Index of Industrial Production (IIP) shrank to 1.9% in February. With this, growth in factory output recorded its sixth decline in first 11 months of the Financial Year 2013-14. In February, manufacturing index recorded its steepest fall (down 3.7%) since April 2012. As a result, despite of modest performance of mining index (up 1.4%) and robust performance of electricity index (up 11.5%); IIP number turned negative. There has been an upward revision in the IIP January data.from 0.1% earlier to 0.8%.
 

See-saw movement in IIP

(Source: CSO, PersonalFN Research)  

Impact on RBI policies...
Although the IIP growth has again turned negative, RBI may not cut policy rates in next bi-monthly monetary policy for 2014-15 (schedule on June 3, 2014). You see, in its first bi-monthly policy conducted on April 01, 2014 RBI kept interest rates unchanged. PersonalFN believes, before taking any call on interest rates, RBI may take into consideration factors such as outcome of Lok Sabha elections, policy response of the new Government for reviving economic growth and monsoon forecast. If inflation continues to moderate RBI is unlikely to raise rates.

RBI has set 8.0% target for containing inflation measured by the movement of Consumer Price Index (CPI). Against, 8.79% recorded in January 2014, the CPI inflation fell further to 8.10% in February.

Given that hailstorm and unseasonal rainfall has destroyed rabi crop in Maharashtra and Madhya Pradesh there are likely chances that food inflation may go up again. Unseasonal rainfall across northern and western India has already caused fruit and vegetable prices to move up by 10%-15%. Unless, RBI gets better clarity on above mentioned factors, it is likely to keep policy rates unchanged.

Impact on equity markets...
The lacklustre industrial growth, especially reflecting in manufacturing, has already been factored in the prices. IIP has been a non-event for equity markets at least for the time being. Going forward, equity markets will predominantly focus on policies of new Government and would track the performance of the new Government in reviving growth. If IIP fails to turnaround, it would remain a concern and be disappointing, but if IIP revives the markets may take with a positive stride.

Impact on debt markets...
Rather than the industrial data, debt markets would be concerned about fiscal situation. Fiscal deficit has run-up 114.3 % in the first 11 months of the fiscal year 2013-14 and poses a risk of breach to the ambitious fiscal deficit target of 4.6% as well as inflicts risk of sovereign rating downgrade for the country. Such a concern on the fiscal situation and no real signs of further fall in retail inflation, debt markets may remain depressed. Interest rate movement, election outcome and fiscal management of the new Government are the more relevant factors for debt markets for now.

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