Data boost: Pickup in output, cooling inflation brighten India outlook

By: |
Mumbai | Updated: November 12, 2014 6:57 PM

India's IIP grows 2.5 pct in September, retail inflation drops to 5.52 pct in October.

Wednesday's data is expected to bolster the outlook for Asia's third-largest economy. (Reuters)Wednesday’s data is expected to bolster the outlook for India, Asia’s third-largest economy. (Reuters)

India’s economic outlook brightened on Wednesday with a surprise pickup in industrial output and further cooling in consumer prices, data showed, boosting Prime Minister Narendra Modi’s bid to end the longest slowdown in growth in decades.

Retail inflation, which the Reserve Bank of India (RBI) tracks in setting lending rates, slowed to 5.52 percent in October from a multi-year low of 6.46 percent a month earlier, helped by slower annual rises in food and fuel prices.

Industrial output unexpectedly grew 2.5 percent year on year in September, its fastest pace in three months, helped by a rebound in the capital goods sector, separate government data showed.

Read Full Report: CPI Inflation

Wednesday’s data is expected to bolster the outlook for Asia’s third-largest economy which is recovering weakly from a two-year spell of sub-5 percent growth.

Economic growth hit a 2-1/2 year-high of 5.7 percent in the quarter to June, prompting some economists to predict 6 percent growth for the fiscal year to March 2015, higher than 5.5 percent projected by the central bank.

But lacklustre industrial production since then has led some to trim their more optimistic projections.

Read Full Report: IIP Growth

Cooling prices will intensify pressure on the RBI to cut interest rates to stimulate consumer demand which powers 60 percent of the economy.

“A rate cut at this juncture will no doubt add to the existing positive growth impulses,” said Prithviraj Srinivas, an economist with HSBC.

“But such a move would also increase the risk that the RBI misses its inflation target … to return inflation back to the level last seen in the period between 1999 and 2005, when CPI inflation averaged just 4 percent.”

Worries that price pressures would revive once food prices pick up due to a weak monsoon and the fading of base effects led the RBI to leave one of Asia’s highest lending rates on hold for a fourth straight meeting in September.

It is widely expected to maintain the status quo when it reviews monetary policy on Dec. 2.

Slowing inflation, however, has bolstered hopes for a rate cut next year, triggering a rally in the bonds market.



“The CPI trajectory is benign and the decline is well entrenched. I expect the next number to be below 4.5 percent.

“But we do not expect an RBI rate cut before mid-2015 as inflation will remain higher than RBI’s 6 percent target by January 2016. The IIP (industrial output) is better than expectation, but this could be a transient number and improve only in the last quarter of the current fiscal year.”


“We see some further downside in inflation driven by base effect. There is strong indication that food price inflation and momentum of core inflation is coming off.

“But that said, trajectory of CPI inflation will only be clear after base effect wears off post-December.

“We expect a status quo on rates in the RBI policy though the statement could be more dovish than in the September policy.

“The industrial production number is high, but the worrying aspect is consumer goods, which is fairly weak. The real improvement in industrial production will be seen next year when inflation comes down, which will spur consumer spending and exports will be higher.”


“It is a very sweet pair of numbers, but the point is that with IIP (industrial production) one cannot look at it with a high level of credibility because it is a very, very volatile series.

“It has to do with the lumpiness in the capital goods production series. But what really matters is that all other indicators of economic activity actually have slowed in the month of October, whether it is PMI, or credit demand or auto sales. So I don’t think that today’s reading of industrial production is sustainable.

“Inflation, of course, has started moderating but recent data shows that towards the end of October we have seen spikes in vegetable prices as well as in cereal prices because of delayed monsoon. So there’s a big question of sustainability of these readings.

“I stick with my stance that at least in the current financial year there will not be any rate reduction.


“CPI is more or less in line. Post-September we saw a cut in petrol, diesel prices. Along with the ongoing play on the base effect, both have worked on the year-on-year number.

“IIP (industrial production) is a bit above survey, but that doesn’t say much.

“It’s still a very weak reading at 2.5 percent. We had a series of decent reading leading up to the June quarter, but the subsequent quarters have clearly indicated a weak reading, which may point to a slightly low GDP number at the end of the month.”


“The CPI data is positive.

“Next number is also expected to be benign and could be below 5 percent. But base effect will kick in after that, which will push up inflation in the January-March quarter, and average inflation could be at 7 percent by financial year-end.

“As far as RBI is concerned though, inflation is likely to undershoot RBI’s 8 percent target for January 2015. There are still upside risks to the 6 percent target by January 2016 and therefore we expect rates to remain unchanged this financial year.”


“The unexpected fall in October consumer inflation will mean that the inflation number for the December quarter will likely be less than 7 percent.

“This is heartening and gives RBI scope to consider rate cuts next year. On the IIP (industrial production) front, although the rebound is reassuring, we do expect some moderation in the coming days.

“The 10-year bond has already factored in this substantial fall in inflation, so the incremental gains from hereon in government bonds will be limited. Lastly we expect RBI to cut interest rates only by February next year.”

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Wheat procurement grows by 30 pc to 366.61 lakh tn this season
2Govt considering subsidy to offset rise in global prices of P&K fertilisers’ raw material
3GST Council to meet on May 28; compensation shortfall, rates on COVID essentials on agenda