IIP CONTRACTS AND SO DOES CPI!

By Ruma Dubey

The markets today shuddered and crumbled down to bits after news spread that the US Federal Reserve could hike rates and this could seriously affect bond yields.

This is the real puzzling part – there is no doubt that the US Fed will eventually hike rates; it simply cannot and should not continue with this near-zero rates. Hiking rates would be an indication that US is getting back on track and is that a better news or not? But a few fear mongers, who probably needed to press this sell off today, got their objective met and not just India, most emerging markets crashed. Don’t be surprised if tomorrow, some news comes in that there is no rate hike or that there is nothing for equities to fear due to a rate hike. Markets have indeed become a play thing in the hands of the few powerful.

But while we remained somber over this happening, macro data which came in late in the evening was mixed. As was widely expected, Consumer Price Index (CPI) for August came in much lower. This was thanks to the softening of fruit and vegetable prices as monsoon spread its bounty though, it still remains patchy in some regions. And going ahead, prices are expected to come down.

The internal dynamics of CPI for August:

• CPI at 5.05% v/s 6.07% (MoM)
• Food inflation at 5.83% v/s 8.35%
• Vegetable inflation at  1.02% v/s 14.06%
• Pulses  at 22.01% v/s 27.5%.
• Fuel at 2.49% v/s 1.95%.

The news on the IIP front, as expected was not great. We already had an inkling of this from the core sector growth which was at 3.2% for July v/s 5.2% in June. Core sector, which represents 38% of total IIP comprises of coal, steel, cement, electricity and fertilizers.  IIP for July came in at (-)2.4% v/s 2.1% (MoM). A contraction when a minor fall was widely expected.

Manufacturing contracted by a sharp 3.4% and 12 out of 22 industry groups showed a negative growth with Electrical machinery & apparatus showing the highest negative growth, followed by  Medical, precision & optical instruments, watches and clocks’ and Wearing apparel; dressing and dyeing of fur’. On the other hand, Tobacco products showed the highest positive growth, followed by Coke, refined petroleum products & nuclear fuel and Radio, TV and communication equipment & apparatus.

Some important items showing high negative growth during July were Cable, Rubber Insulated, Marble Tiles/ Slabs, H R Sheets, Sugar Machinery, Sealed Compressors and rice.

Some important items that have registered high positive growth include ‘Air Conditioner (Room), Wood Furniture, Instant Food Mixes (Ready to eat), Colour TV Sets, Purified Terephthalic acid, Antibiotics & It’s Preparations and Terry Towel.

Coming back to the impact of data on hand, the market will shrug this off on Wednesday,– it has more important things to worry about. The festive season demand is likely to underline corporate performance and there is now a fortnight to go for the Q2FY17 earnings to start coming in. Monsoon has done OK till now and all eyes will also be on the total kharif sowing done.

RBI has no credit policy scheduled for this month; it is now on 4^th  October and soon expectations will start building up that the new RBI Governor, might give a small rate cut as a welcoming gift! Yes, that how the media will build the hype – the first policy of Urjit Patel.

So there is much more to look forward to and this macro economic data will not have much impact on the markets.