retail inflation: Consumption pickup, capital far behind?

Foreign portfolio investors (FPIs) are chasing the Indian consumption story, directing an overwhelming part of recent inflows into consumer and financial services stocks. This meshes with latest GDP figures showing consumption outpacing investment and government expenditure in April-June.

Resilient urban consumption received a leg-up from reopening of contact-intensive services even as demand for consumer durables is pushing factory output. Households continue to pull up bank lending as they buy houses, cars and consumer durables. But the pace of such credit-driven purchases could slow as interest rates rise. Consumer non-durables should benefit when monetary tightening pulls down retail inflation.

Industry’s demand for credit, which has broken out of a multi-year range, can get a fresh impetus from the consumption revival. So far, industrial credit demand is being driven by targeted lending over the course of the pandemic to industries with a higher concentration of small enterprises that have a wider employment footprint.

Some heavy industry segments are also embarking on a new debt-enhancement cycle in step with a government-led capital expenditure push, a move towards self-dependence in strategic areas, and India’s effort to offer a ‘China plus-one’ manufacturing opportunity.

With equity interest increasing in India’s consumption prospects, debt exposure to this segment is likely to rise with improvements in capacity utilisation. Indian companies are well placed to ride out the interest rate upcycle, according to an S&P stress test. The interest rate trajectory is shallow and is starting out from a low base. System-wide liquidity is not a concern, lowering refinancing risks.

Top drawer companies have built buffers by locking into low rates during the pandemic to fund the subsequent capex cycle. Finally, banks have built lending capacity by improving capital cushions and reducing stressed assets. India’s demand revival is one of the few bright spots in a grim global economic landscape. Capital could gravitate towards it.