According to the India Strategy report of Motilal Oswal Financial Service, international commodity expenses have surged in CY21, with the CRB core commodity index rising 70% YoY in Apr’21. The current feedback of Chinese policymakers have resulted in some moderation and volatility in prices.
Nonetheless, the rise in international commodity prices in CY21 has brought the focus back on inflation. While food/agri prices have proven a quicker increase, the CRB index is supported by a decrease base of Apr’20. The rise in prices comes amid an increase in COVID 19 instances and restricted monetary activity. With the uncertainty in the demand environment, it would prove difficult for companies to bypass on the rise in commodity costs.
“In a restrained demand environment, due to broad-based lockdowns and macro uncertainty, corporates would be reluctant to pass on the higher input prices to consumers and would first exercising other P&L levers to control margins. Sectors that are probably to be most impacted include Auto, Consumer Staples, and Consumer Durables. On the different hand, Metals and O&G (upstream companies) would be the clear beneficiaries of the surge in commodity prices,” India Strategy document of Motilal Oswal Financial Services says.
Global inflation returned in focus; implications for policymakers
Although the CRB index is partly supported by a low base (35% YoY decline in Apr’20), food/agri expenditures and base metals are showing a much faster and more robust enlarge vis-à-vis fuels and precious metals, according to the report.
“With the low base setting in up to Dec’21, inflation may continue to vogue upwards. However, central banks across the world are possibly to proceed to look past this. If the excessive inflation trends maintain in CY22, this is probably to pose a concern for financial authorities.
Another trend, however, may additionally pose a issue for India. In the previous decade or so, inflation trends in base metals and fuel commodities have followed every other very closely. Although international food prices have firmed up, the impact on India’s fundamentals stays limited. Furthermore, the share of industrial metals is also low (~10%) in WPI. Nevertheless, if fuel expenses also start rising, comparable to base metal prices, the situation for India could turn unfavourable very quickly,” says the Motilal Oswal Financial Services India Strategy report.