Poor IIP numbers pull down markets

Banks, auto stocks hit; industry calls for a rate increase pause.

Industrial growth continued to be sluggish in May, triggering demands from industry for a pause in rate increases by the Reserve Bank of India (RBI). This, along with debt worries in Europe and lower-than-expected corporate numbers, sent stock markets tumbling.

The Bombay Stock Exchange Sensex fell 309.77 points, or 1.65 per cent, to 18,411. The S&P CNX Nifty of the National Stock Exchange ended the day at 5,526, down 89 points, or 1.60 per cent.

Industrial growth fell to a nine-month low of 5.6 per cent from 8.5 per cent a year ago. The previous low, according to the new Index of Industrial Production (IIP) series launched earlier this year, was 4.5 per cent in August 2010. According to the old series (1993-94), industrial growth stood at a four-month low of 3.6 per cent.(Click here for table & graphics)

Mining and manufacturing, which comprise a large part of IIP, failed to take off. While manufacturing growth fell to 5.6 per cent from 8.9 per cent a year ago, mining expanded 1.4 per cent as compared to 7.9 per cent in the year-ago period.

Segment-wise, intermediate goods grew by less than 1 per cent. Besides, the capital goods sector is not showing any pick-up in demand, hinting at a lacklustre investment scenario.

Consumer durables expanded 5.2 per cent, almost one-third of the 14.7 per cent growth seen a year ago.

Industry chambers, including Ficci and CII, asked the government to provide incentives to the manufacturing sector. They said repeated interest rate increases had hit investments and urged RBI to refrain from another increase in its policy review on July 26.

Finance Minister Pranab Mukherjee expressed concern but played down the numbers saying one-month figures could not be taken as a trend.

He pinned hope on the proposed National Manufacturing Policy. “We are having discussions with various people, chambers of commerce and others and are working on ways to improve the manufacturing sector,” he said.

Economists believe industrial growth is just moderating. On whether growth was slowing in only interest rate-sensitive sectors, Kotak Mahindra Bank Chief Economist Indranil Pan said, “Slowdown starts from interest-rate sensitive sectors only.” He said a favourable monsoon could play a major part in boosting rural demand.

Despite the new series taking 2004-05 as the base year as against the earlier base of 1993-94, IIP continues to show volatility.

The April figure has been revised sharply from 6.3 per cent to 5.7 per cent. RBI has been expressing concern over frequent changes in data.

YES Bank Chief Economist Shubhada Rao said, “Looking at the revised April IIP data, we find a sharp downward revision in capital goods growth from 14.5 per cent to 7.3 per cent. Clearly, volatility continues to mar the new IIP series. Having acknowledged this volatility earlier, RBI, in our view, is likely to attach little importance to the recent data.”

The fear of hardening rates hit banking and technology stocks. Weak sentiment was visible since the morning as Infosys, citing global uncertainties, gave a conservative outlook. India’s second-largest software services exporter gave a revenue guidance of Rs 7,699-7,810 crore for the quarter ending September 30, which means 10.8-12.4 per cent growth. It reported a 16 per cent increase in net profit for the quarter ended June 30.

Infosys shares fell nearly 6 per cent, before recovering partially to close at Rs 2,786.10, down 5 per cent. TCS and Wipro also lost ground. Foreign institutional investors sold shares worth Rs 970 crore, according to the provisional data.

“There were a number of concerns. Infosys numbers were lower than expected and its guidance was conservative.

This has showed that uncertainties around the globe still exist. In addition to this, the European crisis added to the worries. The IIP data were also below expectations,” said K K Mital, head, portfolio management services, Globe Capital.

While analysts attribute the poor IIP numbers to RBI’s tight policy, there are enough indications that the central bank will increase rates later this month to contain inflation.

State Bank of India, ICICI Bank and HDFC Bank fell 0.7-1.77 per cent due to concerns over hardening rates and slowing economic growth. The BSE Bankex fell 1.04 per cent.

Auto stocks, including Maruti Suzuki, Tata Motors and Mahindra and Mahindra, fell 1.43-3.22 per cent on worries over slowing sales.

Elsewhere in Asia, Hang Seng lost more than 3 per cent while Nikkei and Kospi were down 1.43 per cent and 2.20 per cent, respectively, due to growing concerns related to the European crisis.