WHAT ARE IIP NUMBERS.docx

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WHAT ARE IIP NUMBERS?

IIP- index of industrial production is a measurement which represents the status ofproduction 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 ofindustrial 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 segmentsmanufacturing (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 basedclassification with categories like Basic Goods, Capital goods, Intermediate goods,Consumer durables and Non-consumer durables.

The IIP index reflects the growth in Indias industrial activity and excludes all kinds ofservices ( for example banking sector).

The base year for the index over the period of the analysis is 1993-94 and it includesitems 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 cancomprise 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 remainedsame.

IIP AND STOCK MARKETS.

The reduced consumer spending leads to lower demand situation. The producers respondby 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 beingundervalued. 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 Sectorcontributes 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 inproduction & 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 countrys economy, it should not be taken


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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 havegone 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 associationsand 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 Industrialproduction and share markets would possibly cheer.

How does interest rate affect stock markets?

by J Victor on November 3rd, 2011

WHY SHOULD YOU KNOW ABOUT INTEREST RATES?

Interest Rate in simple words means the cost of borrowing funds. It is the payment we make tothe lender for the facility of using his money for our own purpose. Many times our spending

decisions are also guided by the interest burden that we would be bearing.

But, more than the returns we should be concentrating on real returns on our savings (real
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return = interest rate- inflation). The real returns concept has been already discussed in our

previous article titledInflation. Even as consumers, interest rate is an integral part of our

spending habit as we borrow from the bank for buying house, cars, house old items etc. For thebusiness community interest rate is also very important as they borrow money from bank for

investment activities like capacity expansion, setting up of plants, acquisitions, modernization

etc. So interest rates play a critical role in a businesss profitability and hence, on stock prices.

INTEREST RATES DECIDE WHERE WE INVEST.

How many of us would invest in stock markets if our bank would pay 12% interest in fixed

deposits? Many of us will prefer to deposit money in that bank than invest in stocks (as well as

mutual funds). Why? Because, we have the opportunity to earn higher returns at very low risk.As a result, funds move out of stock market affecting the stock markets adversely.

THE IMPACT OF HIGHER INTEREST RATES.

After reading the above paragraph, some of you might have thought that it would be great to geta 12% risk free return annually. Unfortunately, thats not the case. If the bank is paying you12% interest, it would have to charge its customers anywhere between 15% to 18% on their

loans. (Customers here would mean anyone who borrows money from bank including big

corporates, small and medium enterprises, farmers and individuals). This, inturn, will result inhigher borrowing costs for them and thereby disturbs the overall profitability. A drop in profitswould result in stock prices coming down.If interest rate continues to rise for a longer duration

then it will have an all round negative impact on the economy, leading it into a recessionary

mode. For examplefarmers who borrow money at higher interest rates to buy land, fertilizers,seeds, tractors etc would find it difficult to improve agricultural productivity to match up with

the rising costs. Since agriculture is the backbone of Indian economy, high interest rate would

act as a road block to the entire growth process.

SHORT TERM AND LONG TERM IMPACT.

In the short term: The immediate impact of rise in interest rate is on companies with high debt

in their balance sheet .The interest payment made by them rises which reduces their EPS. Thus

there would be negative sentiments for such stock; resulting into depleted stock price.

In the long term- high interest rate would have more sector specific impact. The sectors which

are most impacted by high interest rate is the real estate, automobile and all the capital intensiveindustries. So, any investment by you in these sectors must be taken with a lot of caution during

the situation of high interest rates.

So, definitely High interest rate is not the way to go about for the country.

SO, WHAT ABOUT LOW INTEREST RATES? DOES THAT WORK?

When the interest rate is very low, you would be obviously saving less and consuming more. Thefixed deposits are no longer attractive. This would leave the banks with much lower money to
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lend out to the borrowers, and their profit margins would also be affected by lower interest rate.

Thus there would be fall in consumption & investment activities in the economy. The

government in this situation would resort to printing of currency to infuse more money in theeconomy. This would lead to inflationary situation in the country. Also,FIIs pace their decision

on the basis of difference in interest rates between economies among other things. At very low

interest rate the inflows are likely to be reduced.

So, what a country like ours needs is a balance between high and low interest rates. Interest rates

cant go high and it cannot be very low. A moderate inflation & interest rate over a period oftime will keep the banks, business community and the consumers happy.

REPO RATE AND REVERSE REPO RATES.

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the

rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks toget money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more

expensive.

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks.

Banks are always happy to lend money to RBI since their money is in safe hands with a good

interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI dueto attractive interest rates. It can cause the money to be drawn out of the banking system. RBI,using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their

lending or investment rates for common man.

BASIS POINTS.

A basis point is one hundredth of a percentage point (0.01%). Basis points are often used tomeasure changes and differentials in interest rates rates of return, and other percentage-based

performance metrics that can occur as fractions of a percent.. Basis points are used to mentionchanges in interest rates because percentage changes are often small.

When changes in interest rates are quoted in basis points, it is always understood this indicatesan absolute change in the rate. This avoids the ambiguity that arises when changes in interest

rates are quoted as percentages. To illustrate, if an interest rate were 5%, and we were told the

rate rose one percent, it wouldnt be clear whether the change were absolute,

rendering a new rate of 5% + 1% = 6% OR

relative, rendering a new rate of 5%(1 + .01) = 5.05%

If instead we were told the rates are up 100 basis points, we would know the change was

absolute and that the new rate must be 6%.

So, One basis point is one-hundredth of a percentage point. 25 basis points is 0.25%.INTEREST RATES AND STOCK MARKETS.


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Having explained so far, I know you would have already guessed about the relation between

interest rates and stock markets. They are inversely related. As the interest rates go up, stock

market activities tend to come down. The following points are also worth taking note-

Capital intensive industries would be most affected by high interest rates but when theinterest rates are lower they would be gaining the most. It is better to avoid investmentsin sectors such as real estate, automobiles etc when the interest rates are rising.

Companies with a high amount of loans in their balance sheets would be affected veryseriously. Interest cost on existing debt would go up affecting their EPS and ultimatelythe stock prices. But during low interest rate these companies would stand to gain.

Sectors like Pharma and IT are less affected by interest rates. The IT sector is moreinfluenced by factors such as currency rate fluctuations, rising attrition level, visa

restrictions, competition from the large global players and margin pressures. Certainly, ITsectors are not interest rate-sensitive. Pharma is considered as the defensive sector and

investors can invest here during uncertain and volatile market conditions.

In a high interest rate scenario, companies with zero or near zero debts in their balancesheets would be kings. FMCG or fast moving consumer goods is one sector thatsconsidered as a defensive sector due to its low debt nature.

Banking sector is likely to benefit most due to high interest rates. The Net InterestMargins (It is the difference between the interest they earn on the money they lend andthe interest they pay to the depositors) for banks is likely to increase leading to growth in

profits & the stock prices.

How do FI investors affect stock markets?

by J Victor on November 4th, 2011

WHO ARE THEY?

FIIs are Foreign Institutional Investors. A term that is commonly found whenever theres adiscussion on stock markets. FIIs are entities (banks, insurance companies, mutual funds etc)

registered in a country other than in which they are investing. For e.g. a US Mutual Fund which

invests in the Indian Stock Market. FIIs usually pool large sums of money and invest those insecurities, real property and other investment assets. As bulks of their investments are in the
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stock market, the inflow or outflow of money by FIIs affect the stock market movement

significantly. If you follow financial dailies, you are bound to see headlines such as FIIs

remained net buyers. Net buyers implies that foreign investors poured more money into thestock market than they took out, which is generally seen as a positive development as far as our

economy is concerned.

In India, Foreign Institutional Investors are not permitted to invest in equity issued by an Asset

Reconstruction Company. They are also not allowed to invest in any company which is engagedor proposes to engage in the following activities:- Business of chit fund, Nidhi Company,

Agricultural or plantation activities, Real estate business or construction of farm houses (real

estate business does not include development of townships, construction of

residential/commercial premises, roads or bridges).Trading in Transferable Development Rights(TDRs).

FIIs VS FDIs.

FDI is defined as investment made to acquire lasting interest in enterprises operating outside of

the economy of the investor. Examples of FDI would include POSCO setting up a steel plant inOrissa (in-bound FDI), Tata buying Arcelor (out-bound FDI) and so on.

ARE FI INVESTORS BENEFICIAL FOR OUR ECONOMY?

The presence of institutional investors has its own plus and minus points.

On the brighter side

FIIsalways purchase stocks on the basis of fundamentals. And this means that it isessential to have information to evaluate, so research becomes important and this leads to

increasing demands on companies to become more transparent and more disclosures.This will lead to reduction in information asymmetries.

The increasing presence of this class of investors leads to reform of securities trading andtransaction systems, nurturing of securities brokers, and liquid markets.

FII inflow increasing every year will bring the very welcome inflow of foreign capital.Attracting foreign capital is the main reason for opening up of the stock markets for FIIs.

If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their highconfidence and a healthy investor sentiment for our markets. They have improved thebreadth and depth of Indian markets.

FII inflows help in financial innovation and development of hedging instruments. Also, itnot only enhances competition in financial markets, but also improves the alignment of

asset prices to fundamentals.

FIIs as professional bodies of asset managers and financial analysts enhance competitionand efficiency of financial markets

On the Flipside-


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There are always some dangers if certain limits are exceeded. Firstly, the foreign capitalis free and unpredictable and is always on the look out of profits.FIIs frequently move

investments, and those swings can be expected to bring severe price fluctuations resultingin increasing volatility.Infact the FIIs are greatly responsible for causing volatility in

Indian market.

Increased investment from overseas may shift control of domestic firms to foreign hands.

The FIIs profit from investing in emerging financial stock markets. If the cap on FII ishigh then they can bring in huge amounts of funds in the countrys stock markets and

thus have great influence on the way the stock markets behaves, going up or down. The

FII buying pushes the stocks up and their selling shows the stock market the downwardpath. This creates problems for the small retail investor, whose fortunes get driven by the

actions of the large FIIs.

FII flows leading to appreciation of the currency may lead to the exports industrybecoming uncompetitive.

FIIs EFFECT ON STOCK MARKETS.

While analysing a stock, the percentage of FII holding is an important factor to be noted.When % holdings of FIIs increases in a stock its stocks price goes up and when it drops,its share price comes down. However, readers should not take that as a negative remark.

If an FII invests in a company, it also means that they see growth potential in that

company.

If the number is too large then its easier for the individual entities to move out of a stockwhich would make stock price of the company very volatile and risky. So, investing in a

company which has smaller number of FIIs could be a safer investment option.

A fundamentally sound company which has a consistent and stable FII shareholdingwould be an ideal candidate for investment. When some FIIs exit from a good stock, its

price actually falls thus giving a good chance to invest in it. However be sure to check

the reason for the FIIs exiting the stock. If it is due to change in the fundamentals of the

company, it is a negative sign.

Stock markets in india

by J Victor on August 2nd, 2010

THE HISTORY OF BOMBAY STOCK EXCHANGE

The Bombay stock exchange traces its history back to the 1850s, when 4 Gujarati and 1 Parsi

stock broker would gather under a banyan tree infront of mumbais Town hall.The location ofthese meetings changed many times, as the number of brokers constantly increased.The group

eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as

The Native Share stock Brokers association.


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THE PRESENT SCENARIO

There are 19 recognized stock exchanges in India. The Bombay stock exchange (popularlyknown as The BSE ) and The National stock exchange (popularly known as The NSE ) are the

most prominent in terms of volume and popularity.

The Bombay Stock Exchange Popularly called The BSE is the oldest stock exchange in Asia

and has the third largest number of listed companies in the world, with 4900 listed as of Feb

2010. It is located at Dalal Street , Mumbai , India . National Stock Exchange comes second toBSE in terms of popularity.

Over the decades, the stock market in the country has passed through good and bad periods. Till

the decade of eighties, there was no measure or scale that could precisely measure the various

ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock Index-SENSEX-

(SENSitive indEX) that subsequently became the barometer of the Indian stock market.

WHAT IS A STOCK MARKET INDEX?

Stock market indexes provide a consolidated view of how the market is performing. Stock

indexes are updated constantly throughout the trading day to provide instant information.

The SENSEX and other indexes

The BSE SENSEX (SENSitive indEX)is a basket of 30 stocks representing a sample of large,

liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is

100. The index is widely followed by investors who are interested in Indian stock markets.

During market hours, prices of the index scrip, at which trades are executed, are automatically

used by the trading computer to calculate the SENSEX every 15 seconds and continuouslyupdated on all trading workstations connected to the BSE trading computer in real time

30 stocks that represent SENSEX.(Updated on 7/7/2010)

ACC Ltd. Bharat Heavy Electricals Ltd.

Bharti Airtel Ltd. Cipla Ltd.

DLF Ltd. Jindal Steel & Power Ltd.

HDFC HDFC Bank Ltd.

Hero Honda Motors Ltd. Hindalco Industries Ltd.

Hindustan Unilever Ltd. ICICI Bank Ltd.

Infosys Technologies Ltd. ITC Ltd.


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Jaiprakash Associates Ltd. Larsen & Toubro Limited

Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd.

NTPC Ltd. ONGC Ltd.

Reliance Communications Limited Reliance Industries Ltd.

Reliance Infrastructure Ltd. State Bank of India

Sterlite Industries (India) Ltd. Tata Consultancy Services Limited

Tata Motors Ltd. Tata Power Company Ltd.

Tata Steel Ltd. Wipro Ltd.

The BSE Sensex is not the only stock market index in India. The NSE has The NSE S&P CNX

Nifty 50 indexa well diversified 50 stock index accounting for 24 sectors of the economy.While both SENSEX and NIFTY would give you an overall direction of the stock market there

are other indices which track a particular sector.

For exampleThe NSE CNX IT Sector Index tracks companies that have more than 50% of

their turnover (or revenues) from IT related activities like software development, hardware

manufacture, vending, support and maintenance. So for those who are tracking the performance

of IT Sector this index would become a benchmark for investing. Yet another example is theBSE BANKEX index which tracks the banking sector shares.

WHATS GOOD ABOUT INDEXES

Indexes provide useful information including:

Trends and changes in investing patterns. Snapshots, even if they are out of focus. Yardstick for comparison.

KNOW IT

A stock market index is a statistical indicator which gives an idea about how the stock market isperforming. In India the main indexes to be tracked are The BSE SENSEX and The NSE NIFTY.

The SENSEX comprises of 30 companies representing different sectors and the broader NIFTYcomprises of 50 companies from 24 sectors. There are many other indexes that track particular

sectors of the economy. These indexes would give you an idea about how that particular sector

is performing.

World over, there are a number of indexes as there are stock markets. DOW JONES INDUSTRIALAVERAGE and NASDAQ COMPOSITE INDEX both track US stock markets. NIKKEI 225 is the


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stock market index of Japan, HANG SENG index for Hong Kong, FTSE 100 For UK, KOSPI for

Korea, SHANGHAI for China etc. All these indexes serve the same purpose. It gives an idea about

where the financial growth of a country is headed to.

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WHAT ARE IIP NUMBERS.docx