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Foreign institutional investors (FIIs), we are told, are shying away from Indian equities. Most
headlines blame it on inflation and the fall in index of industrial production (IIP). However,
there is no denying that the market is in doldrums, which brings forth the importance of
economic indicators in the investment landscape.

To be sure, the market may defy the underlying fundamentals in the short term, but it moves in
sync with the economy in the long run. That makes a strong case for long-term investors to
keep track of some of the key economic indicators. That means apart from gleaning the
industry and company news, investors should also devote more time to some numbers that
impact the fate of the stock market . Here are a few data points that you should always keep an
eye on:

 
This is an all-time favourite of analysts. Simply put, the gross domestic product (GDP) of a
nation captures the value of all the goods and services produced in that country in a given year.
It comprises consumption, gross investments, government expenditure and net exports
(exports minus imports). In simple words, it is a measure of the economic activity in a country.
The GDP growth rate indicates the pace at which a country͛s economy is growing.

For example, at a time when the world, especially the developed world, is experiencing
anaemic growth of 1-2 % year-on-year, the domestic economy is growing at an impressive rate
of 8%. India is next only to China, which has clocked a double-digit growth rate. The Reserve
Bank of India͛s (RBI) third quarter review of the macroeconomic and monetary scenario
published on January 25, 2011 expects the Indian economy to grow at 8.5% in 2010-11.

But how does it affect you as an investor? ͞Nominal GDP growth has a strong positive
correlation with corporate earnings,͟ says Devendra Nevgi, founder partner, Delta Global
Partner. This means that when the economy grows as a whole, companies will also witness
soaring profits. ͞GDP elasticity to corporate earnings in India stands around 1.25%,͟ adds Nevgi.
In other words, for every 100 basis points rise in GDP growth rate, the rate of growth in
corporate earnings rises on an average 125 basis points (one percent comprises 100 basis
points).

No wonder, global investors track this parameter very closely. ͞Investors investing across the
world watch this macroeconomic variable first before committing any money to a country,͟
says an analyst with a fund house. Needless to say, if India maintains the rate of growth of GDP
over the next decade, it can expect to become a superpower. And the best way to participate in
the growth story is to own Indian equities with a long-term view.


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A lot of noise is made over inflation these days. Inflation ʹ a rise in the general price level Ͷ is
an obvious outcome of economic growth. ͞Inflation numbers offer cues about emerging trends
in the economy to the investing community,͟ says Rahul Pal, head, fixed income, Taurus Mutual
Fund. Inflation eats into the purchasing power of individuals and brings down consumption.

As inflation rises, the interest rates also rise. High interest rates push up the cost of funds for
companies and pull down profitability. They also affect the demand for housing and
discretionary spends funded by loans. In short, high inflation is not conducive to both economic
growth and equity and debt investments. Bond investors don͛t particularly like the
phenomenon of rising inflation. As interest rates rise along with inflation, prices of long-term
bonds fall, making bond investors lose their money.

In the year to January 15, 2011, the food price index rose 15.57% and the fuel price index
climbed 10.87%, according to the latest government data. ͞Food inflation is expected to cool
off as rabi crops arrive in the market,͟ says Gopal Agrawal, deputy CIO and head equity, Mirae
Asset Global Investments. Though food inflation is expected to fall, investors should watch out
for crude prices. Crude oil comprises a huge chunk of Indian imports and if the prices cross the
$100-mark per barrel, it can trigger higher inflation in the economy.





 

You normally hear this one from debt fund managers and treasury heads of banks. The debt
market tracks the yield at which the 10-year government bond trades. It represents the long-
term cost of funds prevailing in the market. Some investors look at the benchmark yields to
take cues about valuations in equity markets. In classical thinking, a reciprocal of the bond yield
should be the price-to-earnings (P/E) ratio of equity index.

Put simply, if you divide 100 by the bond yield, you will arrive at a number which should be the
index P/E. For example, if the benchmark bond yield is quoting at 8%, the Nifty index should
quote at 12 times the trailing 12 months͛ earnings. As the yields fall, the market offers higher
valuations multiple and vice versa.
The yield curve comprises the rate of interest payable for borrowing for various tenures Ͷ say,
from one year to 30 years Ͷ by the government. ͞Other things remaining the same, a flat yield
curve Ͷ when there͛s not much difference between short-term and long-term interest rates Ͷ
connotes expectations of a moderate slowdown in the growth in the near future whereas a
steep yield curve Ͷ low interest rates for short-term and high interest rates for long-term
borrowings ʹ indicates high expected economic growth,͟ explains Nevgi.

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This one captures the status of production in the industrial sector for a given period of time
compared to a reference period of time. But many analysts do not consider it to be a good
indicator, given the structural issues. ͞Capital goods, a component of IIP , is experiencing
extreme volatility and offering a distorted picture of IIP,͟ says Agrawal.

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There are many analysts who prefer to look at auto sales numbers. Passenger car sales connote
the strength of the ͚consumption story͛ whereas the commercial vehicles sales reflect
͚economic growth͛. ͞An ear-to-the-ground indicator for the auto industry is the waiting time for
the buyer of a car before the car is delivered to him,͟ says Alok Ranjan, head Ͷ PMS,
Way2Wealth Brokers. The new phone connections data each month talks about the
communication revolution in India, leading to opening of new opportunities. Bank credit
growth is one more parameter that analysts follow. Higher credit growth indicates a prospering
economy. Cement despatches are tracked by analysts to understand the trends in
infrastructure.



 
Getting the relevant information has become much easier with the advent of internet. RBI͛s
macroeconomic review can be found on its website. The website of the ministry of statistics
and programme implementation is also a data treasure. The Clearing Corporation of India also
comes out with useful data points about the fixed income market. Industry bodies such as the
Society of Indian Automobile Manufacturers (SIAM), Cement Manufacturers͛ Association (CMA)
and Cellular Operators Association of India (COAI) also offer good data points.

 



However, never follow these indicators blindly. ͞Investors must understand the seasonal issues
that crop up while interpreting the numbers,͟ says Agrawal. For example, El Nino Ͷ a climatic
phenomenon Ͷ impacted agricultural output across the world, including India. It was reflected
in rising food inflation numbers. ͞One has to look at the base while interpreting the indicator.
Again, looking at the number in isolation can lead to incorrect decisions,͟ says Ranjan. Keep
them at the back of your mind while taking broad calls, but it will be wiser to look at them
closely before committing money on specific bets.

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Buoyed by a smart jump in the production of crude oil, petroleum refinery products and steel,
the six key infrastructure industries' output growth recovered to 6.6 per cent in December
2010, after having slumped to a 21-month low of 3 per cent in November 2010.

Output in the six core industries Ͷ crude oil, petroleum refinery products, coal, electricity,
cement and furnished steel Ͷ had expanded by 6.2 per cent in December 2009. These six
industries account for 26.68 per cent of the country's industrial output.For the nine-month
period April-December 2010, these six core industries recorded a growth of 5.3 per cent against
4.7 per cent in same period in the previous year, official data released by the Commerce and
Industry Ministry showed.
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The six core industries' strong show in December 2010 is likely to boost the overall index of
industrial production (IIP) performance for that month, say industry observers. Growth in
industrial output had sunk to 18-month low of 2.7 per cent in November 2010, raising concerns
over the sustainability of economic growth momentum seen in the first half of the current
fiscal.

" 

Domestic exploration companies had produced 15.8 per cent more crude oil in December 2010
against 1.1 per cent growth in same month in the previous year. While crude oil production in
December 2010 stood at 3.4 million tonnes, it was 2.9 million tonnes in the same month in the
previous year. Petroleum refinery output grew 8.3 per cent in December 2010 compared with
0.9 per cent in December 2009. This growth performance reversed a four-month declining
trend.Refiners including Indian Oil Corporation and Essar Oil processed 14.7 million tonnes or
3.48 million barrels a day of crude oil in December, according to the Petroleum Ministry. Public
sector IOC processed 27.3 per cent more crude oil to 4.9 mt. Hindustan Petroleum
Corporation's output increased by 14.2 per cent to 1.5 mt in December.

Reliance Industries Ltd's output from its first refinery in Jamnagar, Gujarat, dropped by 0.8 per
cent year-on-year at 3.1 mt. Reliance does not provide data for its second 29-million-tonne-a-
year refinery. The combined capacity utilisation of 17 public sector and two private sector
refineries in December stood at 111.4 per cent.

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Meanwhile, finished steel production grew 11.2 per cent in December 2010 compared with 9.6
per cent in same month in previous year. Finished (carbon) steel production in December 2010
stood at 5.17 million tonnes against 4.64 million tonnes in December 2009.

While coal production for the month under review grew 3 per cent (1.2 per cent in December
2009), cement output declined 2.2 per cent in December 2010 against 11 per cent in December
2009. Electricity generation grew 4.3 per cent in December 2010 (6.6 per cent in December
2009).