Lehman Brothers - Inflation in India to be strong

Anti-inflationary measures are unlikely to turn India into a slow growing economy, while other Asian nations could face the situation of rising prices and economic stagnation, a latest report says.

"We do not believe that India would be affected significantly in a stagflation scenario and growth would remain strong in relative terms...," global research firm Lehman Brothers said in a recent research report.

However, even as the economic growth is projected to remain strong, interest-rate sensitive stocks could be adversely impacted during stagflation situation in Asia.

Stagflation refers to a situation when inflation is rising and the economic growth is simultaneously slowing down.

The negative impact is likely to be felt by interest rate-sensitive stocks or by companies that are not in a position to pass on cost pressures to consumers, Lehman said.

Further, investment spending is unlikely to witness a substantial slowdown primarily on account of significant shortages in key sectors such as steel and power.

The report pointed out that risks out of a stagflation scenario would be high for the banking sector, infrastructure, automobile and cement firms.

"The risks are significant for part of the banking sector, companies with a high proportion of fixed-price contracts and companies with high energy usage without the ability to pass on increased costs," it said.

Lehman noted that in India inflation would remain on the higher side for some more time due to the base effect -- which relates to the inflation data of the corresponding week in the previous year.

Given particular prices in the current week, inflation would turn out to be higher, if it was a small number in the previous year, but would be less, if it was high a year ago.

In addition, the report said that inflationary headwinds would lead to increased fiscal deficit and negatively impact the country`s expansion plans.

"One of the major reasons for India`s premium expansion has been the reduction in fiscal deficit, a process which could be derailed in the short term due to inflationary headwinds," it added.

The government has initiated fiscal and monetary measures to lessen the effects of inflation on consumers. However, according to the report, some of these measures do not reflect the "true market economics."

"If the inflation period is prolonged, we expect the government to start passing on some of the suppressed price increases (especially those relating to crude oil and fertilisers) in small doses.”

However, we do not expect this anytime soon, given the proximity of the elections, the report pointed out.