Meaningful Minutes - November 16th 2012: Kotak Sec

Economic Data: Three things to note on inflation, factory outputDuring the Diwali festivities, the Indian government announced two sets of key economic data. If you are a stock market investor, you will often read pundits speaking about the slow economic growth and the rising inflation. The two data releases are used by the Reserve Bank of India as indicators for setting borrowing and lending rates. Money could become expensive or cheap based on the trend in these two indicators. Here are three things to note from the week’s key data releases: 1) Industrial output weak: India’s industrial output, represented by the index of industrial output or IIP, fell by 0.4 per cent in September 2012 after rising 2.3 per cent in August 2012. The Reserve Bank of India plots the monthly data on a graph. It will note that the industrial output weakened in September 2012. While mining and electricity sectors reported a growth, the manufacturing sector reported a fall. The manufacturing sector accounts for 76 per cent of the index. Hence, a fall in the manufacturing sector growth is a point of concern. 2) Slow recovery likely: An important aspect of this data release is the outlook for growth. Analysts do not expect a sharp spurt in manufacturing or mining or in electricity generation. A key trend to observe could be a revival in India’s investment cycle. This means businesses deploying capital for growth and expansion of capacity. Credit Suisse, a foreign brokerage, believes that India could take three to four years to revive the investment cycle. Credit Lyonnais, another influential foreign brokerage, expects the creation of the National Investment Board as a significant development. “The idea is that the NIB will be an expediting body which will have the power to overrule ministers and fast track approvals of big-ticket investment projects,” says the brokerage in a note. This means a lot depends on policy initiatives taken by the government in the future. 3) Wholesale prices ease: Wholesale price inflation or WPI, a key inflation indicator, rose an annual 7.45 per cent. This is the slowest pace of growth since February 2012. In September 2012, it was 7.8 per cent. The Reserve Bank of India plots the trajectory or the path of this data point each month. RBI has clearly stated that it is not comfortable with the inflation rate hovering around the 7.5 per cent mark. The Reserve Bank of India’s main priority is to fight the inflation in the economy. If inflation remains high, it eats into the growth of an economy. RBI is unlikely to lower borrowing rates if it feels that inflation is likely to remain high. .

The detailed government press release on WPI inflation. The release gives in detail the break-up of the index and factors that contribute to the index. Read More    The economic worries due to a slowdown in India were indicated by the IIP and trade data. Read More

9.75%The consumer price inflation or CPI for October 2012 stood at 9.75 per cent against September 2012 figure of 9.73 per cent. This means, for people like you and me, prices continue to rise. All over the world, the main index of inflation is the consumer price inflation index. In India, RBI follows the wholesale price inflation index trajectory. If it were to follow the CPI, it would take longer to cut key interest rates.

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