India's IIP Declines In November; Analysts Expect Rate Cuts

 
on January 11 2013 5:25 AM

India's industrial output in November unexpectedly dropped by 0.1 percent to 8.2 percent from the revised growth rate of 8.3 percent recorded in October, the official data released Thursday showed.  A Reuters poll of analysts had predicted 0.7 percent growth rate.

The Index of Industrial Production (IIP) contracted in November due to poor performance by the manufacturing and mining sectors and a fall in the capital goods production.

The cumulative growth in the April-November period of 2012-2013 over the corresponding period in the previous year stands at 1 percent.

The manufacturing sector that contributes to 76 percent of the industrial production grew by 0.3 percent against 9.6 percent in the previous month and a 6.6 percent compared to the same month last year, according to the data released by the Central Statistics Office of the Ministry of Statistics and Program Implementation.  

The mining output in November declined by 5.5 percent compared to a decline in production by 3.5 percent in the corresponding period in 2011. 

Capital goods production shrank by 7.7 percent annually in November, as against a contraction of 4.7 percent in same period last year. Consumer goods output growth too declined to 1 percent in November against 12.8 percent in the corresponding period, a year ago.

The analysts attribute the contraction in manufacturing growth to the Deepavali festival - one of the biggest festivals of the Hindus - which was observed in November 2012. In 2011, the festival was observed in the month of October, and the industrial production witnessed a sharp contraction in that month as the number of working days was less due to festival holidays.  

"The correction in the November headline (industrial production) was largely priced in on passage of festive demand and manufacturers' possibly drawing down on inventories rather than stepping up production towards end-2012," Radhika Rao, economist at Forecast Pte, Singapore, told Reuters.

Economists and the government have been clamoring for interest rate cuts to boost the GDP growth, which has hit a decade low this year.

However, RBI had left the repo rates unchanged since April, blaming the high inflation that is beyond the comfort levels of the central bank.

Inflation numbers for both wholesale and retail prices are due to be released Monday and would influence the RBI decision. India's headline inflation had declined moderately to 7.24 percent in November 2012 from 7.45 percent recorded in October 2012.

However, some economists believe that the decline in growth would prompt the Reserve Bank of India (RBI) to cut rates in the next policy review meeting scheduled to be held Jan. 29.

"We are of the view that the Reserve Bank of India will definitely cut rates by 25 basis points, maintain a dovish tone, and a commitment to maintain liquidity in the comfort zone through open market operations," Shubhada Rao, chief economist with Yes Bank told Reuters.

"The next print is unlikely to be very strong. Overall, this again reminds of the weak industrial activity in the economy and strong positive prints (favourable base effect in Jan-March 2013) should not be inferred as a rebound in the segment,” Anubhuti Sahay, senior economist, Standard Chartered Bank, Mumbai, told Reuters."We expect RBI to reduce rates by 100 basis points in 2013. With weak economic activity a rate cut is likely and Monday's WPI would decide whether we get it on Jan. 29," he added.

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