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Improving macros – IIP at 11 month’s high

Research Digest | December 14, 2018

Index of Industrial Production grew at a solid 8.1% in the month of October vs. 4.5% in the previous month witnessing a 11 month high data on the backdrop of high growth in electricity generation and manufacturing activity which grew at 10.8% and 7.9% respectively. In the manufacturing segment the highest growth was in production of furniture(41%) for a fourth consecutive month followed by manufacturing of computer and electronic products(30.2%) while decline in manufacturing could be visible in beverages(-1.7%) and paper products(-1.8%).

Consumer Price Index on the other hand eased for a 5th straight month to 2.23% from 5% in June. The two repo rate increases this fiscal showed its signs in easing the inflation. Food products like vegetables, pulses and sugar and confectionery had positive roles to play to curb inflation along with the fall in crude prices and bring it down to this level , This is the fourth month where the inflation has stayed below the RBI`s comfortable 4% level. The CPI for the month of November will be in line with the RBI`s projected 2.7-3.2% inflation for the second half of the year. Urban inflation stood at 3.12 percent against rural inflation of mere 1.71 per cent.

The factory output saw huge growth on a slightly lower base and is expected to again come down a bit on a higher base effect. Consumer Price Index tapering downwards would make the RBI feel justified with its December monetary policy to keep the rates unchanged. The low food prices show the worrying signs which the farmers have now, which is also evident from the slowing rural inflation. A lower inflation coupled with sustaining oil prices do not show much signs of distress in the economy and may be well enough reason for the RBI to change its stance to neutral from the calibrated tightening position in the next monetary policy review 

The manufacturing growth has shown decent growth in October 2018. 21 out of the 23 industry groups have shown positive growth where the manufacturing of furniture has shown steep upside growth of 40.8%.

When comparing the use based goods the growth rate in primary goods and capital goods showed a 6% and 16.8% growth respectively, while the intermediate goods saw a nominal increase to the tune of 1.8%, construction goods saw an increase by 8.7%. Consumer durables and consumer non-durables saw 17.6 and 7.9% growth respectively.

The inflation eased to comfortable position at 3.31% for October 2018 which is a year and a half low inflation rate. The decline in the inflation can be attributed to two back to back repo rate hikes by the RBI in view of easing the inflation to around 4%. Positive impact could be seen in vegetables and pulses where the base had a bigger impact in lowering the inflation.

Fuel, light and housing continued to see the upward trend where inflation was the highest for October, although with the crude price sustaining worldwide, the fuel prices have shown some down trends and helped in easing the inflation

The RBI`s view of the calibrated tightening stance seems a little harsh when we see the recent inflation numbers. The inflation easing to such low levels should have a justified neutral stance for a while.  The congress winning the 3 elections on the backdrop of assured farm loan waivers might affect the fiscal slippages, while the BJP may turn populist after seeing the recent defeat and also may give rise to fiscal slippages in the economy, hence the inflation trajectory for the medium term can be on the upper limit.


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