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IIP And Inflation Data To Guide Market Mood This Week

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About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal

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Original Article

Stock markets are likely to witness volatile trading in the coming week in view of industrial output and inflation data that are lined up for release, according to experts.

That apart, there are indications that the government may hike fuel prices impacting market sentiment.

While stock markets may open on a bullish note following European Central Bank’s announcing last week a bond-buying plan to revive euro-zone’s ailing economies, key triggers for domestic markets in the form of IIP numbers and inflation data will appear from the middle of the week.

July’s industrial output data will be released on September 12, and August headline inflation figure on September 14.

While slowdown in economic growth has made investors cautious, inflation remains above the comfort level of the government as well as the Reserve Bank, keeping interest rates high.

The new data will provide key inputs for a decision on interest rates coming ahead of RBI’s monetary policy review on September 17, analysts said.

“Concerns over slowing growth and high level of inflation in the economy are expected to persist in the near-term. The Indian markets continue to take positive cues from global events in spite of the weak domestic economic and political environment,” Angel Broking said in a report.

It further said that RBI is unlikely to cut key rates in the mid-quarter review of the policy due next week since upside risks to inflation continue to persist.

Macroeconomic concerns may prompt investors to book profits at higher levels after a smart rally in the market last week, analysts said.

“It will not be easy to hold on to the gains amid growing concerns about the economy and the government’s ability to push through key reforms,” an expert said.

Besides, the government is widely expected to hike petrol, diesel, cooking gas and kerosene prices simultaneously in the coming week.

While the move will ease pressure on oil marketing companies, high crude oil prices remain a concern for the markets for the fear of fanning inflation.
On NSE index Nifty’s weekly outlook, Rakesh Goyal, Senior Vice President, Bonanza Portfolio, said: “For the coming week, if Nifty sustains above 5,350, likely upside target shall be 5,400-5,450. On the other hand, if it goes below the 5,300 level, further selling pressure is likely up to 5,280-5,250.”

On the global front, the Federal Open Market Committee (FOMC) will hold meeting on September 12-13 and markets will keenly await its outcome.

Explanation

Stock markets are public entity where trading of company stocks (shares) and securities at a given price happens. A bunch of people like regulators, investors, buyers, sellers, brokers constitute to the working of the financial market. Every country has its own bourse (stock market) where trading of stocks takes place. For example US has NYSE (its biggest stock market), India has Sensex, Nifty and MCX as the approved bourse for buying and selling of various stocks and commodities.

What is volatile trading?

Volatile trading refers to a situation of high frequency trading where price of a financial instrument varies greatly over a particular frame of time- basically the same stock exchanging hands — being bought and sold multiple times with a higher frequency. Volatile trading occurs during a variety of situations, and occurs on account of ‘important and substantial developments’. Both industrial output and inflation data are ‘substantial developments’ and have a great impact on markets. Analysts and investors scrutinize ‘developments’ and speculate market confidence and movement and make investment decisions on this basis. For eg., Positive news of any company, such as the government approving companies X infrastructure project, will raise its share price as analysts would look at this is a positive development.

Industrial output and inflation data are scheduled to be released next week, and given ‘their weight’ huge activity is predicted to occur on the market floor.

Industrial Output and Index of Industrial Production (IIP)

Index of Industrial Production (IIP) is an index which details out the growth of various sectors in an economy. Industrial production is an economic indicator registered on a monthly basis by an individual country. These figures are based on monthly production output of goods by factories, industries, mines etc. An increase in industrial output depicts a strong order book and demand in the market; and good positive business activity. A decrease in production depicts a fall in output and demand which is negative in the short term (of course the time frames of these definitions need to be understood. Here data is suggestive of a very small time frame which might be completely different in the long run). Increase and decrease of these numbers directly equate to investor confidence in the sector, companies, markets and economy; and impact the nature of trading

Inflation Data

Rise in price of goods and services is referred to as inflation over a period of time. The rise in prices can be translated to reduction in purchasing power as the same value of money can now buy fewer goods and services and this in turn also reduces demand. Inflation results in higher prices and triggers responses from Central Banks like ‘increase in borrowing rates’ without necessarily increasing the ‘value of the purchased commodity or service’- this means that cost of borrowing money for any endeavour will increase thus discouraging increased investment in an effort to slowdown the economy. In fact because of inflation people who compete in the global market are at a higher risk as foreign competitors/ producers do not necessarily have to adjust prices as per inflation. An example to explain inflation is price hike of petrol in India. Petrol in 2010 was Rs 55.8 and now it stands at Rs 75 a price hike of 36 %.

Rising inflation would tend the Central Banks to increase short term borrowing rates to decrease available capital in the system; which translates to cash being more expensive for a business to borrow and use for investment. Inflation forecast can swing markets on either side.

But natural, industrial production and inflation data will inspire volatile trading. The country is in a precarious situation. As the global economy is under turmoil, positive steps like the ECB’s pledge to go on a bond-buying spree to tame a worsening economic situation are positive signs, but are contested by a weakening domestic market scenario. While the economy is slowing down inflation is still way above the benchmark for the RBI to reduce interest rates. Which means that even though the capital flows in the country and business investment is slumping, inflation levels is still quite high and the Central Bank cannot lower borrowing rates. The coming weeks will be extremely challenging for RBI and key reforms need to be pushed.

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