Hopes Of A Rate Cut Sink Low

Macroeconomic data released yesterday caused the day to be extremely volatile. The day saw the announcement of two key numbers – the Index of Industrial Production (IIP) and Consumer Price Index (CPI). Both these numbers showed trends that caused a stir in equity markets. Dampened hopes of a rate cut by the RBI have spoilt the mood for investors and a negative opening can be expected for today.

The IIP for January came in at 2.4%, higher than the estimated 1%. This has been taken positively by the markets considering it to be a signal of bottoming out. It has shown a slight bounce back indicating a nascent stage of recovery. However, the CPI dampened the mood for investors soon after. Data indicated a reading of 10.9% which is worrisome. Moreover, it puts a question on probable action on the monetary front. The RBI would, with such high and sticky inflation, be left with little/no room for a rate cut. The possible action gets highly restricted with data not being very supportive for actions to spur growth.

Globally, the scenario hasn’t shown any improvement. The UK Office for National Statistics said industrial production saw a decline of 1.2% in January 2013 and manufacturing output saw a fall of 1.5%. To top this slump up, the National Institute of Economic and Social Research estimated a contraction in UK output in February. This has put the economy in fears of a triple-dip recession. Equities however saw gains as expectations of the Bank of England ramping up quantitative easing boosted.

Overall, although growth is seen to be reviving gradually, inflation remains a problem for India. The recent rate cut had the markets cheering. It had also left the markets hoping for another rate cut in March 2013. However, with inflation at near-11%, this seems unlikely, especially considering the hawkish and rather practical stance that the RBI has maintained throughout.

With hopes down low, markets are not expected to see a positive opening today. Yesterday’s closing was rough and today’s opening is expected to be disappointing. Asia too has been low since opening today, trading negative in the range of 0.23% and 0.36%. The SGX Nifty was seen trading lower by 17.50 points at close to 08:00 AM. All these factors sum up to a negative opening for the day.