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IIP Fails To Dent Market Spirit

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The disconnect between the the state of economy and the Indian equity market continues to grow. On a day when the government released the by now familiar dismal industrial output growth data, the markets actually vaulted to close above the 18,000 level for the first time since February 23.

Rising for sixth straight day, the Sensex on 12 September jumped 147 points, rising on hopes of government reforms after the aviation minister signalled the country was moving to allow foreign direct investment into the sector. It was also buoyed by expectations that muted IIP growth may actually force RBI to cut interest rates, even as good news arrived in the form of reports that Germany's top court has backed a new EU bailout fund.

Allowing foreign carriers to invest in the sector would help cement expectations for further government action, with investors also hopeful India will open up the multi-brand retail sector and raise fuel prices to lower its subsidy burden. Ajit Singh's utterances had SpiceJet Ltd gaining 7.12 per cent, its biggest percentage gain since August 7. Kingfisher Airlines, which has been reeling under heavy debts, advanced 8 per cent, while Jet Airways rose 4.85 per cent.

Thus the IIP data showing India's industrial output rising a mere 0.1 per cent in July, just below expectations for a 0.3 per cent increase, had little impact on the markets.  (Read: July IIP Growth Almost Flat)

HSBC downgraded Indian stocks to "underweight" from "neutral" on 12 September, citing the government's lack of progress in fiscal or structural reforms as a key factor. (Read: HSBC Cuts Indian Stocks To Underweight)

HSBC economists point out industrial production improved less than expected due to weak exports and domestic investment demand. The growth slowdown is largely supply driven and needs a supply side response in the form of progress on structural reforms to boost growth. A policy rate cut from the RBI will do little to re-invigorate the supply side and would more so imply inflation risks by boosting demand pressures. The central bank is aware of these risks and will therefore stay on hold until Delhi delivers tangible progress on fiscal consolidation and supply side reforms.

Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities pointed out that the IIP index actually fell on a month-on-month basis as well. Apart from the slowdown in capital goods (investments), the consumer goods have also started showing moderation in growth. This is also concerning because consumption has been driving the growth in the economy over the past few months.”  It was only yesterday that Deloitte India's CFO survey predicted a worsening economic situation in 2012. (Read: CFOs Expect Economy To Worsen In 2012)

Policy reforms are seen key for a country facing ratings downgrades into sub-investment grade. Instead, investors cheered comments from India's civil aviation minister Ajit Singh saying he had talked to most of the government's political allies on opening up the sector, raising hopes action could be near.

Global Leg-up
Gains in local shares on 12 September also tracked a risk-on mood globally, after Germany's top court backed the legality of the euro zone bailout funds, although with conditions.

Investors are also hopeful the Federal Reserve will announce new US asset purchases when it concludes its two-day meeting on Thursday, although some analysts warned of the dangers of relying on liquidity that is driven by global risk factors.

"The path is laid for FDI in aviation to go through,"said Ambareesh Baliga, chief operating officer at Way2Wealth Securities.

"International cues such as German court ruling are triggers which will take the market up for a while. But markets cannot sustain those higher levels unless you have a fundamental domestic reason to keep it up," Baliga added.

"German court's ruling today, affirming the implementation of Eurozone's new rescue fund and budget pact, also helped the market sentiment," said Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio.

The BSE Sensex rose 0.82 per cent to end at 18,000.03 points, just above the psychologically key level of 18,000 points. The Nifty rose 0.76 per cent to mark its highest close since March 14.

(With input from Agencies)