The IIP growth shock is transitory and should be seen as lull post the festive demand in September.
Kotak Securities takes an in-depth look at the permutations and combinations in the Indian economy post the unveiling of the economic data on Friday.
Transient production shock, stable disinflationary trends. The IIP growth shock is transitory and should be seen as lull post the festive demand in September. We expect November to pick up both partly on production and mostly on positive base effects. The good news comes from a stabilizing disinflationary trend in CPI inflation. December data release will be keenly watched to gauge the deviation from RBI’s estimated outturn of ~5.5%. We maintain our call for 50-75 bps cut in CY2015 with the first cut likely after the Union Budget.
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November CPI inflation expectedly has positive base effects through food…. November CPI inflation at 4.38% was helped by vegetable prices expectedly falling further by 1.5% sequentially, pulling the yoy inflation down to (-)10.9%. However, December onwards base effect on food articles will be significantly minimized and the typical seasonality seen due to kharif produce in December and January may be muted this year given (1) correction over the past three months and (2) impact of lower kharif production. Read Full Report
… but disinflationary trends will be key going forward. Core inflation corrected sharply to 5.5% (October at 5.9%) with sequential growth of only 0.2%. The effect of lower fuel prices was visible in 1.9% price increase in transport and communication (mom contraction of 0.8%). Apart from fuel prices, softening (lower/flat mom increases) was visible in clothing component (0.4%), housing (0.3%) and household requisites ((-)0.2%). The key to lower inflation trajectory will lie on the softening trajectory of these components along with food inflation remaining in check. However, while the short-term drivers of inflation like commodity prices, MSPs, etc. remain comfortable, the rectification in the long-term drivers like rural wages and structural frictions (hoarding, storage and logistics) will be important for sustained retail inflation of 4% (+/-) 2%.
October IIP contracts on post-festive season demand effect. October IIP growth fell to (-)4.2% from 2.8% in September owing to post festive season production lull. We had highlighted in the last data release that the September uptick would be transient due to the festive effect. However, the magnitude of correction was definitely a surprise. Sector-wise, consumer durables production led the contraction with yoy growth of (-)35.2%. The base effect was clearly visible in consumer durables mom growth of (-)20.6% against mom growth of 8.9% in October 2013 and November 2013 mom growth of (-)20.3%. Passenger vehicles production (key component in consumer durables) contracted ~15% in October and subsequently has grown ~16% in November 2014.
We pencil in 50-75 bps cut in CY2015. The inflation-based decision to cut repo rate will be driven by (1) sustainability of disinflationary impulses and (2) achieving the glide into the 6% even after rate cuts. These two conditions will receive greater attention over the next 2-3 months, a period when the base effect-related drops in inflation will be over and also when some seasonal uptick in vegetable prices could be expected. As of now, we expect December inflation to pick up to ~5.5% (in line with RBI’s inflation fan chart). This is likely to keep the RBI on pause and we expect the RBI to react (1) after factoring in the implications of the Union Budget in end-February and (2) if the disinflationary impulses persist over the next few months.