US rate, logjam, inflation weigh

Political gridlock in parliament and rising inflation are likely to overshadow a surge in manufacturing activity in India, and add to worries for equity investors who have been biting their nails for weeks as foreign funds pulled out in anticipation of a US interest rate rise.

Data released after the market closed on Friday showed that industrial output in October grew at a faster-thanexpected annual pace of 9.8 per cent, the best show in five years. Manufacturing expanded 10.6 per cent, indicating that factories were kicking into top gear — a strong point for investors to scoop up beaten down shares.

Output of capital goods, a barometer of underlying strength in the economy, climbed an impressive 16.1 per cent. Consumer goods production, a proxy for demand, jumped 18.4 per cent. As much as 17 out of 22 industrial segments showed positive growth, the central statistical office said. Although the data was helped by base effect — output had contracted in the year-earlier period — there has been sequential growth.

The good news, however, is likely to be swamped by a dysfunctional parliament where opposition lawmakers have stalled proceedings and threaten to jeopardise a much awaited Goods and Services Tax legislation, a major tax reform that would help accelerate factory activity and enable the creation of a common market for the whole country.

Investors, particularly deep-pocketed foreign institutions, have been grumbling about the slow pace of reforms that Prime Minister Narendra Modi had promised to deliver. A lack of adequate numbers in the indirectly elected upper house of parliament has been a big stumbling block for the ruling coalition to get crucial reform bills passed.

“The factory data has beat expectations by a wide margin,” said equity salesman Anmol Bhushan.

“But I am afraid this might not be enough to lift investor sentiment because of the big question mark on reform legislations.”

To a large extent the markets have discounted a speculated 25 basis points increase by the Federal Reserve when it decides after a two-day meeting that ends on Wednesday. Foreign portfolio investors have withdrawn about $500 million (Dh1.8 billion) from stocks this month after taking out $1.1 billion in November n the run up to the event.

“The Fed will dominate world markets until the decision is announced, but it will then fade into the background,” said a money manager at an overseas fund who did not want to be named. “For India, the focus is mainly on fractious politics which is holding back the country from achieving its potential.”

If Modi can swing the GST bill, you can expect a stocks rally, he said, and added that inflation would also be on the radar in the coming week.

Market pundits expect retail inflation for November, due tomorrow, to come in at 5.4 per cent, the highest in five months and ahead of 5 per cent in October. With economic activity picking up and high food prices showing no sign of easing, there will be more pressure on prices to go higher in 2016 — which could force the Reserve Bank of India (RBI) to clamp down on its easing policy.

Car makers Maruti Suzuki and Hyundai have announced plans to raise prices in January, confident that buyers with higher incomes would not mind. While this would help boost their earnings, the firmer prices would feed into the inflation.

Little surprise that economists are betting the central bank, which has slashed its repo rate by 125 basis points since mid-January to 6.75 per cent, would most likely stay pat through 2016. “If you look at the forecasts, then inflation pretty much remains above the RBI’s target range of 5 per cent for January to March 2017, which suggests to us that the RBI is likely to remain on hold,” said Tushar Poddar, an economist at Goldman Sachs.

ANZ and Mizuho Bank also expect the RBI to follow a cautious path.

Be that as it may the big story that will emerge as the defining factor in 2016 would be salary increases across the country. An official pay commission has proposed around a quarter per cent hike in pay packets of central government employees and pensioners, which is estimated to put around $15 billion in the hands of consumers.

Workers at India’s 29 provincial governments as well as in public sector undertakings would also demand and get fat increases in wages. If all the proposals are accepted, the total stimulus could reach $72 billion, or 2.8 per cent of the GDP by March 2017, according to Credit Suisse.

Housing, processed food and entertainment are likely to grab the top spots for incremental spending by some 34 million workers and pensioners, the brokerage said in a report. Companies that will benefit from the stronger demand include UltraTech Cement, Hindustan Unilever, Zee Entertainment Enterprises and appliance maker Havells India.

Makers of cars and motorcycles should also ride the consumer boom in the new year. Rakesh Arora, head of research at Macquarie Capital Securities India, believes that shares in Maruti Suzuki, HDFC Bank, Eicher Motors and Asian Paints can return a combined 21 per cent on average over the next 12 months. In other words, the sluggish stock market should provide a good launching pad to build a portfolio.

At Friday’s closing of 25,044.43, the benchmark is down 8.9 per cent so far this year and 16.6 per cent off the all-time high of 30,024.74 reached in early March.

The broader 50-share Nifty dropped 2.2 per cent week and hit a three-month low.

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