IIP DOWN, CPI UP

CPI for August came in at 7% v/s 6.71% in July, which was widely expected; no shocks or surprises here. But IIP for July came in much lower than expected at 2.4% v/s 12.7% in June.

Sectors which showed a rise were manufacturing, electricity, primary goods, capital goods, intermediate, infra and construction; mining and non-durables pulled down the growth substantially.

Consumer non-durables are what dragged down the IIP while consumer durables came in also marginally in the positive – basically it is durables, which reflects consumer demand directly was poor. Mind you, this was for July and it is only in August that the festive season began indicating that durables and the IIP will most certainly start showing a much better uptick in coming months.

On the CPI front, clearly higher food prices, which accounts for nearly 50% of the CPI basket, pushed up the prices – vegetables, pulses, cereals and the effect of increase fuel prices – all together pushed up the prices. This is for the 8^th straight month that CPI remained over RBI’s target of 6%.

The market is sure to be perturbed by the double whammy – higher inflation and lower growth but it will not be a death blow. Once again, the market can be wise like an old man when required, reasoning that it is past data and already been discounted for.

For the markets the focus will be next Wednesday, when US Fed will take a decision on its interest rate; in fact we will see the whole of next week, rallying just around this news.

For us in India, the positive trigger, more for the bond market and psychologically for the equity markets would be the inclusion of Indian bonds by JP Morgan Chase to its Emerging Bond Index. This is expected to be announced either by end of this week or early next week. If this does indeed happen, then it has the potential to attract $30 billion of foreign inflows in the next fiscal year.

Lets see how things pan out as India heads into another festival in some days, Navratri and then the penultimate, Diwali in Nov. Afterall, all durables as well as non-durable sectors are looking at making the most in Q2 and Q3 of this fiscal.