Industrial growth measured by the movement of Index of Industrial Production (IIP) has become stagnant and range-bound. After being in the positive territory for consecutive 3 months, IIP growth slipped into red again in October. Negative growth in manufacturing and mining dragged the performance but positive growth recorded by the electricity sector helped the index to limit the slide. Manufacturing activities shrank by 2% while mining sector recorded negative growth of 3.5%. Although positive, electricity sector witnessed a moderate growth of 1.3%.
 

See-saw movement of IIP continues...

Data as on September 2013, but released on November 12, 2013
(Source: CSO, PersonalFN Research)  

An evaluation of some of the important components of IIP for October 2013 reveals the following:
 

• Manufacturing Index which occupies about 3/4th of the index weight, registered negative growth. Almost half of the constituting industries (10 out of 22) witnessed deceleration in activities. Furniture, Office, accounting and computing machinery were among few industries that showed sharp fall while electrical machinery, other transport equipment and medical precision and optical instruments registered significant rise in output.
   
• Consumer goods index recorded negative growth of 5.1%. Consumer durable segment came under pressure as growth decelerated at 12.0% on Y-o-Y basis. Industries engaged in consumer non-durables registered growth of 1.8%.
   
• Basic goods industries continued to experience lull and recorded negative growth of -1.6% in October. Due to their higher weightage in the index, better performance of capital and intermediate goods segments couldn't uplift the performance of manufacturing index.
   
• Mining activities remained lacklustre due to which mining index recorded a fall of 3.5% in October on Y-o-Y basis.
   

Impact on RBI policies...
The Current Account Deficit (CAD) is expected to be around 3% as per the estimates of RBI. Falling CAD would take the pressure off Indian Rupee. RBI is now focused on containing consumer price inflation. Also it has forecasted growth of economy to be around 5% in the current fiscal. Gross Domestic Product (GDP) grew at 4.8% in the second quarter while consumer price inflation measured by the movement of Consumer Price Index came in at 11.24% in November. PersonalFN is of the view that, RBI may ignore weak IIP and hike repo rate by 25bps or (0.25%) at third quarter mid-review of the monetary policy scheduled on December 18, 2013.

Impact on equity markets...
Although markets expect growth to remain sluggish, double digit consumer price inflation may dampen the sentiment. Further, likeliness of a rate hike at third quarter mid-review of RBI monetary policy may negatively affect the market movement. Speculation about tapering of stimulus package in the U.S. may put pressure on markets. PersonalFN believes, investors shouldn't get carried away by the rally that has happened. Staggered investment approach might help investors beat volatility. Investing through Systematic Investment Plans (SIPs) offered by the mutual fund is advisable.

Impact on debt markets...

As said earlier, lower IIP may not discourage RBI from hiking policy rates at third quarter mid-review as consumer price inflation has been persistently high. Bond prices may fall and yields rise if RBI hikes rates. The fiscal deficit has already exhausted 84% of its limit set for the Financial Year (FY) 2013-14. Higher deficit would put pressure on bond yields. PersonalFN is of the view that investors would be better off avoiding any speculation pertaining interest rate movement. PersonalFN is of the view that one shouldn't invest more than 20% one's portfolio in long term debt funds. Going forward, shorter end of the yield curve appears to be more beneficial than the long end of the yield curve.
 

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