IIP - Base effect pulls down IIP growth to 20-month low: Edelweiss

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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 Y-o-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.