The Index of Industrial Production (IIP) contracted to -4.2% in the month of October 2014 from an expansion of +2.8% recorded in September 2014. This contraction was largely contributed by the 7.6% decline in the manufacturing sector, which constitutes to about 75.5% of the IIP. Some relief was provided by the mining and electricity sectors which grew by 5.2% and 13.3% respectively. The IIP for the month of September 2014 was revised upwards from 2.5% to 2.8%.
 

Lacklustre growth

(Source: CSO, PersonalFN Research)  

As can be seen in the graph above, the industrial activity has been lacklustre with a see-saw trend depicted.

However, there are some positives as well...
 

• Mellowed down inflation – Inflation measured by the movement of Wholesale Price Index (WPI) fell to 0.00% in November 2014 as against 1.77% recorded in the month prior. Inflation measured by the movement of Consumer Price Index (CPI) too declined further to 4.38% in November 2014 from 5.52% recorded in October 2014. With this the the wholesale inflation (measured by WPI) has recorded a 5½-year low and the retail inflation (measured by CPI) too has fallen to an all-time low. Since both, food and fuel inflation has mellowed; it has aided inflation at WPI and CPI levels to print lower numbers. You see, at the retail level food and beverages inflation has fallen to 3.50% in November 2014. Fuel and light inflation has also fallen to 3.27%, aided by softening in the prices of global crude oil. However, as per the assessment of the RBI, there are several upside risks to food inflation stemming largely from loss of Kharif crops due to lower than normal monsoon and unlikeliness of Rabi crop compensating for the decline in Kharif crop.
   
• Improvement in India's economic outlook - For economic growth to reinvigorate the Modi-led-NDA Government has encouraged foreign investments. Prime Minister Narendra Modi's successful visit to the U.S. is expected to bring U.S. $41 billion from the U.S. over the next 3 years according to the U.S.-India Business Council. Likewise, Indo-Sino tie-up is likely to benefit both – India and China ...and the latter has committed to invest U.S. $20 billion in India over the next 5 years. Moreover, the manifold increase in Foreign Direct Investment (FDI) in itself speaks about the confidence exuded in the Modi-led-NDA Government. And with the ease of doing business in India going forward, more investments are likely to pour in. Recently, the Government relaxed the rules for foreign direct investment in construction development. The new rules make it easier for foreign companies to invest in India and many projects will now qualify for FDI through automatic route (no FIPB clearance will be required). It appears that the Government now wants to open up the construction sector so that it can deliver Prime Minister, Mr Narendra Modi's promise to create 100 smart cities in India by 2020. From May this year the Government has cleared more than 200 projects pending for environment related clearances. To improve the state of infrastructure, the railway ministry has recently released orders for 2,400 wagons.
  
  In the winter session of the parliament more reform measures such as the indirect tax regime and the land acquisition bill are likely to be discussed. Moreover, now that the outcome of the assembly polls in Maharashtra and Haryana are also in favour of the Bhartiya Janata Party (BJP) it would facilitate the Government to pass important Bills in both the houses and put reforms on the forefront. So, overall confidence has been boosted and hopes are raised that the Modi-led-NDA Government would take India on the path to long-term economic growth rate.
   

How markets have reacted...
Markets have opened negative and remained choppy through-out the day, but this is mainly due to global factors. Weak IIP has not impacted the market sentiment much. A number of holidays in October is said to be one of the reasons -for the fall in the output of manufacturing industries. Furthermore, the HSBC India Purchasing Managers' Index (PMI) stood at a 21-month high at 53.3 in November 2014, as against 51.6 in October 2014. Therefore, it is likely that, performance of manufacturing industries may improve in November. Markets remain hopeful about the recovery.

However, PersonalFN is of the view that fundamentals have to now justify valuations. Valuations have already run ahead of fundamental amid the 'hope rally'. Although the prospects for the Indian economy appear good with the Modi-led-NDA Government at the centre, from a valuation perspective the margin of safety appears to have narrowed. So far the markets have been going up on the hopes of revival. Now unless that the measures taken by the Government do not translate to economic growth and there is a revival in capex cycle; equity markets may take a breather, especially in a scenario where interest rates in the economy are elevated. Although the Indian economy appears to be in a much better position now than what it was a year back, it is certainly miles away from what a number of investors expecting it to be. Under such circumstances, role of the RBI and that of the Government has become even more crucial. Despite of the decline in retail inflation, RBI may still await further improvement in a number of other economic indicators. Now, it remains to be seen whether RBI announces a rate cut or prefers to maintain its status quo in the next monetary policy review. Similarly, the implementation of the reform measures taken by the Government remains the key. It will also have to play a major role in not only reviving business confidence but timely addressing the concerns of industries, especially the small scale industries.

What should investors do?
PersonalFN believes that instead of timing the market, investors must chalk out their financial plan and follow a well-directed asset allocation strategy to achieve their financial goals. Those who do not have the expertise or time to invest in equities by purchasing stocks must invest via the mutual funds route. Adopting the Systematic Investment Plans (SIPs) mode of investing in mutual funds not only helps you to even out the volatility of equity markets effectively but also instils in you the habit of saving in a disciplined manner.

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