Factory output for February came in at a lacklustre 3.6% year-on-year, well below expectations. The bad news is that on a seasonally adjusted basis the February IIP fell 0.5% month-on-month from a 1.4% month-on-month rise in January. Among the culprits in February was the capital goods segment, which clocked a negative 18.6% year-on-year, following a negative 18.4% year-on-year in January.

As Deutsche Bank points out, while the January decline was mainly led by a high base effect and capital goods production actually grew +0.8%month-on-month, seasonally-adjusted, the February outturn was both due to negative base effect and some genuine loss of growth momentum compared to the last month. Production fell -4.9% month-on-month seasonally-adjusted in February. The numbers endorse what has been believed all along, namely that there has been no material pick up in the private sector investment.

The good news is that excluding capital goods, IIP actually grew 8.6% in February. Moreover, the seasonally adjusted 3-month over 3-month annualised data indicate a considerable recovery in most categories and has risen to 7.7% in February, more than double the rise of 3.6% in January. Other indicators such as the HSBC manufacturing PMI have been positive; the index was stable at 57.9 in both February and March. A waning base effect should have therefore, seen the IIP looking up from April. However, crude oil prices are at $125 per barrel and so inflation which was expected to taper off to 7% to thereabouts in 2011-12, could stay put at levels of 8%. That means India?s central bank will need to keep on tightening money. A 25 basis points rise in key policy rates at the May meet is likely. Treasurers are already looking at a yield on the benchmark bond of between 8.15 and 8.25% in the months ahead as the government steps up borrowings.

Although rising interest rates have never really hurt consumption much, companies may go slow on big projects. Moreover, it?s now evident that the government has under-budgeted for subsidies which could turn out to be three times what it had planned for, pressuring the fiscal deficit. Economists point out that it could be withdrawing fiscal stimulus this year, estimated to the extent of about 1.7% of GDP. All this cannot be good news for growth.

India, however, is back on the radar of fund managers together with other Emerging Markets (EMs) for a variety of reasons. First, after their underperformance EMs are now cheaper compared with Developed Markets (DMs)?the former are trading at under 11 times one year forward earnings while DMs are trading at 12 times forward.

What?s more EMs have all along offered the prospect of higher growth. Moreover, EMs, says an HSBC analysis have been less volatile of late. The chances of further hikes in interest rates in Europe and the UK after the ECB hiked rates by 25 basis points last week seems to have raised fresh concerns in developed economies since inflation would impact consumer confidence. While money will not completely move out of the US, EMs will perhaps get a large share of the pie in the next few months.

However India is among the more expensive EMs and corporate India must deliver good numbers for valuations to remain attractive.