Industrial Production - Oct IIP: -1.8%, Rate hike to track Fed's tapering decision - Emkay

Oct IIP contracts 1.8%; below consensus

IIP growth at -1.8% y-o-y is lower than consensus at -1.2% and 2% growth in Sep. The IIP data is in line with the eight core industries data at -0.6% for Oct; the first contraction in FY14. While the Oct IIP print contracted, the index gained 0.9% m-o-m on seasonally adjusted basis.

Mining, manufacturing and electricity grew -3.5% y-o-y, -2% and 1.3% respectively. The overall IIP number remained muted tracking a) weak consumption demand post festive stock up seen in Sep b) continuing subdued investments c) poor basic goods data evident from core data release and d) adverse base effect.

Nov IIP likely to be near zero

Tracking mixed lead indicators and a favorable base effect (-1% IIP in Nov 2012), November 2013 IIP data would likely be closer to zero.

- November commercial vehicle sales contracted 28.8%, lowest since Feb 2009, whereas passenger vehicle sales declined 11.3%. Two wheeler sales grew slower at 5.6% in line with the slowdown seen in recent credit growth (14.2% in Nov compared to an average of 17.3% in Aug-Oct). For Oct, Consumer durables lending growth (32.6%), vehicle loans (22.4%) and overall personal loans (16.4%) were all slower than in previous three months.

- Manufacturing PMI in Nov climbed to 51.3, first expansion since July, suggesting that the industrial sector could pick up marginally going ahead

- Power generation data for November suggests m-o-m slump; indicating around 6% y-o-y growth in Electricity data for Nov IIP

Outlook: Rate hardening not over yet, Tapering to decide RBI's action

Weak industrial production data in the context of revival in exports, higher government spending, strong agri sector growth is puzzling and possibly indicates slackening in core manufacturing sector activity. There is a possibility of some lagged impact of these factors, which may appear in the coming months. Nonetheless, the growth momentum remains quite weak and with YTD growth of just 0% it is likely that GDP growth revival in H2FY14 may remain modest. We expect FY14E GDP growth to remain around 4.8%. High inflation numbers and weak IIP growth continue to support our view that the investment cycle is still away.

The context for the upcoming monetary policy has been complicated given sustained weakening in industrial growth and persistent high inflation (Nov CPI at 11.24%). Hence, RBI's recent move of easing liquidity constriction measures of Jul'13 and replacing it with a softer stance of two-25bp hike in repo rate is undermined by persistent inflation. In addition, while measures to tighten imports and mobilization of Fx through FCNR deposit scheme have aided some stability on the external balances, possibility of US tapering being advanced on the back of strong US economic data and weak domestic growth could translate into renewed financial market volatility and INR weakening. Hence, we are of the view that rate-tightening cycle has not got over in India yet and we expect another 50bp hike in repo rate in the next 6 months. In our view, the recent measures of creating Fx buffer and taming CAD have only provided temporary buffer to ward off serious tightening.

In our view, RBI may decide to hike repo rate by 25bp if Fed decides to initiate tapering in its FOMC meet on Dec 17-18.

Source : Equity Bulls

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