Macro view: Sentiment sanguine

Inflationary pressures have remained strong; however, a pick-up in manufacturing activity is seen as a positive.

While concerns over inflation abound, there is a strong undertone of optimism. The signs of economic recovery and momentum being sustained are getting clearer. Inflation raised its ugly head with the wholesale price index (WPI) rising 10.16 per cent in May. These numbers are worrisome, as inflation has been surging for the last seven months (much above the comfort zone of five per cent).

However, the Index of Industrial Production (IIP) jumped 17.6 per cent year-on-year in April, way above the expectation of 14.3 per cent. This was more than the 13.9 per cent growth in the previous month. The 72 per cent jump in the capital goods sector was behind the sanguine sentiment. Such growth was seen on completion of pending orders from the infrastructure sector. Capacity expansion, though yet to pick up impressively, has started to come onstream. The investment pipeline also remains strong, say experts.

Another positive indicator will be the advance tax numbers. Key companies and banks like HDFC Bank and TCS have paid considerably high advance tax. However, high IIP numbers are expected to normalise in June, as the low base-effect disappears and the inventory re-stocking effect dries out. But, this has been factored in the market place and estimates will be adjusted accordingly.

The critical area to watch out for will be the reaction of the central bank to rising inflation and IIP numbers. Experts reckon that the Reserve Bank of India will take ‘calibrated’ steps to manage inflation so that the growth momentum is not hit. The funds mopped up by 3G auctions are expected to see the government report an improvement in the fiscal deficit. Therefore, there are more positives than negatives.