March IIP at 7.3 %

The IIP figure for the month of March stood at 7.3 % YoY up from the 3.6 % in the month of February, according to data released by the Central Statistics Organization.

Manufacturing output which constitutes about 80 percent of the industrial production rose by 7.9 %.

Industrial output grew 7.8 percent in the 2010 – 11 fiscal that ended in March compared to the 10.5 percent growth clocked in the previous fiscal.

The HSBC Markit Purchasing managers index moved up 0.1 % to 58 for the month of April. The index was at 57.9 in March.

The RBI stepped up it fight against inflation by hiking the interest rates by 50 bps and is seems willing to take more tough measures to rein in inflation. Experts believe that more tough measures by RBI will hamper the industrial growth as the cost of borrowing will increase further.

Markets haven’t reacted well to the IIP numbers as both the indices are in the red. At 12.20 PM the Sensex was down 98 points at 18486 and the Nifty was down by 33 points at 5531.

Sector wise  figures

Mining Sector growth at 0.2% vs 12.3% y-o-y

Manufacturing Sector growth at 7.9% vs 16.4% y-o-y

Basic Goods growth at 4.3% vs 10.8% y-o-y

Electricity growth at 7.2% vs 8.3% y-o-y

Consumer Goods growth at 7.7% vs 9.3% y-o-y

Capital Goods growth at 12.9% vs 36% y-o-y

Sensex slipping into bear phase?

The BSE sensex has shed almost 10 percent this year, the worst performance among Asian nations, compared to 17 percent returns that it gave last year. A fall of 20 percent in the key indices is generally considered a bear phase.

Inflation has become the biggest threat to growth and RBI is finding it tough to rein it in. Even after eight rate hikes in the last thirteen months inflation didn’t seem to be coming under control. The March end figure of 8.98 percent had everyone convinced that RBI will have to continue its rate hike program. RBI, in its mid quarter review on 3^rd May increased key lending rates by 50 basis points, 25 basis points more than what market experts had expected. This clearly shows that the RBI has woken up to the fact that strong measures are needed to stop inflation from spiraling out of control.

RBI Governer D. Subbarao, said that controlling inflation is essential to maintain the medium term growth of the economy, even if this means sacrificing growth in the short term. Experts predict RBI to continue its hawkish stance in the near term.

Economic growth forecast for this year is at 8%, down from 8.6% last year. Foreign funds have pulled out close to 2,000 crore in the last few days. Easy money was the key driver for the rise in equities in 2009-10, but is coming to an end as the US Fed might end some of the monetary measures it initiated to spur growth. This will reduce the amount of investments by FIIs.

Investors are worried about the rising funding costs as well the rising input costs which will hit the earnings of Indian corporates. The tough stand that policy makers are taking to control price rise by sacrificing some amount of growth is another factor that has the investors worried. Market experts are warning investors to be prepared for some pain in the short term.

RBI takes inflation head on

The RBI increased lending rates yesterday, in its mid quarter policy review. Markets and economists expected rates to be increased by 25 bps but RBI surprised everyone by increasing them by 50 bps. RBI acknowledged that rising input cost and oil price are fuelling inflation to a high of almost 9 percent (March end) and controlling inflation is its priority even if it means economic slowdown in the short term. It also reduced its growth projection for the economy to 8 percent for the current fiscal year.

The short term lending rate (repo) was increased by 50 bps to 7.25 percent. The reverse repo, the rate at which banks park their funds with RBI, too has been raised by 50 bps to 6.25 percent.

RBI Governor D Subbarao said that the inflation which stood at 8.98 percent in March and the rising oil and commodity prices will pose a challenge to economic growth this fiscal. RBI reduced its GDP growth projection by 1 percent between 7.4 and 8.5 percent.

RBI expects inflation to be at high levels for the first half of the current financial year. Hence one can expect some more rate hike in the near term if the inflation figures do not start to come down. A normal rainfall might just ease the inflationary pressures.