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OCTOBER IIP: SURGES TO 10.8%
Ahead of street expectations; on tract for ~9% IIP growth in FY11
q October IIP surged to 10.8% on festive demand supported by all the
three segments (economic activity wise) - Mining, Manufacturing and
Electricity which grew at rates of 6.5%, 11.3% and 8.8%, respectively.
Meanwhile, September 2010 number has been revised downward to
4.4%.
q Growth has been spectacular even if seen through use-based classification. Capital goods, consumer durables and Intermediate goods witnessed robust growth - 22.0%, 31.0% and 9.5%, respectively. Even basic
goods demonstrated good traction and grew at 7.7% during October 10.
q We expect RBI to keep the policy rates unchanged, and announce measures for liquidity easing may be through temporary CRR cut or more aggressive government bond buying in its next policy release on December
16, 2010. We acknowledge that rate cuts could signal policy easing which
is not the intent of RBI, but liquidity scenario is quit tight; with over 1
trillion rupees borrowing through LAF, slower government spending and
upcoming tax outgo for the third quarter warrant action from RBI.
q However, we continue to expect further increase in policy rates going
forward next year, given high inflationary pressure and likely pressure
from increasing prices of crude and metals. We expect benchmark yields
to remain at about 8% over the course of the FY11.
IIP surged on festive demand; growth well spread in most of the
segments
October IIP surged to 10.8% on festive demand supported by all the three segments
(economic activity wise) - Mining, Manufacturing and Electricity which grew at rates
of 6.5%, 11.3% and 8.8%, respectively. Meanwhile, September 2010 number has
been revised downward to 4.4%.
The cumulative growth during April-October, 2010-11 over the corresponding period
of 2009-10 in these three sectors have been 8.3%, 11.0% and 4.6% respectively,
which moved the overall growth in the General Index to 10.3%.
Growth has been spectacular even if seen through use-based classification. Capital
goods, consumer durables and Intermediate goods witnessed robust growth -
22.0%, 31.0% and 9.5%, respectively. Even basic goods demonstrated good traction and grew at 7.7% during October 10.
On a MoM seasonally adjusted basis growth in October was 6.6% against 2.2% fall
in September and fall of 6.2% in August. Seasonally adjusted IIP growth for the
month of October stands at 2.5% against -4.1% in September. Cumulatively during
Apr-Oct 10, IIP growth stood at 10.3% against 6.9% in the same period last year.
Use-based classification also exhibits spectacular growth in IIP
The sectoral growth (use-based classification) has been as under:
n Basic goods: 7.7% (against 3.4% in September), 3-month moving average:
4.9%
n Capital goods: 22.0% (against -4.1% in September), 3-month moving average:
6.9%
n Intermediate goods: 9.5% (against 10.9% in September), 3-month moving average: 10.5%
n Consumer goods: 9.6% (against 4.8% in September), 3-month moving average:
7.6%
l Consumer durables: 31.0% (against 10.9% in September), 3-month moving
average: 23%
l Consumer non-durables: 2.5% (against 1.9% in September), 3-month moving average: 1%
Fifteen out of the seventeen industry groups (as per 2-digit NIC-1987) have shown
positive growth in October 2010.
The industry groups 'Transport Equipment and Parts' have shown the highest growth
of 39.5%, followed by 26.0% in 'Leather and Leather & Fur Products' and 24.6% in
'Other Manufacturing Industries'. On the other hand, the industry group 'Wood and
Wood Products; Furniture and Fixtures' have shown a negative growth of 25.7%
followed by 0.5% in 'Jute and other vegetable fibre Textiles (except cotton)'.
Strong growth in capital goods & consumer durable segments are
positive
During the current month, high growth has been observed in Capital goods and
Consumer durable goods. High growth registered in Capital goods is to a large extent attributed to 'Well/offshore platforms' [76.4%], 'Ship-building and repair'
[75.2%], 'Control panels/boards/disks' [69.9%], 'Laboratory and scientific instruments' [57.85%], 'Electric generators (including alternators)' [53.7%] and 'Turbines
(steam/hydro)' [47.3%].
Similarly, high growth in Consumer durable goods is due to high growths in 'Scooter
and mopeds' [77.5%], 'Alarm time pieces' [47.2%], 'Motor cycles' [44.2%], 'T.V.
receivers' [33.4%] and 'Passenger cars' [30.8%].
As expected capital goods number remain bunched over, we expect capital goods
growth in next release to be moderate and consumer durable goods growth is likely
to soften going forward, as indicated from slower growth in automobile segment.
Following the last month revisions based on the new series of WPI for IIP items reported in value terms, the CSO has now released the entire series from April 04
onwards. Since IIP is quantitative index, and over 2/3rd items of capital goods are
measured in value terms, they are adjusted based by WPI to arrive at quantitative
value. These items include machinery (textiles/printing/industrial), ship building, offshore platforms, hydraulic cylinders, agri implements etc. Thus change in deflator
results in revised IIP numbers, more so for capital goods segment.
Intermediate goods segment has stabilized near 10% levels; still
healthy for future growth of production cycle, in our view
Intermediate goods segment has stabilized near 10% levels; still healthy in our view.
During April-Oct 10, it has grown at the average pace of 10.4%. This segment is
important as it typically tends to exhibit 3-4 months of lead period over headline IIP
number and maps the future growth of production cycle.
The above chart shows that there is a high correlation between growth of intermediate goods and manufacturing goods (Correlation: 0.83). Output of Intermediate
and basic goods are used for production by the final user sectors like capital goods
and consumer goods.
IIP likely to moderate, going forward as base effect comes into
play; however IIP for FY11 is likely to be ~9.0%, in our view
After peaking in March, IIP has come off a bit towards its trend level. Going forward, we expect moderate improvements in IIP, as base effect comes into play. Removing the seasonality, IIP growth has moderated to 7.4% (3M moving average)
and 9.3% (4M moving average) during October 10 as against ~15% few months
back.
We expect IIP figures to remain in single digit for the rest of the year. However, we
continue to expect IIP to grow by ~9% in FY11, supporting ~8.5% GDP growth expectation.
We expect RBI to keep the policy rates unchanged, and announce measures for liquidity easing may be through temporary CRR cut or more aggressive government
bond buying in its next policy release on December 16, 2010. We acknowledge that
rate cuts could signal policy easing which is not the intent of RBI, but liquidity scenario is quit tight; with over 1 trillion rupees borrowing through LAF, slower government spending and upcoming tax outgo for the third quarter warrant action from
RBI.
However, we continue to expect further increase in policy rates going forward next
year, given high inflationary pressure and likely pressure from increasing prices of
crude and metals. We expect benchmark yields to remain at about 8% over the
course of the FY10.
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