BI rate steady at 7.5% : DBS Research

Base effects and seasonal factors led Oct industrial production up 9.8% (YoY),above consensus and vs Sep's revised 3.8%. Oct-Nov production numbers are routinely distorted by domestic festivities, with timing of Diwali the key influence. The latter was held in October last year, compared to November this year. This depressed Oct14's print to -2.7% but helped to buoy this year's reading (see chart). Barring this one-off spike, the underlying trend based on seasonally adjusted sequential basis is positive and hovering around the 4.5-5.0% range.

Manufacturing output also rose 10.6% (YoY), influenced by base factors in Oct, while mining rose 1.9% close to recent trends. Electricity generation noted another firm 9% from 11% month before. On the supply side, capital goods imports persisted with its strong run, up 16% from 10% in Sep. Distortions from a sharp jump in insulated cable/rubber sub-component (punched above its weight to add +1.0ppt to headline IP) continues to influence the headline print. While consumer goods output soared 18%, propped by a 42% spike in durables production (vs Oct'14 -35% YoY) much due to base effects, the underlying trend has been one of gradual improvement. In 1H FY16 consumer durables was supported by easing inflation and low financing costs.

Beyond Oct's spike, other related indicators suggest the cyclical improvement in factory output continues to gather pace, with full-year growth likely to average4-5% (YoY) this year from 2.8% in FY15. A weak external sector, tentative return in consumption demand and rise in the inventory vs sales ratio will delay a quick turnaround in factory output. Focus shifts to the Nov CPI and WPI inflation due today. The gradual uptick in inflation readings is likely to persist on fading base effects and bounce in food price indices.

Nov CPI likely ticked up to 5.3% YoY from Oct's 5.0%, strongest in four months. Decline in the WPI inflation also likely eased, with Nov's reading at -2.5%YoY from -3.8% in Oct. Against the back drop of rising fiscal commitments and a go-slow on the reform agenda, the central bank adopted a cautious tone in December. The US Fed rate trajectory will also be the other crucial input for the next review. Sum of these factors suggests that the RBI will extend its on-hold stance to the early-Feb16 rate meeting.

Source : Equity Bulls

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