IIP - A positive surprise, this time :: Edelweiss

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Index of Industrial Production (IIP) grew ~5.9%YoY in November, much higher than our expectation of 2.8%. The increase in November activity can be partly explained by the deferment of Oct production (due to festive holidays and industrial disputes) to Nov. Mining continued to contract although at a slower pace, manufacturing grew briskly owing to a sharp spike in consumer goods output while electricity improved up on an already strong trend. High volatility in the monthly IIP data makes it hard to assess underlying trends, but on a more stable 3MMA basis, industrial activity has seen a persistent decline, consistent with other macro indicators such as credit growth, auto sales, order inflows etc.

In terms of the monetary policy, we believe that the core inflation data (to be released on 16th Jan) would be more consequential for RBI. Recent communications from the central bank suggest that CRR may remain unchanged in its next policy meeting on 24th Jan, but we do expect monetary easing to commence from March onwards amidst falling inflation and slowing growth.