IIP contraction: Economists caution against policy easing

HDFC Bank chief economist Abheek Barua said, “Even though price pressure is likely to ease going ahead with the first sign of moderation coming as early as this week, inflation still remains high and there is still some uncertainty over how it can pan out going ahead”

Mumbai: Even as the 5.1-percentage points contraction in the factory output data came as a rude shock, leading economists and analysts on Monday advised the Reserve Bank of India (RBI) against any knee-jerk reaction on the monetary front as inflation still remains highly elevated, reports PTI.

Earlier in the day, the government released the factory output number for October that showed manufacturing contracted by a whopping 5.1% in the month against 11.3% growth a year ago, hitting a 34-month low.

HDFC Bank chief economist Abheek Barua said, “Even though price pressure is likely to ease going ahead with the first sign of moderation coming as early as this week, inflation still remains high and there is still some uncertainty over how it can pan out going ahead.

“We therefore expect RBI to maintain key policy rates on December 16, and abstain from a cash reserve ratio (CRR) cut. The central bank could, however, build in a dovish forward guidance throwing the door open for a CRR cut when it meets in January, timing it with a possible expansion in government borrowings at the time,” Mr Barua said.

HSBC Asia chief economist Lief Eskeseen too opined that “Though the massive contraction in the IIP numbers was partly coloured by the volatility of the capital goods segment and the timing of Diwali, it goes well-beyond this and reflects a broad-based slowdown.

“However, this does not mean that rate cuts are just around the corner. Inflation remains too high for comfort and downward pressures on the exchange also act as a constraint.

“Despite the slowdown in growth, there are still significant upside risks to inflation from tight capacity, pent-up commodity prices pressures, and the depreciated exchange rate. Moreover, RBI is fighting a lonely battle against inflation, with the fiscal stance not sufficiently tight and structural reform efforts to lift supply-side constraints not rolling out fast enough,” he said.

The RBI has increased its key lending rate by a total of 375 basis points since March 2010 to batten down inflation that has stayed above nine percent for nearly a year. However, its rate hikes have done more to dampen growth than tame inflation. The September quarter GDP rose only 6.9%, the slowest in over two years.

Manufacturing output, which contributes about 76% to industrial production, fell an annual 6% in October, reflecting weak consumer demand at home and overseas.

On the policy front, HSBC said RBI will have to keep monetary policy settings tight for some more time to get inflation under control.

“Moreover, RBI would need to see a further worsening in a broader range of economic indicators (such as PMI readings and credit growth) before they dramatically change their perspective on the economic outlook. A key thing is the extent to which the all important service sector holds up. Inflation would also have to come off more notably before the policy concern shifts from inflation to growth.”

Global investment firm Nomura said though the IIP numbers were much lower than its forecast of -0.7%-1.1%, “we believe the October print exaggerates the slowdown in manufacturing activity as the month had fewer working days this year than last. Therefore we expect the November reading to be more positive.”

However, it expects the RBI to keep policy rates unchanged at its 16th December meeting saying that although economic activity continues to slow down, we expect core inflation to remain elevated in November.

“From a policy perspective, although economic activity is likely to weaken in the months ahead, we believe inflation will remain RBI's primary concern. We expect core inflation to remain high in November, hence we expect RBI to stay on hold at its 16th December meeting,” Nomura said in a statement.

Kotak Mahindra Bank chief economist Indranil Pan, said though global concerns will be a major headwind for the domestic economy and the slowdown in real, any RBI intervention at this juncture “should be limited and only for managing volatility on making money cheaper as inflation still remains high though slowly moderating.”

Barclays Capital said the dip is markedly weaker than the already subdued market expectations and at the lower end of street expectations and opined that no quick recovery is on sight yet.

On the policy side, it said RBI is set to maintain status quo and added that aggravating weakness in IIP has further complicated the job of the central bank as continued dip in manufacturing activity will not necessarily offer any respite on the inflation front.

Barclays pegged the November inflation, expected on Wednesday, at 9%.

Though the sharp deterioration in the growth trajectory increases the pressure on the RBI to ease its monetary policy stance, “we think, an average headline inflation of over 7% is a clear deterrent against any rapid change in monetary policy.” 

“Therefore, we expect RBI to hold the policy rate steady over the remaining months of the current fiscal year. We think cuts in the repo rate could start taking place from mid-2012.

“We assign only a small probability to easing in the repo rate before Q2 of 2012, unless there is a major deterioration in global economic and financial market conditions,” Barclays said.

The largest rating agency Crisil attributed the contraction to high base effect coupled with the deterioration in both domestic and global economic scenario and said for the remaining months of this fiscal it expected the IIP growth to remain weak but in positive territory.

D&B India senior economist Arun Singh too concurred and said the sharp contraction in the IIP data, significantly more than anticipated, indicates the slowdown that has set in the economy but it also indicates the high base effect.

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Cement prices likely to rule firm till June 2012

The prices are expected to increase to about Rs300-Rs330 per 50 kg bag over the next couple of months against Rs280 per bag now and would hold on to that level till June 2012. The rise in prices would be due to increase in raw material costs like limestone and coal as manufacturers may be forced to pass on the cost to the consumer, Angel Broking analyst V Srinivasan said

Mumbai: Cement prices are expected to rule firm till June 2012, in the wake of growing demand from the construction industry, reports PTI.

“Cement prices should be on upswing till June 2012, due to demand from construction and infrastructure industry that has started picking up in north, central and western regions.

However, there is little room for price hike in south as the prices are already at a peak level,” Angel Broking analyst V Srinivasan told PTI here.

The prices are expected to increase to about Rs300-Rs330 per 50 kg bag over the next couple of months against Rs280 per bag now and would hold on to that level till June 2012, he said.

The rise in prices would be due to increase in raw material costs like limestone and coal as manufacturers may be forced to pass on the cost to the consumer, he added.

Meanwhile, cement demand is expected to grow at a 6.5% compounded annual growth rate (CAGR) in FY12-13, Angel Broking report on cement sector said.

The cement industry posted moderate 3.1% year-on-year (y-o-y) growth in dispatches in the first half of FY11-12, following 4.5% y-o-y increase in FY10-11.

Modest growth in demand was largely attributed to a continued decline in demand in the southern region due to political instability in Andhra Pradesh and minimal pick-up in demand in Tamil Nadu and Kerala post the elections.

However, the western and northern regions posted good demand growth during first half of 2012. In November 2011, dispatches of players having a significant exposure in these regions grew strongly, the report said.

The analysis showed that the topline growth of the cement majors remained impressive, but margins remained under pressure in second quarter of FY11-12.

ACC, Ambuja, UltraTech, India Cements, Madras Cements and JK Lakshmi Cement posted average topline growth of 24.1% during second quarter of FY11-12, due to adoption of a strong production discipline particularly in south.

The report pointed out that the all-India capacity utilisation is likely to decline in FY11-12, but set to improve from FY12-13. The rate of capacity addition is set to moderate, with only 31 million tonnes per annum (MTPA) of capacity expected to be added in FY12-13, much lower than 55 MTPA added in FY10-11.

But demand slowdown has become a bigger concern, it said.

For FY12-13, Angel Broking expects the central region to report the highest capacity utilisation of 87%, followed by the northern, eastern and western regions with capacity utilisation of 83%, 80% and 79%, respectively.

However, we expect the southern region to continue to be a laggard with capacity utilisation of 64% due to minimal growth in demand and 13.5 MTPA of capacity expected to be added in FY12-13, Mr Srinivasan said.

However, the western and northern regions posted good demand growth during 1H FY11-12. During November 2011 also, dispatches of players having a significant exposure in these regions grew strongly, the report said.

The analysis showed that the topline growth of the cement majors remained impressive, but margins remained under pressure in 2Q FY11-12.

ACC, Ambuja, UltraTech, India Cements, Madras Cements and JK Lakshmi Cement posted average topline growth of 24.1% during 2Q FY11-12 due to adoption of a strong production discipline particularly in south.

The report pointed out that the all-India capacity utilisation is likely to decline in FY11-12E, but set to improve from FY12-13. The rate of capacity addition is set to moderate, with only 31 MTPA of capacity expected to be added in FY12-13 which is much lower than 55 MTPA added in FY2010-11. But demand slowdown has become a bigger concern, the report said.

For FY12-13, Angel Broking expects the central region to report the highest capacity utilisation of 87%, followed by the northern, eastern and western regions with capacity utilisation of 83%, 80% and 79%, respectively.

However, we expect the southern region to continue to be a laggard with capacity utilisation of 64% due to minimal growth in demand and 13.5 MTPA of capacity expected to be added in FY12-13, Mr Srinivasan said.

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COMMENTS

JNC

5 years ago

With economic indicators failing to sustain the projected trajactory, iand capacity utilizations at their lowest, Infrastructure push lacking and continued political disaray are collectively not indicating that prices could sustain except during Jan-Mar12.
Prices have declined steeply in Central India and parts of North.

Hiring activities to accelerate in Jan-March quarter

“Job seekers will get more opportunities as data shows the India’s employment markets will experience recovery in the fourth quarter. The good news is that many markets appear to be heading in the right direction,” MyHiringClub.com CEO Rajesh Kumar said

New Delhi: The job market is set to get a boost in the next quarter—the three-month period between January and March 2012—led by increased hiring in sectors like infrastructure and information technology, reports PTI.

As per the survey of prospective employers conducted by recruitment tendering platform MyHiringClub.com, the country’s net employment outlook—an indicator of hiring intentions—stands at 29% for the quarter ending 31 March 2012.

This marks an improvement by 9 percentage points from the year-ago quarter and an increase of 11 percentage points on the quarter-on-quarter basis.

“Job seekers will get more opportunities as our data shows the India’s employment markets will experience recovery in the fourth quarter. The good news is that many markets appear to be heading in the right direction,” MyHiringClub.com CEO Rajesh Kumar said.

The survey, which was conducted among over 4,000 employers, found that all nine sectors and all four regions of the country have positive hiring plans for the next quarter.

However, the employment outlook for some sectors has weakened over the year-ago period.

The report said the infrastructure sector has the most bullish hiring plans, with a net employment outlook of an impressive 20% for the January-March period of 2011.

The hiring intentions have improved considerably for the infrastructure, as also the IT and ITeS sector, from the levels seen in the year-ago quarter.

“... After a long wait-and-watch, now IT/ITeS industry is having very aggressive plan to hire new employees, compared to what they had hired in previous 3-4 months,” Mr Kumar said.

He noted that the infrastructure sector is seeing robust hiring activities and the recruitments have gone up on a month-on-month basis too.

The infrastructure and IT sectors are followed by the automobile, manufacturing and FMCG segments, in terms of hiring optimism for the January-March 2012 quarter.

At the same time, hiring activities may witness a decline in the banking and financial services, and telecom sectors from the levels in the year-ago quarter.

A region-wise analysis also predicted a strong labour market for all four regions for the fourth quarter of FY11-12, with the south leading the pack with a net employment outlook of 31% for the period.

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