October IIP throws up a sharp negative surprise


  • Industrial production surprised negatively at -4.2% YoY for October (Prior: 2.8% YoY; ICICI: 2.4% YoY)
  • November CPI declined sharply to 4.4% YoY (ICICI: 4.2%) amid a decline in food prices and favourable base effect
  • We expect the RBI to ease policy rate in the February meeting


October IIP throws up a sharp negative surprise

IIP came in at a dismal -4.2% YoY (ICICI Bank 2.4% YoY) as compared to a revised 2.8% YoY previously. This print comes as a significant surprise and the disaggregate details are fairly worrying. We note that this outturn comes in the backdrop of robust core index performance at 6.3% YoY and an improvement in leading indicators such as the PMI.


The contraction in manufacturing to the tune of 7.6% YoY was more than expected and reinforces the belief that the industrial cycle is yet to recover and any investment/manufacturing led growth recovery seems to be a way off. The other factor, which concerns us is the steep fall in consumer durables (-35.2% YoY) and an overall contraction in consumer goods (-18.6% YoY). So far the first half GDP data seemed to indicate that consumption demand was showing steady growth. However, the October IIP indicates this component may be slowing down despite significant improvement in inflation and a lowering of fuel prices.


The other components such as mining and electricity registered robust growth. On the use based side, with the exception of basic goods all other components have shown contraction for October.


CPI inflation plunges to 4.4% YoY (in line with expectations)

The headline inflation print came in at 4.4% YoY versus prior of 5.5%. Apart from a favourable base effect, this is attributable to a seasonal decline in food prices with inflation levels easing to sub-4% levels after averaging ~8.5% between April-October. The fall was led by vegetables with double-digit deflation being witnessed in this segment. However, we believe that the sequential fall in vegetables prices is being underestimated in the official index, with the index easing only 1.5% MoM versus 2.6% MoM in October-2014. Other food sub-components also remained subdued.


Fuel CPI remained close to record low levels. Core inflation also dropped further to 5.5% YoY as against 5.9% in previous month on the back of steep petrol price cuts. The sequential momentum also dropped with easing price pressures across sub-components. We expect core CPI to remain at sub-6% levels till end of FY2016 with support from easing international crude prices and fall in housing inflation momentum. The only cause for concern at the current juncture is the weak transmission of fall in global prices on domestic fuel prices.


RBI likely to ease rates in the February meeting


The inflation print is in line with expectations and signals continued easing in price pressures in the economy. The RBI in its latest policy statement signaled comfort towards achieving the 6% inflation target by FY2016. The Central Bank waited to watch for trends in global commodity prices, inflation expectations and any risks to food inflation. On the assumption that conditions will remain favourable, we expect policy easing action in the February meeting and reduction in repo rate by 50 bps by end-Q1 FY2016.