporate woes

Having exhausted its fiscal options, monetary policy doesn’t leave much room for manoeuvre and is indeed fraught with risks, reports Suman Layak.

business Updated: Apr 11, 2008 21:57 IST
Suman Layak

With the government not only drawing a blank on controlling the runaway inflation but clamping down with price controls, corporate India is facing a big squeeze – uncontrollably rising input costs on the one side and the resultant increase in the cost of money, through rising interest rates, on the other.

A slowdown, therefore, is inevitable. For, having exhausted its fiscal options, monetary policy doesn’t leave much room for manoeuvre and is indeed fraught with risks. If the rupee, for instance, is allowed to strengthen, imports will become cheaper but technology companies and exporters will cry foul. “The government had already banned use of external commercial borrowings for companies’ capital expenditures,” said Prabal Banerjee, group CFO, Hinduja Group. “An increased inflationary scenario will increases interest costs.”

Higher interest rates, in turn, will hurt the real estate sector as home loans will become costlier. “If home loans are costlier it will reduce the number of inquiries for homes,” said Anuj Puri, chairman and country head, Jones Lang Lasalle Meghraj, a real estate brokerage. “However, this phenomenon is cyclical and will even out again as inflation is curbed.” According to a Goldman Sachs report, “Given that raw material costs continue to escalate, producers are facing pressure on their profit margins, which in turn can hurt investment.”

Not too many companies will be able to pass on the price pressure to consumers, who are already burdened by food inflation. While this may not impact their results for the quarter ended March 31, 2008, it will show up in the next quarter.

(With inputs from Indulal PM & Lalatendu Mishra)