retail price inflation: Resumption of consumption, capital far behind?

Foreign portfolio investors (REITs) are continuing the Indian consumer story, directing an overwhelming portion of recent inflows into consumer and financials stocks. This is consistent with the latest GDP figures showing consumption outpacing investment and government spending in April-June.

Resilient urban consumption has benefited from the reopening of contact-intensive services even as demand for durable consumer goods pushes factory production. Households continue to increase bank lending when buying houses, cars and durable consumer goods. But the pace of these credit-driven purchases could slow as interest rates rise. Consumer non-durables should benefit when monetary tightening lowers retail price inflation.

Industrial credit demand, which has come out of a multi-year range, may find new impetus thanks to the recovery in consumption. So far, industrial credit demand has been driven by targeted lending during the pandemic to industries with a higher concentration of smaller businesses that have a broader employment footprint.

Some segments of heavy industry are also embarking on a new cycle of rising debt in line with a government-led surge in capital spending, a move towards self-reliance in strategic areas and government efforts. India to provide a ‘China plus one’ manufacturing opportunity.

With increasing equity stake in India’s consumer outlook, this segment’s debt exposure is likely to increase as capacity utilization improves. Indian companies are well positioned to ride out the bull interest rate cycle, according to an S&P stress test. The path for interest rates is shallow and starts from a low base. System-wide liquidity is not an issue, reducing rollover risks.

Leading companies have built up buffers by locking in low rates during the pandemic to fund the subsequent investment cycle. Finally, banks have strengthened their lending capacity by improving capital buffers and reducing distressed assets. The revival of demand in India is one of the few bright spots in a bleak global economic landscape. Capital might gravitate towards it.

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