X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Inflation: Calm before the storm - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 4, 2007

    Inflation: Calm before the storm

    After being the basis for drastic increases in the Cash Reserve Ratio (CRR) for banks, the Indian Wholesale Price Index (WPI) seems content to stay below 4% for the present. And we surmise that it will stay there for a few more weeks. But as the popular proverb has proven in the past, still waters run deep. Scratch below the surface, and we see turmoil. Turmoil as prices of basic necessities take center stage yet again this year, not just in India but across the world. As the dollar weakens against all currencies in the world, the commodities are in demand as they act as a natural hedge in times of crises in the value of the dollar. Thus, world crude prices are shooting higher every week. Gold leads the pack of most other commodity prices that too have risen in tandem.

    The crude prices reflect supply issues as well: with most of the world's economies going into overdrive in the last couple of years, they have been on the upward trend. India's highly cross-subsidised oil industry has been gamely holding the fort - they shell out more for imports but get the same in return from the buyers as the political will to increase domestic petroleum product prices is lacking. However, a stronger Rupee reduces their import cost significantly.

    Significantly, product prices in the developed world have not kept pace with crude prices as yet. The international prices for diesel and petrol have increased by less than 80 basis points in the first six months of FY08. Thus the rationale for a domestic price hike might not be such a big bogey going forward.

    Fuels expenses
    What are more worrying are the flatter production curves in coal, steel, cement in FY08. This will mean higher prices for these basic goods in the coming few months. And as they form the basis for a whole host of end products, prices of transport and manufactured items are also likely to follow. This will further feed the inflationary spiral.

    Among the plethora of the Consumer Price Indices (CPIs) India has, the one that gives greater weightage to transport and communication, is the one for urban non-manual labourers (UNME, i.e. white collared workers, mostly working in service industry that today accounts for 60% of the nation's GDP). Their transport costs have doubled in the last six years.

    The price rise in fuel and lights and housing has averaged 5.3% annually. It is a proven fact that the price paid by extensive users of electricity in India, is among the highest in the world. As wages try to keep pace with increased costs on these necessities, staff costs for companies go up across the board. And this can be seen in the aggregated quarterly results of Indian companies. This sets the stage for wage price inflation.

    Thus India is in an unenviable position of fielding two issues at the same time - the basic commodity inflation, and secondly as this commodity inflation has remained unchecked, there also is a wage price inflation looming.

    A good crop will help
    It is the prices of agricultural commodities like sugar, cotton, and oilseeds that have been reducing thanks to bumper crops last season, and more expected at the end of this kharif (summer) harvests. It is the foodgrains, fruits and vegetables in the consumption basket that hold the key. The world food grain production is expected to grow by 4.8% in FY08. If the Indian harvests also keep pace, the inflationary tendencies can be kept at abeyance.

    Preliminary findings of a committee having Dr C Rangarajan on board, show almost 50% of India's population yet depend on agriculture for a livelihood. The prayers for a good crop thus intensify!

     

     

    Equitymaster requests your view! Post a comment on "Inflation: Calm before the storm". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS