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Industrial
Production
IIP
at 8.2%, sustainability an issue, expect no rate cut
IIP sees the steepest rebound this
fiscal
IIP growth for Oct’12 at 8.2%YoY came in as a
significant upside surprise against our expectation of 4.1% and consensus
estimate of around 5%. The growth rate is the highest recorded this fiscal.
The sharp upside is in contrast to the downward revisions for Jul’12
and Sep’12 both lower at -0.1% and -0.7% respectively from 0.1% and
-0.4% provided earlier. The Oct’12 IIP witnessed a sharp 4.9%MoM rise
on seasonally adjusted basis, which implies that Oct’12 IIP print got
boosted by both a weak base year growth and sequential inventory build up.
Cumulative YTD growth for Apr-Oct now stands at 1.2% vs 0.1% seen till H1FY13.
Sectoral performance - Strong core
sector data reflected in manufacturing
The Mining, Manufacturing and Electricity sectors grew
at -0.1%, 9.6% and 5.5% respectively. The strong core sector data recorded
at 6.5% earlier gets reflected in the 8.2%YoY production growth.
User based - Significant rebound across
segments
Use-based numbers for Oct reflect strength in all key
categories viz. Capital goods (7.5%), Intermediate goods (9.4%), Consumer
goods (13.2%) and Basic goods (4.1%). Consumer durables grew 16.5% whereas
non-durables clocked in 10.1%.
IIP numbers indicate significant
pre-festival inventory build up
The greater than expected bounce in the IIP growth rate
is indicative of stronger than expected inventory stock up ahead of the
festive demand for Diwali in Nov’12. The growth in coal and cement
has supported a good performance in the Basic goods whereas the refinery
products aided strong growth in Intermediate goods.
Outlook: Downside risks remain;
December policy to abstain from rate easing
The Oct’12 IIP data brings in a temporary spike up
built on expectation of very robust festive demand. However, such buoyancy
remains questionable tracking subdued demand during Diwali suggested by
anecdotal data. Muted festive demand will likely result in inventory pile
up. Forward looking indicators for Nov’12 point at such a scenario.
Apart from lead indicators, base effect also remains unfavorable. Overall,
there is high likelihood of FY13E IIP growth to remain very modest.
Our conviction of no rate cut has strengthened
Overall, we believe rising cost structure and weakening
demand will keep the inflation-growth friction alive. The strong IIP data
along with renewed hardening of inflation numbers leaves little headroom
for RBI to reduce policy rates. This strengthens our expectation of no rate
cuts on Dec 18, next week. Higher CPI inflation for Nov’12 at 9.9%
provides upside risk to the expected WPI inflation of 7.5% for the month.
The evolving growth-inflation dynamics constrain scope for monetary easing.
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