India's IIP Shock Opens Room For Rate Cut

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Includes: IBN, INFY, INP
by: Disruptive Investor

Summary

India's October 2014 IIP was the lowest in three years and the surprise decline can result in near-term correction in Indian equities.

I expect an interest rate cut soon with dismal IIP data coupled with low inflation being the key triggers.

Investors can use the current correction to buy interest rate sensitive stocks.

I have been of the opinion that India's economic growth will accelerate in 2015 with the new government being investment friendly. IMF GDP forecast data also suggests that India's GDP growth will accelerate to 6.4% in 2015 as compared to 5.6% in 2014.

While I remain optimistic on the country's GDP growth prospects for 2015, the latest index of industrial production data has come as a shocker. The country's October 2014 IIP has come at a negative of 4.2%, which is the lowest level in three years. According to the news release -

The index for industrial output (IIP) for the month of October slipped to a three-year low of -4.2 percent against a CNBC-TV18 poll estimate of 2.1 percent, led by a degrowth in manufacturing sector, which stood at -7.6 percent as against 2.5 percent (MOM). The September IIP had come in at 2.5 percent.

Besides the IIP shocker, the CPI came in at 4.3% for November 2014 as compared to 5.5% in October 2014.

There are several points and conclusion from these two set of data -

  • The sharp decline in industrial production comes at a time when the global economy is slowing down and it raises concerns on India's growth sustainability (especially when China and Eurozone are slowing down significantly).
  • The Indian Central Bank has not cut interest rates on inflation fears. However, with oil prices falling along with a fall in agricultural commodity prices, it is likely that central bank will consider cutting interest rates soon.
  • The Indian markets have corrected by 5% in the last two weeks, and I believe that there is more correction to come considering the latest set of data that has come as a surprise. However, the correction is a good long-term buying opportunity.
  • Banking stocks can be considered for exposure as the markets correct. With increasing likelihood of interest rate cut, banking stocks are likely to outperform in 2015. I am particularly bullish on ICICI Bank (NYSE:IBN), which is India's largest private sector bank.
  • IT stocks can be considered for exposure as with weak economic data pointing to further depreciation of the rupee. The Indian currency is currently at 62.3 against the dollar and I believe that further depreciation is on the cards over the next 1-2 quarters. With the US economy showing amazing resilience, the dollar will continue to strengthen. Among the IT stocks, I like Infosys (NASDAQ:INFY) and I had discussed earlier the reasons to be bullish on the stock.

Overall, I remain bullish on India as the reforms have just started and GDP growth will pick up as these reforms percolate in the real economy. Just as an example, infrastructure projects worth 1.8 trillion rupees have been kicked off since the government came to power in May 2014. With planned infrastructure spending of 5 trillion rupees over the next five years, a significant impact is bound to come on the GDP growth. Again, interest rate cuts will trigger higher infrastructure spending as most public-private partnership projects involve significant debt.

Therefore, the current decline in IIP is likely to be temporary and impacted by global cues. As I have opined earlier, US equities and Indian equities will remain the bright spot in 2015. I maintain the view and I am bullish on the country's growth prospects for the coming year.

I must also add here that India's finance minister has also promised a better tax regime to attract foreign investments. This is important as there will be big portfolio reallocation from China towards India. A better tax regime will help spur growth on higher foreign direct investments.

In conclusion, the recent IIP might have come as a shocker for the markets. However, investors can use this opportunity to consider further exposure to Indian markets. In particular, interest rate sensitive sectors will be outperformers in 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.