Are you worried about the recent volatility in the Stock Market? Are you confused what to buy, sell or hold? The newsletter selects quality mid-caps and small-caps for investors with a long-term perspective and provides timely buy/sell/hold suggestions. Send an email (to address in profile below) for subscription details today.

Thursday, April 12, 2012

Should you ignore the Feb ‘12 IIP number?

For the uninitiated, the Index of Industrial Production (IIP) is one of the many indicators that policy makers look at to assess the strength or weakness of the broader economy. So, why should investors ignore the IIP number declared today? The short answer is: The figure is unreliable at best, and fiction at worst.

Am I being harsh? Sure. But how else can I describe an important indicator if the Jan ‘12 number is revised downwards from 6.8% to 1.14%? The reason for the sharp downward revision was an ‘error’ in the calculation of production data for sugar. Production figures from all the sectors don’t always come in on time. A ‘best guess’ is often made for the numbers from the missing sectors. That still doesn’t justify an 83% error!

What about the Feb ‘12 number of 4.1%, which was much lower than the consensus estimate of 6.6%? It is better than the revised Jan ‘12 figure of 1.14%, but who can say whether another ‘error’ won’t crop up after a month? Either way, 4.1% is not worth cheering at all. It shows that industrial growth remains sluggish.

Why did the stock market celebrate a not-so-great number? It was probably on the expectation that next week the RBI will be forced to cut the repo rate after almost three years to help stimulate growth. But the RBI is in the horns of a dilemma.

They have taken a stance that controlling inflation is their top priority. While inflation is no longer in double digits and is expected to fall some more, it is still quite high and may start going up once again as the base effect kicks in. The RBI also expects the government to take worthwhile steps in curtailing its huge deficit, which is partly responsible for causing inflation.

But the government is showing no inclination to cut down wasteful expenditure on populist measures. Instead, the Finance Ministry is desperately trying to generate revenue by milking cash-rich PSUs and by introducing measures that may cut-off FII inflows (which will further compound the deficit problem).

If RBI cuts the repo rate and inflation goes up after a couple of months, they will look like fools. If they don’t cut rates and growth slows down further, they will be made a scapegoat for all ills. They may compromise by reducing the CRR once again to inject more liquidity into the system. Alternatively, they may cut the repo rate by a token 25 bps (0.25%) – which seems to be already priced in by the market.

What could be a positive surprise for the market? A CRR cut and a 25 bps repo rate cut or a repo rate cut of 50 bps. If either of those two events occur, the stock market may trend upwards from its current consolidation range.

No comments: