Investors have been bullish on India as they hope that performance of corporate Inc. would revive and economy would make progress at a faster pace. Foreign money is flooding Indian markets. Over last one month, Foreign Institutional Investors (FIIs) have brought in nearly Rs 11,300 crore to Indian shores. Even the domestic retail investor has been investing actively in equity markets. However, performance of the industry measured by the movement of Index of Industrial Production (IIP) has dented hopes.

After rising at an average of 4.2% in the April-June quarter of Financial Year (FY) 2014-15, IIP growth slipped to just 0.5% in July. Weaker growth in manufacturing, sluggish performance of mining due to seasonal factors and moderate growth in the electricity sector brought the industrial growth down. Having said this, IIP data for the month of June has been revised upwards from 3.4% to 3.9%.
 

Is growth cooling off?

(Source: CSO, PersonalFN Research)  

Manufacturing growth declined by 1.04% this July as against the positive growth of 2.99% in July 2013. In June 2014, the manufacturing activities grew by 2.69%. Performance of manufacturing industries remained lacklustre. Out of 22 groups of industries, 12 have witnessed positive growth. Among major manufacturing industries base metal, chemical and chemical products and food products and beverages recorded impressive growth. On the other hand, a few important industries such as wearing apparel, dressing and dyeing, tobacco, coke, refined petro products and nuclear fuel recorded negative growth. Consumer goods sector continued to post negative growth due to struggling consumer durable segment. Mining recorded a growth of 2.07% while electricity sector grew at electricity 11.73% in July. India’s Gross Domestic Product (GDP) had recorded a growth of 5.7% in the April-June quarter of the current fiscal, which was the highest rate over last 2 ½ years. This had raised hopes about an even stronger recovery. Weaker IIP for the month of July 2014 hints at fragility of growth indicators.

Retail inflation eases a bit...
The retail inflation measured by the movement of Consumer Price Index (CPI) for the month of August has come a tad lower than that recorded in July. As against 7.96% in July, the inflation eased a little to 7.80% in August. At 9.42%, food price inflation still remains a worry.

How markets have reacted?
Frontline indices were down by about 0.7% in the early trade. Although weaker global cues was the primary factor for indices falling in red, sharply falling growth and sticky retail inflation too accelerated the downward movement. Mid and small cap indices remained strong and held up in green. Although this shows that, fall in frontline indices has been more a knee-jerk reaction rather than swing in the market sentiment. Industrial inflation measured by the movement of Wholesale Price Index (WPI) has come in at 3.74% for the month of August.

What to expect?
There has been an important announcement coming out from the U.S. this week which may guide not only markets but also monetary policy direction in India. The Federal Reserve (Fed) is scheduled to meet during this week for deciding the path of interest rates in the United States. Although, rupee movement may not be the main guiding force in the decision making of RBI, direction of the rupee against dollar cannot be ignored either. On the inflation front, if food prices remain high, RBI may have a little room to lower policy rates. Strong revival of monsoon in August and early September may come to rescue but what positive impact it brings to agriculture sector would decide where food price inflation moves going forward.

PersonalFN is of the view that, equity markets appear to have moved ahead of their fundamental merits and you may see some corrections which might be deeper than expected. Similarly, changes in the Fed’s monetary policy may change the fate of Indian debt markets. You should stick to your asset allocation and if any particular class has become more dominant in your portfolio, it is probably the time to trim its exposure and bring it back to predetermined levels.

Add Comments