The figures consolidate expectations of some strict monetary policy actions, but markets unlikely to get impacted.
The Index of Industrial Production (IIP) continues to grow at over 15 per cent year-on-year (February 2010), as India Inc puts the pedal to the metal, albeit on the back of last year’s low base. The growth rate was below market estimates of 16 per cent due to a slower electricity growth and other seasonal factors. However, capital goods and consumer durables are showing strong growth of 44 per cent and 30 per cent, respectively, mirroring the pick-up in capital investment and discretionary spend, reflecting higher consumer confidence.
Analysts peg year-end IIP numbers at 10.5 per cent and expect it to grow 14-16 per cent over the next few months. Thus, the Reserve Bank of India (RBI) will find few reasons to stay away from an intentionally hawkish mode (given the spiralling inflation). The market expects RBI to raise the cash reserve ratio (CRR) by about 50 basis points and policy rates by 25-50 basis points in its annual monetary policy review on April 20 in a phased manner. This will absorb about Rs 22,500 crore at the higher end of this band, says analyst.
So, has the market actually priced in such an aggressive monetary policy stance? The Sensex has steadily moved up in April on the back of record FII inflows and seems to be in a consolidation mode now. While most brokerages are expecting a gradual tightening with no knee-jerk movements, a few believe that the market is underestimating the extent of hardening that is coming up.
Notwithstanding the domestic interest rate risk, the booming growth rates and favourable global carry trade (given the record negative real interest rates across several developed economies) should attract flows to emerging markets like India. As long as global liquidity stays strong, it could push the markets to touch higher levels.
With contributions from Sarath Chelluri & Sunaina Vasudev