Inflation in India has been frustratingly sticky at elevated levels, despite growth coming off significantly, which has raised stagflation concerns. Global investment bank UBS has an anti-consensus view that inflation, as measured by CPI, is likely to moderate as both macro (fiscal/monetary) and micro (especially with respect to sticky food inflation and price-wage spiral) factors are supportive.
El Nino may arguably temporarily disrupt the thesis playing out. UBS, however, believes that changed political economy is likely to ensure that any new government's response will more likely be towards containing inflation (muted MSP increases, use of food stock).
UBS has remained constructive on markets, driven by a cyclical economic recovery, albeit mild, given realities of fiscal consolidation and inflation moderation imperative.
UBS has asked investors to be careful about consumption stocks. "Fundamental drivers of consumption were there pre 2008 too but we saw a spurt in earnings growth for consumption stocks post 2008. Factors which drove inflation trajectory higher also drove consumption above trend post 2008. This will likely change ahead signs already visible over last few quarters," it said.
Further UBS said the consumer stocks have rerated sharply over the last few years and this may reverse. Past period of high CPI trend reversal in late 1990s saw consumers - staples, discretionary and autos underperform sharply.
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