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The Index of Industrial Production (IIP) reported 2.7% growth Y-o-Y for November against our expectations of 6.0% and consensus’ 6.6%. While the weakness in November was broad-based across sectors, consumer goods led the major decline in the headline number. Consumer durables, which was quite strong in the recent months (April-October, at average ~25%), has slowed down sharply to a little over 4% in November, partly reflecting the expected ebb in production in a post-Diwali month. Meanwhile, what is notable is the growth in the consumer non-durables category, which was on a weakening trend, turned negative in November. This weakness could partly be attributed to high and sticky inflation. Growth in intermediate goods, which held steady between 9% and 10% Y-o-Y, also slowed down considerably to 2.4%, reflecting moderation in the overall industrial growth. Going ahead, December and March numbers are likely to be particularly weak, given the high base effect in these months. However, uptick in credit growth and exports in recent months as well as robust PMI index are indicative of industrial activity recovering from its soft patch.
Importantly, weak trends in IIP and rising inflation pose a challenge for the monetary policy. While price stabilization is dominant concern for RBI, an aggressive tightening by RBI (given the tight liquidity conditions) could impact sentiments.
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