Inflation: FMCG Manufacturers Opt To Cut Weight Of Items

Opportunity India Desk
Opportunity India Desk May 16 2022 - 3 min read
Inflation: FMCG Manufacturers Opt To Cut Weight Of Items
The Reserve Bank of India (RBI) is expected to increase the interest rate yet again in the monetary policy meeting. This move may affect interest rate-sensitive realty, auto and bank stocks.

The data from Ministry of Statistics and Programme Implementation recently showed that retail inflation in India surged to 7.79 per cent on an annual basis in the month of April owing to higher edible oil and fuel prices.

According to this data, inflation is at the highest level since 8.33 per cent hit in May 2014.

Analysts had expected the Consumer Price Index (CPI) inflation to be around 7.5 per cent, up from 6.95 per cent in the month of March and 4.23 per cent in April 2021. With this, the headline retail inflation has now remained above the Reserve Bank of India’s 6 per cent upper tolerance level for the fourth consecutive month.

To overcome the price rise and unprecedented inflation, the Fast-moving consumer goods (FMCG) manufacturers have opted to increase the price of items in a single-digit while they are also reducing the weight of those items for which price has not been changed or might not be proved a good business decision to change. These companies are actually reducing size of products where price increase might not be advisable idea.

Apart from this strategy, they are also using economical packaging, recycled products, and are cutting spending on advertising and marketing. All these measures are being taken to counter rising inflation due to geopolitical crises such as the Russia-Ukraine War largely, and also fuelled byevents like Indonesia banning Palm oil exports.

There is no sign of inflation coming down in the coming months. Recently, several companies have reduced the grammage of their products available at popular price points, ranging from soaps to noodles, chips to Aloo Bhujia and biscuits to chocolates.

According to the Reuters poll, the Reserve Bank of India (RBI) is expected to increase the interest rate yet again in the monetary policy meeting.

This move may affect interest-rate-sensitive realty, auto and bank stocks like last week when their share price fell drastically following the interest rate hike by the central bank by 40 basis points.

However, it is futile to blame the central bank for the inflation as it is happening due to geopolitical issues.

According to State Bank of India’s Economic Research Department, 59 per cent of inflation is because of the Russia-Ukraine war which has put pressure on the supply chain.

Due to this situation, price of home appliances and consumer electronics such as TV, washing machines and refrigerators might go up by three to five per cent as manufacturers pass on the impact of rising input costs to buyers.

Moreover, the declining Indian rupee against the US dollar has put further woes on manufacturers as imported components have become costlier.

This has put pressure on the inventory of the manufacturers, and several top line products that have lesser domestic value addition and are largely dependent on imports are not available in the market.

Panasonic India & South Asia CEO Manish Sharma sees this rising cost as a result of continued pressure on input costs. However, he said the company was working to minimise the impact on consumers. He also expected a price rise of nearly five per cent soon across categories.

Overall Impact of Inflation

The higher interest rates following the hike in repo rate will increase the cost of borrowing and lead to lower investment. With this, many firms will face higher costs of production which will result in lower profitability.

All this will lead to lower than expected economic growth.

During this, firms will restrain themselves in making investing decisions. Investors may pull out of shares and put a higher percentage of their portfolio in safer options such as real estate and gold.

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