Through monetary policies, the Reserve Bank of India (RBI) aims to achieve three key objectives - price stability, growth and financial stability. Given the inflationary pressures, the newly appointed RBI Governor opted to continue with the precautionary stance adopted by his predecessor. He hiked the repo rate by 0.25% to 7.5%. In all likelihood it seems the actions taken in the recently concluded monetary policy review was to focus on the first objective i.e. of achieving price stability.
Stock markets have reacted negatively to this development given the short term concerns over growth, credit disbursal, inflation and problem of non-performing assets.
But there may be a silver lining for India Inc.
As per an article in the Mint recently, India Inc. should not be too concerned over the Reserve Bank of India's (RBI) recent actions for taming inflation. While there may be growth concerns in the short term on the back of higher interest rates, these developments would result in more sustainable earnings over the long term.
The author is of the view that RBI's moves would help tame inflation. As inflation rates come down, it would benefit companies in the form of lower operating expenditure. With food inflation - the key culprit behind the high inflation levels in India coming under control; it would benefit companies in the form of lower salaries and wage rates in the long run. Given that employees at the minimum expect salary hikes enough to cover the rising cost of expenses, companies could possibly be in a beneficial position given that this would not be the case going forward. While price rises would be possible on the back of rising purchasing power of consumers (due to rising salaries), this effect would tend to increase costs as well. The cycle would continue as such...
How does this impact your stocks selection approach?
Well, not much should change we believe. Inflation or no inflation, investing in quality companies that have strong moats can take care of all concerns over the long run. Another way of thinking about this is of being a strategy that beats inflation as such companies are usually able to pass on costs to customers. And when this is the case, the requirement for capital to meet their capex requirements would be less each passing year, thereby leaving more money for equity shareholders in the form of dividends.