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The Index of Industrial Production (IIP) grew a paltry 1.6% in December
against 3.6% in the previous month. While the monthly data remains volatile,
the broader moderation in industrial activity is well observed in the 3MMA Yo-
Y data. Nonetheless, high base effect for the month clearly exaggerated the
weakness in production, as sequential growth (M-o-M 3MMA SA) at ~1% was
stronger than the trend in recent months. Pick up in exports in Q3FY11
seems to have supported industrial activity. Among the components of IIP,
weakness in consumer non-durables persists, with production declining for
the second straight month Y-o-Y, possibly reflecting the impact of high and
sticky inflation. The durables category, on the other hand, has grown
strongly, though growth momentum has moderated in recent months.
Production of capital goods remains volatile, but the broader trend (on
moving average basis) continues to depict meaningful moderation,
particularly in the past three months. Overall, we believe that soft patch in
industrial activity will continue in the coming months, with March seeing
significant high base effect. While pick-up in exports augurs well for
industrial activity, tightness in liquidity, rising interest rates and wage
pressures pose a challenge.
IIP growth dips to 1.6%
IIP growth came in at 1.6% Y-o-Y for December, broadly in line with consensus
estimate of ~2%. Meanwhile, the November data was revised upwards to 3.6%
from 2.7% Y-o-Y. While the monthly data remains volatile, the broader
moderation in industrial activity is well observed in the 3MMA Y-o-Y growth that
has slowed down from ~16% in April to 5.3% in December. However, high base
effect for December clearly exaggerated the weakness in production (IIP grew
~18% in December 2009), considering the fact that seasonally adjusted
sequential momentum in IIP was healthy at ~1% during the month.
Sector-wise, slowdown in the manufacturing sector (to 1.0% from 3.2% Y-o-Y)
reduced momentum in the headline index; electricity, however, was up 6.0% (Yo-
Y) from 4.6%. Within manufacturing, 12 out of 17 industry groups expanded Yo-
Y, with significant weakness observed in some of the consumer non-durables
and capital goods categories.
Overall, we believe that soft patch in industrial activity will continue in the coming
months, with March facing high base effect. While pick-up in exports augurs well
for industrial activity; tightness in liquidity, rising interest rates and wage
pressures pose a challenge.
Weakness continues in consumer non-durables
The consumer goods segment grew 3.9% (Y-o-Y) in December against
contraction of 2.0% in November, mainly on the back of 18.5% Y-o-Y growth in
consumer durables. Notably, weakness in non-durables continues to persist, with
Y-o-Y production declining for the second straight month. While seasonally
adjusted 3MMA M-o-M data showed an uptick during the month, it is too early to
call it a turn-around. This sluggish trend in non-durables could partly be the result
of high and sticky inflation.
Trend in capital goods not very encouraging
In December 2010, the capital goods production declined 13.7% (Y-o-Y) against growth
of 12.7% (Y-o-Y) last month. As capital goods data is highly volatile, we look at the
3MMA of capital goods index, which shows growth moderating persistently since the
beginning of the fiscal. Indeed, the intensity of moderation in the capital goods
production increased significantly in the past three months.
Slowing growth momentum in investments could be partly the result of persistent
liquidity tightness since mid-2010, which, in turn, has led to sharp increase in the cost of
funding for the industry.
Monetary policy environment remains challenging
The weak trends in IIP and rising inflation pose a challenge for the monetary policy.
While sticky inflation suggests further monetary tightening, rising interest rates will be
detrimental to investment activity. This, in turn, would further add to capacity
constraints in the economy. Nonetheless, inflation remains the dominant monetary policy
concern at this juncture and we expect RBI to pursue further monetary tightening,
delivering ~75bps hike in the coming year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Index of Industrial Production (IIP) grew a paltry 1.6% in December
against 3.6% in the previous month. While the monthly data remains volatile,
the broader moderation in industrial activity is well observed in the 3MMA Yo-
Y data. Nonetheless, high base effect for the month clearly exaggerated the
weakness in production, as sequential growth (M-o-M 3MMA SA) at ~1% was
stronger than the trend in recent months. Pick up in exports in Q3FY11
seems to have supported industrial activity. Among the components of IIP,
weakness in consumer non-durables persists, with production declining for
the second straight month Y-o-Y, possibly reflecting the impact of high and
sticky inflation. The durables category, on the other hand, has grown
strongly, though growth momentum has moderated in recent months.
Production of capital goods remains volatile, but the broader trend (on
moving average basis) continues to depict meaningful moderation,
particularly in the past three months. Overall, we believe that soft patch in
industrial activity will continue in the coming months, with March seeing
significant high base effect. While pick-up in exports augurs well for
industrial activity, tightness in liquidity, rising interest rates and wage
pressures pose a challenge.
IIP growth dips to 1.6%
IIP growth came in at 1.6% Y-o-Y for December, broadly in line with consensus
estimate of ~2%. Meanwhile, the November data was revised upwards to 3.6%
from 2.7% Y-o-Y. While the monthly data remains volatile, the broader
moderation in industrial activity is well observed in the 3MMA Y-o-Y growth that
has slowed down from ~16% in April to 5.3% in December. However, high base
effect for December clearly exaggerated the weakness in production (IIP grew
~18% in December 2009), considering the fact that seasonally adjusted
sequential momentum in IIP was healthy at ~1% during the month.
Sector-wise, slowdown in the manufacturing sector (to 1.0% from 3.2% Y-o-Y)
reduced momentum in the headline index; electricity, however, was up 6.0% (Yo-
Y) from 4.6%. Within manufacturing, 12 out of 17 industry groups expanded Yo-
Y, with significant weakness observed in some of the consumer non-durables
and capital goods categories.
Overall, we believe that soft patch in industrial activity will continue in the coming
months, with March facing high base effect. While pick-up in exports augurs well
for industrial activity; tightness in liquidity, rising interest rates and wage
pressures pose a challenge.
Weakness continues in consumer non-durables
The consumer goods segment grew 3.9% (Y-o-Y) in December against
contraction of 2.0% in November, mainly on the back of 18.5% Y-o-Y growth in
consumer durables. Notably, weakness in non-durables continues to persist, with
Y-o-Y production declining for the second straight month. While seasonally
adjusted 3MMA M-o-M data showed an uptick during the month, it is too early to
call it a turn-around. This sluggish trend in non-durables could partly be the result
of high and sticky inflation.
Trend in capital goods not very encouraging
In December 2010, the capital goods production declined 13.7% (Y-o-Y) against growth
of 12.7% (Y-o-Y) last month. As capital goods data is highly volatile, we look at the
3MMA of capital goods index, which shows growth moderating persistently since the
beginning of the fiscal. Indeed, the intensity of moderation in the capital goods
production increased significantly in the past three months.
Slowing growth momentum in investments could be partly the result of persistent
liquidity tightness since mid-2010, which, in turn, has led to sharp increase in the cost of
funding for the industry.
Monetary policy environment remains challenging
The weak trends in IIP and rising inflation pose a challenge for the monetary policy.
While sticky inflation suggests further monetary tightening, rising interest rates will be
detrimental to investment activity. This, in turn, would further add to capacity
constraints in the economy. Nonetheless, inflation remains the dominant monetary policy
concern at this juncture and we expect RBI to pursue further monetary tightening,
delivering ~75bps hike in the coming year.
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