The index of industrial production data that came out today and showed a growth of 7.8% vis a vis expectations of 2-4% has reduced the downside risks to the markets substantially.
There are improving trends in most categories and with improving liquidity and benign interest rates the trend should only accelerate in the months ahead. The strong uptick in manufacturing with a growth of 7.3% and of electricity of 8% ( despite reduced hydel generation, positively impacted due to better availability of gas) and the strong growth in consumer durables and capital goods is a big positive. Given the fact that the last six months of financial year 2008-09 were nothing to write home about and the base for the first few months of the current fiscal is also low we should now see steadily improving IIP numbers which should move on to double digit growth from October 2009 onwards.
Although the big negatives due to the monsoons still remains and swine flu continues to impact the markets and economic activity in the short run, the kind of acceleration we are seeing in IIP numbers should be easily be able to make up for the shortfall in agricultural growth for the Kharif season.
An average of 8% IIP growth for the current year, combined with an 8% plus growth in services and a 3% decline in agricultural output should see the economy growing at a rate of over 6% for the current financial year.
Under the circumstances i believe that the downside for the markets in this corrective phase which could have taken the markets in terms of the NIFTY to as low as 3600-3700 levels could get limited to levels of 3850-3950 NIFTY. As such the bottom seen subsequent to the presentation of the budget could turn out to be a durable bottom that the markets are likely to touch over the next few weeks.
As I have written in few of my earlier commentaries the two key factors that were looking oversold and could move against the global markets i.e The US Dollar value and the VIX index also seem to have bottomed out in the near term and are looking to move higher. The bottoming of the US dollar is typically followed ( with a lag of around 5-10 days) by a sell off in risky assets which include equities and commodities. As such we should see the Indian markets complete their leg of correction along with other global markets over the next few weeks.
I believe that the sooner than expected pick up in industrial activity is a game changer for sure as it can nullify the expected underperformance of the Indian markets due to monsoon concerns.
Lets hope that the monsoons also pick up now.