Edelweiss - IIP remains weak, led by capital goods

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The Index of Industrial Production (IIP) grew at 3.7% in January against upwardly revised 2.5% in December. In recent months, IIP has grown at 0-5% against 15-18% seen at the start of the fiscal. This is mainly on account of the base effect and investment-led moderation in industrial activity. Capital goods production, which reflects investment activity, has been declining both on Y-o-Y and seasonally adjusted sequential basis. This decline in investment activity is also reflected in weakness in non-oil imports and capital formation trend in GDP data. 

Among the other components of IIP, what is notable is the reversal in the weakening trend observed in consumer non-durables since the beginning of FY11. Over the past two months, the non-durables category has seen strong sequential growth momentum. Meanwhile, consumer durables grew strongly Y-o-Y, although sequential momentum slowed significantly. The basic and intermediate goods category continued to grow moderately. Overall, we believe that this 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.