Agility 2.0: How businesses can best negotiate a ‘perfect storm’

The Reserve Bank of India (RBI), too, could be prompted to raise policy interest rates in its June meeting by as much as 50 basis points. Prices of essentials and fuel are likely to remain high. The signs are clear: India’s retail inflation rate hit a 17-month high of 6.95% in March and the wholesale inflation rate rose to a four-month peak of 14.55 %. So, we are headed for a reversal of rate policy and the liquidity environment, which, over time, can cause significant economic damage, particularly to those who ignore the stress that can accumulate over time when major macro changes happen. Such stress is not manifest immediately, but will be felt over time and show up in many hard-to-forecast areas.

Then there is the Russia-Ukraine war. As if its senseless human suffering is not enough, uncertainty over when it will end—and whether it will set the stage for peace or future conflict—is playing on nerves in political, diplomatic and business circles.

Add to that the massive energy shock stemming from the conflict. Have oil prices peaked at $139 per barrel, or will there be more spikes? Crude prices remain volatile. What’s more, the war has led to a ‘giant leap’ in global food prices in March to another record high.

The storm becomes ‘perfect’: If all that was not bad enough for political and business leaders trying to get their economies to recoup after the covid blows of 2020 and 2021, we have China’s latest infection spike and lockdowns. This will accentuate inflation issues everywhere, given its trade connections.

So, we now have an energy shock, coupled with rising inflation in food and manufactures. And rising interest rates. This storm was made ‘perfect’ by the Fed’s words spooking financial markets.

If you are feeling the heat, you are not alone. Listen to this recent statement of Powell: “No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context."

For India, the mystery, or boon, so far is that despite rising energy prices, inflation—though now above RBI’s target—is not surging as in other major economies. And, notwithstanding the IMF’s recent slashing of India’s economic growth forecast for 2022-23 to 8.2% from 9%, India is still the world’s fastest-growing major economy—a feat.

As a result, we have a two-track situation where the world in general is seeing rising inflation and interest rates, falling equity markets and a commodity price shock. India on the other hand, still has relatively benign inflation, subdued interest rates and a somewhat robust equity market environment. Yes, commodity prices have risen, but that has not had such a major impact.

Preventing a shock too far: How should businesses react to this never-ending volatility? How do you factor such endless unpredictability into a ‘New Normal’? The biggest financial issue is the reversal in the liquidity cycle. Such changes do last a while and take time to filter through the global system. Liquidity begins to dry up and international bond markets have already been shaken. The longer this reversal lasts, the worse the stress. As financing is integral to all businesses, rate hikes will eventually impact profitability across sectors, particularly debt-intensive areas such as real estate. The stress will likely be felt over a 9 -to-12-month timeframe. Stretched company managements must brace themselves.

Second, given commodity inflation, long-duration project execution risks have gone up, both on account of capex costs and interest rates.

Third, stock valuations may take time to catch up and may be different in the public and private markets, given differential fund flows. Therefore, capital allocation and acquisition strategies need to be fluid and responsive to frequently-changing market circumstances. In this environment, one cannot fixate on a single strategy; agility will be critical as corporates navigate choppy conditions.

Adding to the challenge, valuations will gyrate wildly. We are already seeing this among newly listed tech companies. Different sectors will find sudden favour and then be discarded by markets at various points in time. It’s pointless to base long-term strategic decisions on short-term market movements; rather, one must focus on longer-term value creation and let distractions play themselves out, no matter how tempting some of them may seem.

The unicorn boom seems to be near an end. Employees may not see it yet and could continue to be attracted to startups; these are decisions they might come to regret. But many employers in this space will probably need retention strategies and Human Resource departments will have their work cut out if they are to retain good people.

So, prepare for a rougher ride in the months ahead. The advantage India has is that our financial sector is now healthier, corporates have largely de-leveraged themselves, and demand is finally reviving. Both the government and corporate world, however, will need to be extremely quick-footed with sustained ‘war room’ monitoring of conditions over the next year or so. If short-term external shocks can be weathered, India may get to witness several years of critically-required high and sustainable rates of economic growth.

Sumant Sinha is chairman and CEO of ReNew Power and president of Assocham