Factory growth back in black, but worries abound

Factory output logged a 2.4% growth in May, ending a two-month negative run. Though this is way under the 6.2% growth seen in May last year, economists suggest the improvement could put paid to hopes the Reserve Bank of India (RBI) will cut key rates at its monetary policy review meeting on July 31.

Expectations are that headline inflation, or inflation based on the wholesale price index (WPI), will weigh in higher than the 7.55% it logged in May. The data is due
Monday.

“The overall sluggishness in the industrial sector persists in spite of the slight uptick in IIP growth in May. Nevertheless, drawing upon the guidance provided recently by the RBI, inflationary concerns are likely to dominate monetary policy in the near term,” said Aditi Nayar, senior economist, ICRA.

In a poll of eight economists conducted by DNA last week, as many as six had said the RBI would maintain status quo on the repo rate, or the rate at which it lends to banks.
The stock market appears to have realised this the hard day, amidst the negative statement after information technology bellwether Infosys announced first-quarter numbers well below Street expectations and cut its revenue forecast for the full financial year to 5% from 8-10%.

The BSE Sensex ended the day down 1.47%, its biggest single-day loss since June 1.

Infosys’ bigger peer, market leader TCS, announced upbeat numbers post market hours

Some experts are worried that a delayed rate cut could, in a sort of vicious cycle, hurt industrial production going forward.

“We expect industrial production growth to slow sharply next month. The falling trend in consumer non-durables is particularly worrying, given that there is an additional risk from a weak monsoon,” said Sonal Varma and Aman Mohunta of Nomura in a report released Thursday.
During May, manufactures, led by textiles, fabricated metals and machinery segments that together make up as much as 75% of the index of industrial production (IIP), logged a 2.5% growth. However, mining contracted 0.9% and the capital goods segment shrank nearly 8%.

But on the positive side, fund flows are expected to improve.
On Thursday, the worst trading session in 40 in the equity market, foreign institutional investors were net buyers by Rs 268.54 crore.

“Money can come in incrementally if sentiment changes in favour of taking on more risk. The depreciation in the rupee creates an attractive entry point for the foreign investor,” said Satish Ramanathan, head of equities at Sundaram Mutual Fund.

Any appreciation in the rupee, which is trading near all-time lows, will directly add to the profits of foreign investors who invest in dollars.

SP Tulsian, an independent investment advisor, sees the government taking positive steps to prop up the local currency.
Still, a rate cut may be too much to expect from RBI.

“On rates, we are holding on to our 50-75 basis points rate cut call for the year. But given the RBI’s stance on elevated levels of both the WPI and consumer price index, supply demand imbalances and the onus on the government to deliver change, monetary easing in the immediate near term seems unlikely,” Rohini Malkani of Citigroup Global Markets said in a note released on Thursday.

To be sure, though, Brazilian and South Korean central banks cut rates on Thursday, following similar moves from the European Union and China aimed at encouraging spending, growth and investment in risky assets by making available money at cheaper rates.