IIP - In the doldrums:: Edelweiss

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Index of industrial production (IIP) contracted sharply by 5.1% in October after an anemic ~2% growth in September. Even on 3MMA basis, IIP was largely flat while on seasonally adjusted MoM basis, it contracted more than 2%. Clearly, industrial slowdown is deepening. Manufacturing registered its first contraction (of 6%) since June 2009 while mining posted negative growth for the third straight month. Meanwhile, capital goods posted second consecutive contraction, reflecting the ongoing investment slowdown while growth in consumer goods production also turned negative for the first time since June 2009. Notably, the forward-looking intermediate goods index, which had been weakening for a while, also contracted significantly during the month.

The data is likely to be a cause of concern for RBI. We expect the central bank to keep rates on hold and significantly moderate its hawkish stance in the forthcoming policy meeting. Meanwhile, given huge liquidity deficit, a CRR cut cannot be completely ruled out.