How does IIP data affect stock markets?

WHAT ARE IIP NUMBERS?

  • IIP- index of industrial production is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time.
  • IIP number is one of the best statistical data, which helps us to measure the level of industrial activity in Indian economy. It is a short term indicator. It is useful to guage the rate of industrial growth until the actual results from the annual survey of industries are published.
  • IIP data is broadly divided into three segments – manufacturing (79.36%), mining & quarrying (10.47%) and electricity (10.17%).
  • Another way of categorizing the items used in the calculation of IIP is a ‘Use based classification’ with categories like Basic Goods, Capital goods, Intermediate goods, Consumer durables and Non-consumer durables.
  • The IIP index reflects the growth in India’s industrial activity and excludes all kinds of services ( for example banking sector).
  • The base year for the index over the period of the analysis is 1993-94 and it includes items whose gross value of output is at least Rs 80 crores and Rs 20 crores at gross value added level. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector.

WHEN IS IT PUBLISHED?

Usually IIP number of a particular month would be published after two months. The date of publishing IIP numbers are usually between 11 to 14th of a month.  As IIP shows the status of industrial activity, you can find out if the industrial activity has increased, decreased or remained same.

IIP AND STOCK MARKETS.

  • The reduced consumer spending leads to lower demand situation. The producers respond by cutting down on the production. Low industrial production results in lower corporate sales and profits, which directly affects stock prices. So a direct impact of weak IIP data is a sudden fall in stock prices.
  • A continuous fall in overall IIP data may lead to many fundamentally strong stocks being undervalued. This gives you the perfect opportunity to invest in fundamentally strong companies at discount price.
  • Growth in IIP numbers are good signs for cement and steel industries. Mining Sector contributes approx 10% to the IIP. Growth figures can tell us in advance about how mining and  steel companies  are going to fare in coming quarters.
  • The IIP data is purely industrial data. Banking sector is not included in it. But, increase in production & investment activity is usually financed through borrowings from banks. So, if industrial production & capital spending is increasing then it is likely to have a positive impact on the banking sector. A lower IIP data can affect banking industry adversely.
  • You need to check the reason behind the increase/decrease in IIP figures before investing. Though IIP does indicate the condition of the country’s economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance as compared to others. This was evident in the recent past when realty sector showed higher performance, pharma sector lagged behind.

PROBLEMS WITH IIP NUMBERS.

A major problem with the IIP data is its outdated base year 1993-94. Its product basket of 543 items is no longer representative considering the dramatic transformation of the economy and the consumption behavior of the people in the post-reform period. Some of the old products have gone out of use and many new products have come into the market over the past decade and a half.

There is very little representation of the products manufactured by the micro, small and medium enterprises which account for about 45 per cent of the total industrial output in the country and 40 per cent of exports. Hence the IIP numbers fail to capture the actual trends in this sector.

Another drawback is that the data are revised, reclassified, challenged by industry associations and found not in tune with the Annual Survey of Industries.

However, IIP data is something that investors need to keep track. Indian stock markets are very sensitive to IIP Numbers. A better IIP number would show a positive growth on our Industrial production and share markets would possibly cheer.

Have a nice day..

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1 Response to “How does IIP data affect stock markets?”

Sensex (17563) , Nifty (5284)-Expected outlook. | Basics of Share Market

November 7, 2011 at 8:09 am

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