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Economy
Industrial Production
October IIP: A blip in the path of moderation. October Industrial production at
10.8% surprised the markets positively which was expecting it at around 8.5%.
We were bullish on manufacturing this month owing to the festive season restocking
and had estimated the headline growth at 10.5%. Consumer durables growth staged a
turnaround from last month though consumer non-durables growth continued to be
weak and almost flat in October.
Headline growth at 10.8%; manufacturing production at 11.3%
In line with our expectations of 10.5%, IIP growth for October came in at 10.8%. Manufacturing
that forms the majority of the index (79.4%) registered a growth of 11.3% (against our estimate
of 11.3%). We believe that most of the upside was due to the festive season in early November
which implies an inventory build-up in anticipation of a demand pick-up. Along with this, there
was the advantage of a base effect, created by an October Diwali of last year, that implied
inventory restocking and higher production in September 2009. Mining sector growth surprised
positively at 6.5%. Considering the prolonged monsoon, the upside on the mining sector is not
warranted. Coal mining as indicated by the core sectors growth remained muted with the possible
upside being from the crude production which grew at 4.2% on m/m basis. Electricity production
at 8.8% was slightly higher than the 8.4% number released under the six core sector industries.
Consumer durables strong at 31%; consumer non-durables sector continues to disappoint
The use-based classification points to strength in the consumer durables space (again the Diwali
effect) and basic goods production. Capital goods continues to be volatile and lumpy as the sector
registered a 22% growth from year ago (September at (-) 4.1%). Basic goods production came in
as a positive surprise as it grew by 7.7% against an average growth rate of 5% in 1HFY11.
Intermediate goods growth at 9.5% was in line with the average growth of 10.5% over 1HFY11.
Consumer durables growth was back up to 31% against 11% in September. We believe this was
again due to the festive season. Strong durables sector growth was backed by passenger vehicles
sales touching a high in October. The non-durables segment, however, continues to witness
muted growth. Non-durables production growth was at 0.1% against 1.9% in September.
On m/m basis, production contracted by around 3% against 0.5% last month.
Expect to see moderation ahead; underlying momentum remains strong
We consider the October IIP growth to be a blip in an overall moderating growth path. Strong
base effects from November-December onwards will start pulling down the headline growth rates
despite our expectations of increased productions. Despite the recent slowing trends, the
underlying growth momentum (stripping the volatility of the capital goods from the headline)
remains strong at 8.9% in October and 8.1% for April-October. The recent interest rates hike on
the back of the ongoing liquidity squeeze will also reflect on the growth story in the months
ahead. However, even as industry exhibits some slowdown, the 2QFY11 GDP data continued to
indicate a strong momentum in the services sector. We now see FY2011E GDP growth at 8.6% on
the back of good agriculture and services growth.
December 16 policy meeting likely a non-event; the next change to come in January 25
We believe that the December policy meeting is unlikely to see any policy action despite the
double-digit IIP growth in October. However, we do not see RBI having totally paused in its
monetary policy tightening cycle and expect it to increase the benchmark policy rates by 25 bps in
end-January. RBI is likely to be more watchful of the inflation trends in the economy and would
maintain its hawkish stance till the headline WPI inflation has corrected conclusively.
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