Stock Review: Macro

Industrial growth is expected to be lower, albeit steady, in the days to come and inflationary pressures are likely to ease

Key data unveiled over the past few weeks have brought some relief to economists. The fear of the economy overheating prompting the central bank to take stringent action on the rate front and, thereby, stifling growth, has eased considerably.

Over the past few months, we have changed our view on the Indian economy and things look much better now.

The industrial growth, at 7.1 per cent, was lower than expectations. However, it remained steady on a monthly basis. The three-month moving average remains high, close to the double-digit number. Hence, economists are optimistic about eight nine per cent growth for the whole year. The higher base will have a calming effect on the numbers, though.

A study by economists at Edelweiss Securities points that the demand pull has not been the primary driver of inflation. They realigned the inflation drivers into three baskets – agro inflation, imported industrial inflation and non-food domestic demand driven inflation. The rearranged wholesale price index basket suggests that of the current 9.97 per cent inflation, only 230 basis points is contributed by demand pull factors. Agri-inflation and imported sources together contribute around 770 basis points.

With the monsoon remaining strong and cultivation trends positive, agri based inflation should come down further. Bajoria sees it settling down at around six per cent by December. The key risk at the moment is the decline in money growth, which could be a major deterrent as demand for credit from the corporate sector is strong. Tight liquidity over the next six months could have a spill over effect on industrial production. But, the central bank has several levers to manage this, reckon economists. Hence, the economy is expected to move at a lower but steady pace.