The Modi-led-NDA Government launched a national programme called “Make in India”, last year (in 2014). This programme has an aim of making India a global player in manufacturing. Although it remains to be seen how far this initiative goes in achieving success, industrial activity seems to be kicking off.

The Index of Industrial Production (IIP) for November 2014 expanded to 3.8% after having contracted in the month before. A recovery in manufacturing, an impressive performance of power &electricity generation sector and a decent performance of mining industries, aided the IIP to bounce back, recording its highest levels in last 5 months. Moreover, it is noteworthy that the IIP readings for the month of August 2014 and October 2014 have been revised upwards.
 

IIP: on a see saw mode

Data as on January 12, 2015
(Source: MOSPI, PersonalFN Research)  

Out of 22 manufacturing industries, 16 industries reported positive growth in November. However, the robust performance of manufacturing industries didn’t come as a surprise, since the HSBC Manufacturing PMI for the month of November had hinted at major improvement in manufacturing activity. Strong flow of new domestic orders and sustained flow of export orders helped manufacturers perform better in November. Basic goods and capital goods sectors did well in particular.

Is the growth sustainable?
The growth in industrial activity doesn’t look convincing as yet. You see, the see-saw movement is yet evident. Delve a little deep into the IIP data suggests that growth in a few industries such as automobile and consumer durable sectors may not be sustainable due to cyclicality. Consumer durable segment has been recording uneven performance for quite some time now. On the other hand, production in automobile was substantially higher in November. This could have possibly been on account of excise duty concessions offered by the Government on select categories of autos till December 2014.

Similarly, job data for manufacturing industries doesn’t look encouraging either. There has not been significant hiring reported and employment trends remain unchanged by and large in manufacturing industries. Moreover, the input costs have witnessed pressures, though unexpectedly. The cost escalation has been highest in the intermediate goods segment. Growth in consumer non-durable segment has recorded a 14-month high. But here too sustainability can be questioned.

Trends in retail inflation
The retail inflation measured by the movement of Consumers Price Index (CPI) rose slightly in December 2014 when compared on month-on-month basis. Inflation for the month of November was 4.38% which went up to 5.0% in December. Food price inflation came in at 4.78% in December as against 3.14% recorded in November. However, inflation has been significantly lower on year-on-year. Although the data at the wholesale level for the month of December is not yet out; it is expected that WPI inflation may also show some uptick on account of rising input costs. But the softening in international crude oil prices have honed well for the Indian economy.

How have markets reacted?
Since the inflation and industrial growth numbers are more or less in line with market expectations, markets have stayed relatively unaffected. Bond yields have been steady and there is no major change in equity indices either. However, the Indian debt market would recognise that the RBI would take cognisance such data, especially retail inflation to enunciate the path for policy rates.

What should investors do?
PersonalFN believes that RBI may not lower policy rates at least until the union budget 2015-16 and would await the response of Government on variety of issues pertaining, including fiscal management. The fiscal deficit has already reached to 99% of full year limit. Apart from growth and inflation dynamics, RBI may also give due consideration to exchange rate stability while framing its policies. As far as falling inflation is concerned, RBI may want to look at price stability once crude oil prices form some base. Continuously falling crude oil prices have honed well for India, but the benefit may wane if crude oil prices ascend again. RBI has already clarified that it won’t mix up its policy stance by cutting rates in a hurried manner only to raise them later.

PersonalFN believes you shouldn’t try to time the market and avoid betting on the interest rate movement. Instead, you should focus on your financial goals, and create a personalised asset allocation.

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