IIP OK, but forget about a rate cut

The Index of Industrial Production (IIP) number for May shows a 2.4 percent growth, against a contraction of 0.9 percent in the previous month. This is above what the Street expected—around 1.8 percent—but a closer look at the figures suggests there are still several pressure points which continue to plague the India growth story. Those hoping for another round of monetary easing by the Reserve Bank of India (RBI) will have to wait longer as a rate cut on 31 July, when RBI meets again for its quarterly review.

On a sectoral basis, mining was broadly unchanged, down—0.9 percent, manufacturing rose 2.5 percent, led by communication equipment, machinery and metal products. The manufacturing growth contrasted with the contraction in electrical/textile machinery and medical/optical instruments.Electricity, on the other hand, came in at 5.6 percent.

However, concerns continue to remain as capital goods remained in negative territory for the third month in a row, down 7.7 percent, and while intermediate and basic goods posted marginal recoveries, consumer goods remained positive, up 4.3 percent on the back of durables which rose a smart 9.3 percent. Non-durables growth at 0.1 percent was flat.

Considering the break-up of the IIP numbers, it is amply clear that there are still large gaps in the recovery process, particularly in the wake of global headwinds remaining strong. In sum, the consumer segment has put up a strong showing but the investment cycle continues to be weak, proving to be a drag on growth. Experts have, therefore, begun tempering their views on the overall growth prospects for FY13, slashing estimates by as much as 40-80 basis points.

In a report after the IIP numbers came in, Rohini Malkani of Citi says the next two weeks would be crucial, given the deficit in the monsoon (23 percent as on July 10) and the continuing global headwinds. These two factors, Malkani says, could shave off 40-80 bps from Citi’s FY13 growth estimate of 6.4 percent.  The FY12 GDP growth was 6.5 percent, though the fourth quarter saw a much lower figure of 5.3 percent.

Leif Lybecker Eskesen, Chief Economist for India & ASEAN at HSBC says he does not expect industrial production to come “roaring back”.

Says Eskesen: “Manufacturing is more exposed to global trade cycle. While there are signs of improvement in exports led sectors, possibly due to improved competitiveness on the back of a depreciated currency, the weak global backdrop will continue to hinder a sustained rise in external demand.”

While domestic consumption remains quite firm supported by demographics and favorable labour markets, the investment cycle remains face headwinds from global uncertainty and slow progress of supply side reforms, he adds.

Both Malkani and Eskesen agree that the scope for immediate monetary easing by the RBI is remote, given the global concerns and elevated inflationary pressures. Malkani reckons that while easing will happen, it will not be immediate. Stressing the need for structural reform to ease supply bottlenecks to rejuvenate investment, Malkani says that on rates, she was “holding on to our 50-75bps rate cut call for the year. But given the RBI’s stance on elevated levels of both the WPI and CPI, supply demand imbalances and the onus on the government to deliver change, monetary easing in the immediate near term seems unlikely.”

Eskesen, too, agrees that monetary policy will be of little help given the slowdown to a large extent is structural in nature. “Moreover, RBI is constrained by persistently high inflation. On this front, the below normal rainfalls so far during the monsoons doesn’t help either, although it is still early days and rainfalls could still pick up during July and August. Consequently, there is not a strong case for a policy rate cut at the moment.”

For now, RBI governor Duvvuri Subbarao will likely continue to keep a hawkish eye on the inflation figures even as concerns on growth remain.

(curtsey : first post)

Rupesh Yatesh Dalal
Head Research Department


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