Current Economic Indicators: Is it a time for Euphoria?

WPI inflation rate down to 12.40% from 12.63%, GDP growth for first quarter at 7.9% - greeted by the markets with euphoria, BSE Sensex up 516 points and Nifty up 146 points. What are the reasons for this optimism? Are the markets out of the woods?

Let us try to analyse the ground reality to try and find an answer to the above questions:

• Inflation Rate: The rate of WPI inflation for week ended 16.08.2008, has shown a marginal decline over the past week. The major reason for the decline is the decline in prices of non administered petroleum products like naphtha. But the statement from RBI chief are not assuring, calling for cautious optimism. The WPI which is heavily loaded with the weightage of manufactured articles, is not a better representative of inflation and often leads to misleading connotations. CPI (Consumer price index) is a better parameter, andthe effort on the part of authorities should be to track this index which has remained more stable as compared to WPI in the recent past. Any overoptimism on the part of RBI to furthen tighten interest rates may be catastrophic for the Economy.
• GDP growth: The GDP figures for the first quarter of this fiscal at 7.9% (as compared to 9.2% a year ago) are the lowest in the past 14 quarters, and call for a closer scrutiny. The break up of the GDP figures are (Figures in brackets are the figures for last year): Agriculture 3.0(4.3), Mining 1.7(4.8), Manufacturing 5.6(10.9), Electricity & gas 7.9(2.6), Construction 7.7(11.4), Services sector10.1%. There are some alarming signals too: Gross fixed capital formation has decelerated to 9% from 16.7% a year earlier. However private consumption expenditure has remained stable at around 8%. Slowing of capital expenditure does not auger well for the economy, as it is a negative on the supply side impact on inflation.
• Global Commodity prices: The decline in global commodity prices has been responsible for the euphoria in Indian Markets rather than our internal factors. Crude oil prices are in a range between 112-122 $/ barrel, which is considered positive for India. Indian equties are being seen as a good hedge against global commodity prices. This could lure FII's to India in the near term. The current uptrend is again going to be sustained on the back of foreign liquidity.

Our internals will take some time to improve. So don't be mislead by the euphoria so soon. It may not be the right time for fresh equity investments, but it certainly will be a profit booking opportunity if the markets go up by another 10%.