Markets are likely to remain volatile in the coming weeks on worries that key macro-economic data such as retail inflation and the index of industrial production (IIP), scheduled to be unveiled on Friday, could turn unfavourable due to slow trends in sectors that drive these numbers.
The growth in these data coupled with the progress of the monsoon, will indicate the direction that the Reserve Bank of India (RBI) may adopt on the interest rate cycle; an additional rate cut will spur corporate investments and boost growth.
On June 2, the RBI reduced repo rate — the rate at which banks borrow from the central bank — by 0.25 percentage points to 7.25%, but tempered that with a hawkish stance on inflation and the forthcoming monsoon.
On Thursday, the Sensex fell to an eight-month low as nervous investors, discouraged by a bleak monsoon forecast, sold heavily. The problem was further compounded by a sell-off by foreign investors who have started shifting allocations to China.
“We estimate the IIP number to be pretty bleak, somewhere around 1.6-2% going by the seasonal trends seen in various sectors and in capital goods,” said Axis Bank chief economist Saugata Bhattacharya. “On the inflation front, we see the CPI (consumer price index)-based inflation at 5.24%,” he added.
IIP stood at 2.1% in March, while retail inflation eased to a four-month low of 4.86% in April. “The investment cycle will take time, at least two quarters away. So the IIP recovery will be slow,” said N Arunagiri, MD of Trustline Holdings.