With the festive season having set in early this year, factory output for September predictably got a bit of a boost, with dealers presumably indulging in some pre-festive stocking up. An increase in the Index of Industrial Production (IIP) of 2.5% yoy would otherwise appear anaemic except that the trend over the past few months has been worse. In August, for instance, the IIP barely moved with the rise at just 0.5% yoy. What was heartening in the September data was the pick-up in the manufacturing sector—an increase of 2.5% yoy versus a contraction of 1.3% yoy in August—in general and the capital goods space in particular. The latter grew 11.6% yoy versus a fall of 9.8% in August. The data has always been volatile, but taken together with better numbers for intermediate goods, suggests an industrial recovery may be taking shape, albeit slowly. Also, IIP would have been higher had it not been for the one-off event of the closure of the Nokia factory in Chennai.
A look at the performance of some key sectors would appear to corroborate this. Domestic sales of commercial vehicles, for instance, seem to be troughing out—total sales in October were down 3% yoy, much better than the drop of 9.14% yoy between April and October. There are, of course, other trends that point to continuing sluggishness in the economy, the most pertinent being the pace of loans disbursed by banks. At close to 11-12%, the momentum in credit growth doesn’t indicate any rush on the part of corporates to add capacities. Also, the key to a definite and secular industrial recovery would have to be a sustained pick-up in the capital goods space; while order books at engineering firms are growing, there aren’t any signs these will swell meaningfully at least for the next 6-8 months. Larsen and Toubro has, in fact, tempered its revenue guidance for the current year.
Though CPI inflation continues to fall—it fell to 5.52% in October from 6.46% in September—few analysts expect RBI to lower repo rates in the policy next month. While FE has maintained inflation’s back is broken—headline inflation was 8.8% in January—and that the crude prices being at a four-year low along with the collapse in global commodity prices will keep inflation low, RBI continues to argue the current collapse is largely driven by the base-effect. But with the so-called base-effect set to be over by next month, analysts are looking at RBI cutting rates by March.