Indranil Pan ,Chief Economist, Kotak Mahindra Bank says, "IIP growth likely to be near the bottom. The December IIP growth of 1.8% was much lower than market consensus (Kotak: 1.8%). While this outturn is weak, there has likely been some destocking this month given the stronger-than-anticipated November growth. Capital goods production continued to remain weak, supporting the fact that investment demand has slowed significantly. Based on our expectation of the trend going forward, we believe that industrial production has largely bottomed out. However, it is unlikely to bounce back strongly as headwinds from both the domestic
and global factors continue. We reiterate our view of a 6.6% FY2013E GDP growth and point to a 25 bps repo rate cut on April 17.
Manufacturing continues to remain weak; mining sector shows some pick-up Industrial production was back to the weak zone with December IIP growth coming in at 1.8% on the back of manufacturing sector growing at 1.8% (November at 6.6%). But this was on expected lines given our anticipation of a weaker-than-normal December post the production levels in November. The base effect from December 2010 was also strong and hence also accounted for a lower yoy growth in December 2011. The internals of the manufacturing sector indicate segments like “machinery and equipment”, “electrical machinery”, “textiles”, etc. experiencing contraction on a yoy basis. The mining sector continued to see contraction at (-)3.7% (though on a mom basis it showed a 6.4% growth). Electricity grew at 9.1% compared to 14.6% growth in November.
Capital goods sector pulling down industrial production From a use-based perspective, capitals goods production was a major disappointment at (-)16.5%—the fourth consecutive month of contraction. This strongly signals a slowdown in the investment demand as the economy grapples with demand moderation and high interest rates. Ex-capital goods, the IIP growth appears much better at 4.4%. Along with that, demand from abroad is also likely to remain weak given the global growth moderation. Intermediate goods production also contracted at 2.8% while basic goods production grew at 4%. Consumer durables grew at a modest 5.3% against 11.5% in December (on a mom basis it contracted by 0.8%). Consumer non-durables growth remained strong at 13.4%.
Indicators point to bottoming out in near term; RBI action on April 17 A variety of indicators such as the PMI manufacturing, the core sector growth and also a bounce up in the credit growth probably indicates that the worst has already been seen with respect to the IIP growth numbers. For instance, as of the current understanding, we project the IIP growth for January 2012 at 2.1% with the average for the fourth quarter at 1.7%, slightly higher than the average of 1.0% seen in the third quarter. However, this is not to indicate that the rebound would be very strong as the headwinds from the global environment as also the domestic environment are likely to continue. While we do not expect any V-shaped recovery as was seen in the post- Lehman phase, the key to a sustained recovery could be some strong policy actions from the government post the ongoing state elections, a clear direction to fiscal containment and some stability in the global environment.
From the monetary policy side, we continue to expect RBI to start its repo rate cutting cycle by 25 bps on April 17. However, we do not anticipate an aggressive increase in monetary accommodation as risks to inflation continue to remain strong (our base case is for a 100 bps cut in the repo rate in FY2013E). Brent crude oil is again at US$117 a barrel and USD/INR is again on a depreciating path. RBI, on the other hand, has already signaled that containing inflation would be difficult without help from the fiscal side. Hence, we expect that it would wait for the Union Budget on March 16 before starting to ease monetary policy".