4 Point Impact of IIP Data on Economy & Stocks

How Does An Economy Get Affected by IIP Numbers?

Introduction

In this article, we will discuss the Impact of IIP Data on Economy & Stocks. We have seen what is IIP in our earlier article. Let us see the calculation of IIP, how to interpret IIP in this article.

WHO PUBLISHES IIP DATA & SOURCE OF DATA COLLECTION

• IIP index is computed and published on a monthly basis by Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation.
• It is published with a lag period of 6 weeks from the end of the Reference Month. Reference Month can be defined as the month for which the IIP data is being released.
• IIP data release comprises of quick estimates of the IIP for the relevant month as well as revised and final indices.
• The revised indices are the first revision of the quick estimates of the month prior to the reference month. While the final indices are the final revised quick estimates of two months prior to the reference month.

Calculation of IIP

• The compilation of IIP is carried out in multiple stages. Initially for the items, then for the sub-groups groups and major groups. Finally for all the sectors combined.
• The items included in IIP are selected from the results of 3-digit level National Industrial Classification(NIC)-2008.
• The selection is done in such a way so as to ensure that all the selected items contribute to at least 80% of the output of each 3 digit group.
• Each item is given a relevant weight.
• Weights at the sectoral levels are computed by using the sectoral Gross Value Added(GVA) , the GVA figures are obtained from National Accounts Statistics with the base year 2011-2012.

• IIP is calculated as Weighted arithmetic mean of quantity relatives with weights being allotted to various items in proportion to value added by manufacture in the base year by using Laspeyres’ formula:
• IIP = ( ∑ (W_iR_i) / ∑W_i )
• where i is the index,
• R_i is the Production Relative of the ith item for the relevant month
• W_i is the weight allotted to ith item
• Production Relative is calculated as:
• Ri = (Qi / Qo)
• Where, Qi = Quantity produced in the current year in the reference month
• Qo = Quantity produced in the base year in the reference month

How to Interpret IIP?

• Industry-level data are useful for managers and investors within specific lines of business, while the composite index is an important macroeconomic indicator for economists and investors.
• Fluctuations within the industrial sector account for most of the variation in overall economic growth, so a monthly metric- IIP helps keep investors apprised of shifts in output.
• At the same time, IIP differs from the most popular measure of economic output, gross domestic product (GDP) – GDP measures the price paid by the end-user, so it includes value added in the retail sector, which IIP ignores.

Impact of IIP Data on Economy & Stocks :

1. Stock Market Impacts

• Weak IIP results into sudden fall in stock prices : The reduced Consumer Spending will lead to lower demand. The producers will respond to this low demand situation by reducing their production. A low industrial production will result in lower corporate sales and profits. Thus a direct impact of weak IIP data is a sudden fall in stock prices. On the other hand, a strong IIP data will imply higher industrial production. This, in turn, will imply higher demand, which in turn will lead to higher corporate sales and to greater profits. Hence a direct impact of a strong IIP data will be a rise in the stock prices.
• Investment Opportunity : A continuous fall in IIP may lead to many strong stocks being undervalued. This gives an individual an ideal opportunity to invest in strong companies at a lower price.

2. Banking Sector Growth

Any increase in production and investment activity is usually financed by borrowings from banks. So if industrial production and capital spending are rising it then there is likely to be an increase in the banking sector growth. Similarly a weak IIP data can have an adverse impact on the banking sector.

3. Rate Cut Expectation by RBI

If the IIP data exceeds the market expectations then yield in the bond market will reflect an upward trend as this leads to a reduction in the rate cut expectations by RBI and vice-versa.

4. Growth Indication of 3 Broad Sectors of IIP

Growth in IIP numbers signals the future performance of Mining, Manufacturing & Electricity sector stocks contributing IIP. As mining sector contributes to around 14% of IIP so growth in IIP numbers can give a signal of how mining and steel companies will perform in the coming quarters.

Summary

• IIP index is computed and published on a monthly basis by Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation.
• IIP plays an important role in deciding which stock to buy. A strong IIP data is good for the sector and companies whereas weak data leads to fall in stock prices.
• But, as IIP does not reflect the reason behind the better/worse performance of a sector, therefore, it should not form the sole basis for investments in the stock markets. It is essential to know the reason for the better/worse performance of a sector before investing.