The sharp decline in IIP number in November and retail inflation during December to a 15-month high, have got investors deeply worried
After an impressive 9.87% growth in October that triggered hopes of a recovery, India's factory output declined by 3.19% in the following month into the negative territory, due to a (-) 4.4% drop in manufacturing activity. In addition, the 15-month high consumer price index (CPI) inflation in December have come as a shocker, says a research report.
According to a research note from Religare Capital Markets Ltd, the IIP number for November 2015 surprised on the downside at -3.2% as against its consensus estimate or 0.4%/2.5%. "While a slower growth was largely expected on account of a shift in festive season to November this year from October last year, a decline in production was completely unanticipated. This is the steepest fall in IIP since October 2011," it said.
During November, manufacturing output tanked by 4.4%, registering the sharpest decline in past 12 months. The decline was broad-based; output of 16 of the 22 manufacturing industries contracted. Manufacturing output usually contracts by about 5% in the festive month on a month-on-month (MoM) basis owing to fewer working days. However, the MoM decline in November 2015 was much steeper at 8.6%, suggesting that non-seasonal factors may be at play.
According to Nomura, the sharp contraction in IIP is an aberration, as underlying industrial growth is still positive, though this growth appears to have lost some momentum towards the end of 2015.
According to the numbers on CPI released by the Central Statistics Office (CSO), the annual rate of inflation, moved further to 5.61% in December from 5.41% a month earlier. The official data further showed that prices of pulses were up 45.92% over those prevailing during the past year. This is the third consecutive month, in which, inflation in pulsed remained over 40%.
"The rise in food inflation is worrisome given that Rabi sowing continues to lag and Rabi output is likely to decline on productivity concerns. Besides, core, excluding food and fuel and power, inflation also edged up to 5% in November from 4.9% in previous month, as inflation across the health and transport and communication segments firmed up," Religare said in the report.
On monetary policy, Nomura says it expect the Reserve Bank of India (RBI) to deliver a 25 basic points (bps) repo rate cut to 6.50% against status quo earlier, owing to lower commodity prices and slower industrial momentum. "Although an inter-meeting cut cannot be ruled out, our base case is for an April cut. Beyond that, we expect the RBI to stay on hold as there are upside risks to its medium-term inflation target," it concluded.