Three key data points will be released in the next few days and are likely to affect the stock market in the very short term. The Index of Industrial Production (IIP) will be announced on Wednesday, followed by August inflation numbers on Friday and the Reserve Bank of India (RBI) policy meet the following Monday.
But what do these macroeconomic figures mean to the common man?
INDEX OF INDUSTRIAL PRODUCTION:
The IIP numbers are a base of how well our industrial production is performing and covers three key sectors of our economy -- manufacturing, mining and electricity.
The figures have, from a high base effect of 2010, being showing a constant rate of deterioration indicating partially the real slowdown in the economy due to government policy paralysis and a slowdown in corporate capital expenditure.
The key point is the stock markets are forward looking indicators and discount most negative or positive data earlier than most people envisage. So when data is negative, the markets move up anticipating the worst is behind and expect a positive action from the RBI in the form of cash inflows. The opposite is the case when data is strong. The markets generally see strong profit taking as they sense the central bank will not cut rates as the economy seems to be improving. This market reaction can be very confusing to the common man/investor.
INFLATION:
Inflation data, a measure of the price rise in the index of consumption, is another case where we have been on a sticky wicket for the last three years. From high double digits, we are now in the 7/7.5 per cent range with last month’s data showing a reading below 7-6.87 per cent for the first time in 32 months. This is also on the back of 18 rate increases by the RBI to control inflation in the last two years. The data comprises food articles as well as non-food articles, and includes a huge list of soft/hard commodities.
India has had a long high-inflation tenure, mainly due to food as consumption patterns have changed and the real estate boom acreage areas have shrunk, leading to a demand-supply mismatch. Also, our manufacturing non-food inflation has declined because of high oil and other commodity prices. This is the main reason for RBI to tighten money supply and raise the cost of borrowing.
The common man is most affected as his cost of living goes up and he has less money to save.
RBI MONETARY POLICY:
We also have the RBI policy next Monday (17 September) and the market will keenly look forward to its decision on rates. The central bank has been hawkish and is awaiting government action on subsidy control and an across the board fuel price hike. When fuel prices rise, inflation as a proxy will also increase and so will the cost of living to the common man. However, if the RBI cut the repo rate (the rate at which the RBI lends money to commercial banks) and the cash reserve ratio (the proportion of deposits that banks need to keep with RBI as cash), it could lead to a drop in interest rates on loans as banks will likely pass on the benefit to their consumers by reducing the base lending rates.
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