Inflation based on consumer price index (CPI) eased significantly to an all-time low (new series 2012) of 3.17% in January 2017 against 3.41% in previous month. At the same time, core CPI remains sticky at 5.08%. However, to achieve CPI at 4%, service inflation like medicines, doctor's fee, bus or train fare, mobile charges, charges for cable TV connection, and tuition fees need to be reduced, says a research note.
In the report, State Bank of India (SBI) says, "Our estimates show that (to achieve CPI at 4%) there has to be a decline in services inflation by 86 bps. The contribution of doctor’s fee, bus fare, and tuition fees will have to decline by more than 100 bps. For example, doctor’s fee contribution has to decline by 161 basis points from the current levels. The decline will have to be larger if food prices rise from current levels. The moot point is it feasible or desirable?"
Due to favourable base effects and low consumption demand, the Monetary Policy Committee (MPC) is expecting CPI inflation below 5% by March 2017. "In the last policy when MPC retained its 5% CPI target by March 2017 and reduced its gross value added (GVA) target, we submitted our doubt that RBI projection for March 2017 might not be correct. We have many times reiterated in our research reports that March 2017 inflation will be in the range of 4.2-4.4%. We now see March 2017 CPI below 4%," it added.
SBI says, even as we debate the CPI trajectory, the good thing is that demonetisation fears seem to have faded and the original perception appears to have faltered us all in gauging the extent of impact especially in FMCG products or day to day essential products. It says, "Performance in sectors such as diamond and broking is surprising. While some capital intensive sectors appear to have been impacted, sectors such as steel, fertilisers, cables, petrochemicals, edible oil and agrochemicals seem to have weathered the demonetisation storm better than earlier perceived."
From the 2014 listed entities, sans bank, finance and refineries, who declared their result for the third quarter (Q3) of FY2017, SBI says it observed growth of 4.8% in top line while earnings before interest, taxes, depreciation, and amortization (EBDITA) and profit after tax (PAT) grew by 18.1% and 26.6% respectively as compared to Q3FY16.
According to the research note, non-ferrous metals, broking, diamond, gems and jewellery, steel, cables, agro chemicals, and healthcare have recorded double digit growth in top line whereas sectors such as telecom, constructions, fertilisers, retail, and power generations recorded double digit negative growth during the same period.
Sugar, fertilisers, cables, petrochemicals, edible oil, and agro chemicals have recorded better growth number in PAT while IT hardware, paper, capital goods electricals equipment, glass products, engineering, logistics, online media, and consumer durable have recorded double digit negative growth in PAT during the same period.
"Further with the push for housing and lower interest rate regime consumer sentiment is positive and we believe consumption related sectors such as consumer durable, FMCG, automobile, cement, and steel will deliver better numbers in coming quarters," the report from SBI concluded.